SEMRUSH HOLDINGS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial statements, and related notes that are included elsewhere in this Quarterly Report on Form 10-Q, along with the financial information included in our prospectus datedMarch 24, 2021 (the "Prospectus") as filed with theSecurities Exchange Commission (the "SEC") onMarch 25, 2021 pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the "Securities Act"). Some of the information contained in this discussion and analysis, including information with respect to our planned investments in our research and development, sales and marketing, and general and administrative functions, contains forward-looking statements based upon current plans, beliefs, and expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the sections titled "Special Note Regarding Forward-Looking Statements" and "Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements aboutSemrush Holdings, Inc. ("Semrush Holdings ") and our subsidiaries (collectively, the "Group", the "Company", "Semrush", "we", "us", or "our") and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations, financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as "anticipate," "believe," "contemplate," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "should," "target," "will," or "would," or the negative of these words or other similar terms or expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about: •our future financial performance, including our revenue, annual recurring revenue ("ARR"), costs of revenue, gross profit or gross margin and operating expenses; •the sufficiency of our cash and cash equivalents to meet our liquidity needs; •anticipated trends and growth rates in our business and in the markets in which we operate; •our ability to maintain the security and availability of our internal networks and platform; •our ability to attract new paying customers and convert free customers into paying customers; •our ability to retain and expand sales to our existing paying customers, including upgrades to premium subscriptions, purchases of add-on offerings, and increasing the number of authorized users per paying customer; •our ability to access, collect, and analyze data; •our ability to successfully expand in our existing markets and into new markets; •our ability to effectively manage our growth and future expenses; •our ability to continue to innovate and develop new products and features, improve our data assets, and enhance our technological capabilities; •our estimated total addressable market; 25 -------------------------------------------------------------------------------- •our ability to maintain, protect, and enhance our intellectual property; •our ability to comply with modified or new laws and regulations applying to our business; •the attraction and retention of qualified employees and key personnel; •our anticipated investments in sales and marketing, and research and development; •our ability to successfully defend litigation brought against us; •our ability to successfully acquire and integrate companies and assets; •the increased expenses associated with being a public company; •our use of the net proceeds from our initial public offering ("IPO"); and •the impact of the novel strain of coronavirus ("COVID-19") on our business and industry. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements. Company Overview We are a leading online visibility management software-as-a-service ("SaaS") platform, enabling companies globally to identify and reach the right audience in the right context and through the right channels. Online visibility represents how effectively companies connect with consumers across a variety of digital channels, including search, social and digital media, digital public relations, and review websites. 26 -------------------------------------------------------------------------------- Our proprietary SaaS platform enables us to aggregate and enrich trillions of data points collected from hundreds of millions of unique domains, social media platforms, online ads, and web traffic. This allows our customers to understand trends, derive unique and actionable insights to improve their websites and social media pages, and distribute highly relevant content to their targeted customers across channels to drive high-quality traffic. OnMarch 29, 2021 , we completed our IPO in which we issued and sold 10,000,000 shares of our Class A common stock at a public offering price of$14.00 per share for aggregate gross proceeds of$140.0 million . We received approximately$126.6 million in net proceeds after deducting$9.8 million of underwriting discounts and commissions and approximately$3.6 million in offering costs. In connection with the closing of the IPO, all of the outstanding shares of our Preferred Stock and Common Stock automatically converted into 124,905,954 shares of Class B common stock. We generate substantially all of our revenue from monthly and annual subscriptions to our online visibility management platform under a SaaS model. Subscription revenue is recognized ratably over the contract term beginning on the date the product is made available to customers. We have one reportable segment. See Note 14 of our Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for more information. Key Factors Affecting Our Performance We regularly review a number of factors that have impacted, and we believe will continue to impact, our results of operations and growth. These factors include: Acquiring New Paying Customers We expect increasing demand for third-party online visibility software to accelerate adoption of our platform. Our recurring subscription model provides significant visibility into our future results and we believe ARR is the best indicator of the scale of our platform, while mitigating fluctuations due to seasonality and contract term. We define ARR as the daily revenue of all paid subscription agreements that are actively generating revenue as of the last day of the reporting period multiplied by 365. We include both monthly recurring paid subscriptions, which renew automatically unless cancelled, as well as the annual recurring paid subscriptions so long as we do not have any indication that a customer has cancelled or intends to cancel its subscription and we continue to generate revenue from them. As ofMarch 31, 2021 and 2020, we had more than 72,000 paying customers and 56,000 paying customers, respectively, accounting for$167.6 million and$109.5 million in ARR, respectively. Retaining and Expanding Sales to Our Existing Customers We serve a diverse customer base across a variety of sizes and industries that is focused on maximizing their online visibility. We believe there is a significant opportunity to expand within our existing customer base as customers often initially purchase our entry-level subscription, which offers lower usage limits and limited user licenses, as well as fewer features. We have demonstrated the ability to expand contract values with our existing customers as they use our products and recognize the critical nature of our platform and often seek premium offerings through incremental usage, features, add-ons, and additional user licenses. We have successfully increased ARR per paying customer over time and believe this metric is an indicator of our ability to grow the long-term value of our platform. We expect ARR per paying customer to continue to increase as customers adopt our premium offerings and we continue to introduce new products and functionality. Our ARR per paying customer as ofMarch 31, 2021 and 2020 was$2,274 and$1,942 , respectively. We define ARR per paying customer during a given period as ARR from our paying customers at the end of the period divided by the number of paying customers as of the end of the same 27 -------------------------------------------------------------------------------- period. We define the number of paying customers as the number of unique business and individual customers at the end of a particular period. We define a business customer as all accounts that contain a common non-individual business email domain (e.g., all subscriptions with an email domain of @XYZ.com will be considered to be one customer), and an individual customer as an account that uses an individual non-business email domain. Sustaining Product and Technology Innovation We have a strong track record of developing new products that have high adoption rates among our paying customers. Our product development organization plays a critical role in continuing to enhance the effectiveness and differentiation of our technology in an evolving landscape and maximizing retention of our existing customers. We intend to continue investing in product development to improve our data assets, expand our products and enhance our technological capabilities. Non-GAAP Financial Measures In addition to our financial results determined in accordance withU.S. generally accepted accounting principles ("GAAP"), we believe that free cash flow and free cash flow margin, each a non-GAAP financial measure, are useful in evaluating the performance of our business. Free cash flow and free cash flow margin We define free cash flow, a non-GAAP financial measure, as net cash provided by operating activities less purchases of property and equipment and capitalized software development costs. We define free cash flow margin as free cash flow divided by total revenue. We monitor free cash flow and free cash flow margin as two measures of our overall business performance, which enables us to analyze our future performance without the effects of non-cash items and allow us to better understand the cash needs of our business. While we believe that free cash flow and free cash flow margin are useful in evaluating our business, free cash flow and free cash flow margin are each a non-GAAP financial measure that have limitations as an analytical tool, and free cash flow and free cash flow margin should not be considered as an alternative to, or substitute for, net cash used in operating activities in accordance with GAAP. The utility of each of free cash flow and free cash flow margin as a measure of our liquidity is further limited as each measure does not represent the total increase or decrease in our cash balance for any given period. In addition, other companies, including companies in our industry, may calculate free cash flow and free cash flow margin differently or not at all, which reduces the usefulness of free cash flow and free cash flow margin as tool for comparison. A summary of our cash flows from operating, investing and financing activities is provided below. We recommend that you review the reconciliation of free cash flow to net cash used in operating activities, the most directly comparable GAAP financial measure, and the reconciliation of free cash flow margin to net cash used in operating activities (as a percentage of revenue), the most directly comparable GAAP financial measure, provided below, and that you not rely on free cash flow, free cash flow margin or any single financial measure to evaluate our business. Three Months Ended March 31, (in thousands) 2021 2020 Net cash provided by operating activities$ 9,007 $ 561 Net cash used in investing activities (1,139) (1,381) Net cash provided by (used in) financing activities 128,468 (16) Net increase (decrease) in cash, cash equivalents and$ 136,336 (836) restricted cash 28
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Three Months Ended March 31,
(in thousands)
2021 2020
Net cash provided by operating activities $ 9,007 $ 561
Purchases of property and equipment (166) (1,084)
Capitalization of internal-use software costs (123) (297)
Free cash flow $ 8,718 $ (820) Three Months Ended
(in thousands)
2021 2020
Net cash provided by operating activities (as a percentage of 22.5 % 2.0 %
revenue)
Purchases of property and equipment (as a percentage of revenue) (0.4) % (3.9) % Capitalization of internal-use software costs (as a percentage (0.3) % (1.1) % of revenue) Free cash flow margin 21.8 % (3.0) % Components of our Results of Operations Revenue We generate nearly all of our revenue from subscriptions to our online visibility management platform under a SaaS model. Subscription revenue is recognized ratably over the contract term beginning on the date on which we provide the customer access to our platform. Our customers do not have the right to take possession of our software. Our subscriptions are generally non-cancellable during the contractual subscription term, however our subscription contracts contain a right to a refund if requested within seven days of purchase. We offer our paid products to customers via monthly or annual subscription plans, as well as one-time and ongoing add-ons. As ofMarch 31, 2021 and 2020, approximately 77% and 76%, respectively, of our paying customers purchased monthly subscription plans. Our subscription-based model enables customers to select a plan based on their needs and license our platform on a per user per month basis. As ofMarch 31, 2021 , we served approximately 72,000 paying customers in various industries, and our revenue is not concentrated with any single customer or industry. For the three months endedMarch 31, 2021 and 2020, no single customer accounted for more than 1% of our revenue. Cost of Revenue Cost of revenue primarily consists of expenses related to hosting our platform, acquiring data, and providing support to our customers. These expenses are comprised of personnel and related costs, including salaries, benefits, incentive compensation, and stock-based compensation expense related to the management of our data centers, our customer support team and our customer success team, and data acquisition costs. In addition to these expenses, we incur third-party service provider costs, such as data center and networking expenses, allocated overhead costs, depreciation expense and amortization associated with the Company's property and equipment, and amortization of capitalized software development costs and other intangible assets. We allocate overhead costs, such as rent and facility costs, information technology costs, and employee benefit costs to all departments based on headcount. As such, general overhead expenses are reflected in cost of revenue and each operating expense category. 29 -------------------------------------------------------------------------------- We expect our cost of revenue to increase in absolute dollars due to expenditures related to the purchase of hardware, data, expansion, and support of our data center operations and customer support teams. We also expect that cost of revenue as a percentage of revenue will decrease over time as we are able to achieve economies of scale in our business, although it may fluctuate from period to period depending on the timing of significant expenditures. To the extent that our customer base grows, we intend to continue to invest additional resources in expanding the delivery capability of our products and other services. The timing of these additional expenses could affect our cost of revenue, both in terms of absolute dollars and as a percentage of revenue in any particular quarterly or annual period. Operating Expenses Research and Development Research and development expenses primarily consist of personnel and related costs, including salaries, benefits, incentive compensation, stock-based compensation, and allocated overhead costs. Research and development expenses also include depreciation expense and other expenses associated with product development. Other than internal-use software costs that qualify for capitalization, research and development costs are expensed as incurred. We plan to increase the dollar amount of our investment in research and development for the foreseeable future as we focus on developing new products, features, and enhancements to our platform. We believe that investing in the development of new products, features, and enhancements improves customer experience, makes our platform more attractive to new paying customers and provides us with opportunities to expand sales to existing paying customers and convert free customers to paying customers. However, we expect our research and development expenses to decrease as a percentage of our revenue over time. Sales and Marketing Sales and marketing expenses primarily consist of personnel and related costs directly associated with our sales and marketing department, including salaries, benefits, incentive compensation, and stock-based compensation, online advertising expenses, and marketing and promotional expenses, as well as allocated overhead costs. We expense all costs as they are incurred, excluding sales commissions identified as incremental costs to obtain a contract, which are capitalized and amortized on a straight-line basis over the average period of benefit, which we estimate to be two years. We expect that our sales and marketing expenses will continue to increase in absolute dollars in the year endingDecember 31, 2021 . New sales personnel require training and may take several months or more to achieve productivity; as such, the costs we incur in connection with the hiring of new sales personnel in a given period are not typically offset by increased revenue in that period and may not result in new revenue if these sales personnel fail to become productive. We expect to increase our investment in sales and marketing as we add new services, which will increase these expenses in absolute dollars. Over the long term, we believe that sales and marketing expenses as a percentage of revenue will vary depending upon the mix of revenue from new and existing customers, as well as changes in the productivity of our sales and marketing programs. General and Administrative General and administrative expenses primarily consist of personnel and related expenses, including salaries, benefits, incentive compensation, and stock-based compensation, associated with our finance, legal, human resources, and other administrative employees. Our general and administrative expenses also include professional fees for external legal, accounting, and other consulting services, insurance, depreciation and amortization expense, as well as allocated overhead. We expect to increase the size of our general and administrative functions to support the growth of our business. We expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with rules and regulations applicable to companies listed on aU.S. securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of theSEC , increases in 30 -------------------------------------------------------------------------------- insurance premiums, investor relations and professional services. We expect the dollar amount of our general and administrative expenses to increase for the foreseeable future. However, we expect our general and administrative expenses to decrease as a percentage of revenue over time. Other Income, Net Included in other income, net are foreign currency transaction gains and losses. The functional currency of our international operations is theU.S. dollar except for Prowly, which is Polish Zloty. Any differences resulting from the re-measurement of assets and liabilities denominated in a currency other than the functional currency are recorded within other income, net. We expect our foreign currency exchange gains and losses to continue to fluctuate in the future as foreign currency exchange rates change. Other income, net also includes amounts for other miscellaneous income and expense unrelated to our core operations. Income Tax Provision We operate in several tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business. We account for income taxes in accordance with the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. In addition, this method requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. To date, we have incurred cumulative net losses and maintain a full valuation allowance on our net deferred tax assets. We expect this trend to continue for the foreseeable future. Our tax expense for the three months endedMarch 31, 2021 and 2020 primarily relates to income earned in certain foreign jurisdictions. Results of Operations The following tables set forth information comparing our results of operations in dollars and as a percentage of total revenue for the periods presented. The period-to-period comparison of results is not necessarily indicative of results for future periods. 31 --------------------------------------------------------------------------------
Three Months Ended March 31,
2021 2020
(in thousands)
Revenue $ 39,998 $ 27,787
Cost of revenue (1) 8,773 6,611
Gross profit 31,225 21,176
Operating expenses
Sales and marketing (1) 16,457 12,877
Research and development (1) 5,358 4,237
General and administrative (1) 7,904 5,933
Total operating expenses 29,719
23,047
Income (loss) from operations 1,506
(1,871)
Other income, net 51
56
Income (loss) before income taxes 1,557 (1,815) Provision for income taxes 86 116 Net income (loss) $ 1,471$ (1,931) __________________
(1)Includes stock-based compensation expense as follows:
Three Months Ended March 31,
2021 2020
(in thousands)
Cost of revenue $ 7 $ 5
Sales and marketing 190 27
Research and development 67 29
General and administrative 329 144
Total stock-based compensation $ 593 $ 205
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The following table sets forth our unaudited condensed consolidated statements
of operations data expressed as a percentage of revenue for the periods
indicated:
Three Months Ended March 31,
2021 2020
(as a percentage of total revenue)
Revenue 100 % 100 %
Cost of revenue 22 % 24 %
Gross profit 78 % 76 %
Operating expenses
Sales and marketing 41 % 46 %
Research and development 13 % 15 %
General and administrative 20 % 22 %
Total operating expenses 74 % 83 %
Income (loss) from operations 4 % (6) %
Other income, net - % - %
Income (loss) before income taxes 4 % (6) %
Provision for income taxes - % - %
Net income (loss) 4 % (6) %
Comparison of the Three Months Ended March 31, 2021 and 2020
Revenue
Our revenue during the three months ended March 31, 2021 and 2020 was as
follows:
Three Months Ended March 31, Change
2021 2020 Amount %
(dollars in thousands)
Revenue $ 39,998 27,787 $ 12,211 44 %
Revenue increased in all regions and was most pronounced in the United States .
The majority of this increase was driven by an increase in the number of paying
customers from 56,000 as of March 31, 2020 to 72,000 as of March 31, 2021 . The
net income for the three months ended March 31, 2021 was partially driven by an
increase in the subscription price of our core product.
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The locations of our paying customers during the three months ended
Three Months Ended March 31,
2021 2020
(in thousands)
Revenue:
United States $ 18,132 $ 12,886
United Kingdom 4,195 2,994
Other 17,671 11,907
Total revenue $ 39,998 $ 27,787 Cost of Revenue, Gross Profit and Gross Margin
Three Months Ended March 31, Change
2021 2020 Amount %
(dollars in thousands)
Cost of revenue $ 8,773 $ 6,611 $ 2,162 33 %
Gross profit $ 31,225 $ 21,176 $ 10,049 47 %
Gross margin 78.1 % 76.2 %
The increase in cost of revenue for the three months ended March 31, 2021
compared to the three months ended March 31, 2020 was primarily due to the
following changes:
Change
(in thousands)
Hosting fees $ 446
Integration and data costs 787
Merchant fees 309
Other 620
Cost of revenue $ 2,162
Hosting fees increased, driven by the additional costs associated with our
growth in subscription revenue and the additional costs associated with
expanding our relationships with our current paying subscribers. Integration and
data costs increased primarily as a result of increasing costs incurred related
to new products and customer growth. Merchant fees increased commensurate with
sales growth. Other costs increased primarily as a result of a 95% increase in
headcount as we continue to grow our customer support and customer success teams
to support our customer growth.
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Operating Expenses
Sales and Marketing
Three Months Ended March 31, Change
2021 2020 Amount %
(dollars in thousands)
Sales and marketing $ 16,457 $ 12,877 $ 3,580 28 %
Percentage of total revenue 41 % 46 %
The increase in sales and marketing expense for the three months ended March 31,
2021 compared to the three months ended March 31, 2020 was primarily due to the
following:
Change
(in thousands)
Personnel costs $ 2,156
Advertising expense 1,503
Other (79)
Sales and marketing $ 3,580
Personnel costs increased primarily as a result of a 24% increase in headcount
as we continue to expand our sales teams to grow our customer base. Personnel
costs include the amortization of capitalized commission costs, which increased
quarter over quarter partially due to the amortization of commissions paid in
prior periods, as well as expense associated with the amortization of
commissions paid and capitalized during the three months ended March 31, 2021 ,
which increased compared to the three months ended March 31, 2020 due to the
overall growth in sales. Advertising expense increased primarily as a result of
increasing expenses to acquire new paying customers.
Research and Development
Three Months Ended March 31, Change
2021 2020 Amount %
(dollars in thousands)
Research and development $ 5,358 $ 4,237 $ 1,121 26 %
Percentage of total revenue 13 % 15 %
Research and development costs increased primarily as a result of a 31% increase
in headcount as we continue to expand our product development teams.
General and administrative
Three Months Ended March 31, Change
2021 2020 Amount %
(dollars in thousands)
General and administrative $ 7,904 $ 5,933 $ 1,971 33 %
Percentage of total revenue 20 % 21 %
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The increase in general and administrative expense was primarily driven by a 47%
increase in headcount as we continue to expand our accounting and reporting,
legal and compliance, and internal support teams. It was also driven by a 167%
increase in stock-based compensation applicable to these teams.
Other Income, Net
Three Months Ended March 31, Change
2021 2020 Amount %
(dollars in thousands)
Other income, net $ 51 $ 56 $ (5) (9) %
Percentage of total revenue - % - %
The relatively small decrease in other income was partially driven by changes in
the foreign exchange gains or losses from foreign currency translation
adjustments associated with our international activities.
Provision for Income Taxes
Three Months Ended March 31, Change
2021 2020 Amount %
(dollars in thousands)
Provision for income taxes $ 86 $ 116 $ (30) (26) %
Percentage of total revenue - % - %
The provision for income taxes is primarily attributable to estimated taxes
related to our foreign jurisdictions.
Liquidity and Capital Resources
To date, our principal sources of liquidity have been the net proceeds of $126.6
million , after deducting underwriting discounts and offering expenses paid or
payable by us, from our IPO in March 2021 , the net proceeds we received through
private sales of equity securities, as well as sales of premium subscriptions to
our platform.
As of March 31, 2021 , our principal sources of liquidity were cash and cash
equivalents of $171.9 million and accounts receivable of $2.4 million . With the
exception of this three month period ended March 31, 2021 , we have generated
losses from operations since inception. With the exception of this three month
period ended March 31, 2021 , we expect to continue to incur operating losses and
negative cash flows for the foreseeable future due to the investments in our
business we intend to make as described above.
Our principal uses of cash in recent periods have been to fund operations and
invest in capital expenditures, and are held in cash deposits and money market
funds.
We believe our existing cash will be sufficient to meet our operating and
capital needs for at least the next 12 months. Our future capital requirements
will depend on many factors, including our subscription growth rate,
subscription renewal activity, billing frequency, the timing and extent of
spending to support our research and development efforts, the expansion of sales
and marketing activities, the introduction of new and enhanced product
offerings, and the continuing market acceptance of our platform and products. In
the future, we may enter into arrangements to acquire or invest in complementary
companies,
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products, and technologies, including intellectual property rights. We may be
required to seek additional equity or debt financing. In the event that
additional financing is required from outside sources, we may not be able to
raise it on terms acceptable to us, or at all. If we are unable to raise
additional capital or generate cash flows necessary to expand our operations,
our business, results of operations, and financial condition could be adversely
affected.
Our Credit Facility
Pursuant to the Credit Agreement among us and Semrush Inc. , a Delaware
corporation ("Semrush US Sub"), each as a borrower, the lenders party thereto
from time to time and JPMorgan Chase Bank, N.A ., as the administrative agent, as
amended from time to time, we have a senior secured credit facility that
consists of a $45.0 million revolving credit facility and a letter of credit
sub-facility with an aggregate limit equal to the lesser of $5.0 million and the
aggregate unused amount of the revolving commitments then in effect. The
availability of the credit facility is subject to the borrowing base based on an
advance rate of 400% multiplied by annualized retention applied to monthly
recurring revenue. The credit facility has a maturity of three years and will
mature on January 12, 2024 .
Borrowings under our credit facility bear interest at our option at (i) LIBOR,
subject to a 0.50% floor, plus a margin, or (ii) the alternate base rate,
subject to a 3.25% floor (or 1.50% prior to positive consolidated adjusted
earnings before interest, taxes, depreciation, and amortization ("adjusted
EBITDA") for the twelve months most recently ended), plus a margin. For LIBOR
borrowings, the applicable rate margin is 2.75% (or 3.50% prior to positive
consolidated adjusted EBITDA as of the twelve months most recently ended). For
base rate borrowings, the applicable margin is 0.00% (or 2.50% prior to positive
consolidated adjusted EBITDA as of the twelve months most recently ended). We
are also required to pay a 0.25% per annum fee on undrawn amounts under our
revolving credit facility, payable quarterly in arrears.
Operating Activities
Our largest source of operating cash is cash collections from our customers for
subscription services. Our primary uses of cash from operating activities are
for online advertising, personnel costs across the sales and marketing and
product and development departments, and hosting costs.
Net cash provided by operating activities during the three months ended March
31, 2021 was $9.0 million , which resulted from a net income of $1.5 million
adjusted for non-cash charges of $2.3 million and a net cash inflow of $5.2
million from changes in operating assets and liabilities. Non-cash charges
primarily consisted of $0.5 million of depreciation and amortization expense,
$1.3 million for amortization of deferred contract acquisition costs related to
capitalized commissions, and $0.6 million of stock-based compensation expense.
The changes in operating assets and liabilities was primarily the result of a
$5.6 million increase in deferred revenue due to the addition of new customers
and expansion of the business, a $2.4 million increase in accrued expenses, and
a $1.6 million increase in accounts payable. These inflows were partially offset
by a $2.4 million increase in deferred contract costs, a $1.0 million increase
in prepaid expenses and other current assets, and a $1.0 million increase in
accounts receivable.
Net cash provided by operating activities during the three months ended March
31, 2020 was $0.6 million , which resulted from a net loss of $1.9 million
adjusted for non-cash charges of $1.5 million and net cash inflow of $1.0
million from changes in operating assets and liabilities. Non-cash charges
primarily consisted of $1.1 million for amortization of deferred contract
acquisition costs related to capitalized commissions, $0.2 million of
stock-based compensation expense, and $0.2 million of depreciation and
amortization expense. The changes in operating assets and liabilities was
primarily the result of a $1.7 million increase in deferred revenue due to the
addition of new customers and expansion of the business, a $1.0 million increase
in accrued expenses, a $0.7 million decrease in accounts receivable, and a $0.1
million increase in accounts payable. These inflows were partially offset by
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a $1.7 million increase in deferred contract costs and a $0.7 million increase
in prepaid expenses and other current assets.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2021
and 2020 was $1.1 million and $1.4 million , respectively. The decrease of $0.2
million of cash used in investing activities was primarily due to the reduced
purchases of computer equipment and hardware, as well as a decrease in
capitalized costs associated with internal use software. During the three months
ended March 31, 2021 , cash used in investing activities also included $500 paid
for two convertible debt securities.
Financing Activities
Net cash provided by financing activities for the three months ended March 31,
2021 was $128.5 million , primarily consisting of the net proceeds from the IPO.
Net cash used in financing activities for the three months ended March 31, 2020
was insignificant and consisted entirely of payments of deferred offering costs.
Contractual Obligations
As of March 31, 2021 , there were no material changes in our contractual
obligations and commitments from those disclosed in the Prospectus, other than
those appearing in the notes to the Unaudited Condensed Consolidated Financial
Statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
As of March 31, 2021 , we did not have any relationships with any entities or
financial partnerships, such as structured finance or special purpose entities,
that would have been established for the purpose of facilitating off-balance
sheet arrangements or other purposes. As a result, we are not exposed to related
financing, liquidity, market or credit risks that could arise if we had engaged
in those types of arrangements.
Recent Accounting Pronouncements
Refer to the section titled "Recent Accounting Pronouncements" in Note 2 of the
notes to our Unaudited Condensed Consolidated Financial Statements included
elsewhere in this Quarterly Report on Form 10-Q for more information.
Critical Accounting Policies and Estimates
Our Unaudited Condensed Consolidated Financial Statements are prepared in
accordance with accounting principles generally accepted in the United States .
The preparation of these Unaudited Condensed Consolidated Financial Statements
in conformity with GAAP requires management to make estimates, judgments, and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. On an ongoing basis, we evaluate our estimates and assumptions. Our
actual results may differ from these estimates.
Our critical accounting policies are described under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Critical Accounting Policies and Estimates" in the Prospectus and in Note 2 of
the notes to our Unaudited Condensed Consolidated Financial Statements included
elsewhere in this Quarterly Report on Form 10-Q.
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