SQUARESPACE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, our unaudited condensed consolidated financial statements and related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the fiscal quarter endedMarch 31, 2021 included in the Final Prospectus for our Direct Listing filed with theSEC , pursuant to Rule 424(b)(4) onMay 19, 2021 , and our audited consolidated financial statements and the related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the fiscal year endedDecember 31, 2020 included in the Final Prospectus for our Direct Listing filed with theSEC , pursuant to Rule 424(b)(4) onMay 19, 2021 . This discussion contains forward-looking statements that involve risks and uncertainties. Our actual business, financial condition and results of operations could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" in Item 1A of Part II of this Quarterly Report on Form 10-Q and in our Final Prospectus for our Direct Listing. See also "Cautionary Note Regarding Forward-Looking Statements." Our historical results are not necessarily indicative of the results that may be expected for any period in the future. OverviewSquarespace is a leading all-in-one platform for businesses and independent creators to build a beautiful online presence, grow their brands and manage their businesses across the internet. We offer websites, domains, e-commerce, tools for managing a social media presence, marketing tools, scheduling and hospitality services. Our easy-to-customize and design-first platform empowers millions of customers across over 200 different countries and territories. From individual entrepreneurs just starting out to the world's most iconic businesses,Squarespace helps transform our customers' visions into reality by creating an impactful, stylish and professional online presence. We were founded in 2003 by our Chief Executive Officer,Anthony Casalena , and have achieved a number of significant milestones since then: •In 2004, we launched publicly as a blogging service to enable our customers to publish their content online. •In 2006, we hired our first employees. •In 2010, we raised a combined$38.5 million fromAccel and Index Ventures . •In 2012, we surpassed 100 employees and transitioned the platform to service the next phase of the internet with sophisticated and design-forward presentations, enabling businesses and independent creators to tell their brand stories in a professional manner, including on mobile devices. •In 2013, we launched our commerce offerings, giving customers the ability to sell physical and digital goods directly from our platform. •In 2014, we raised$40 million from General Atlantic. •In 2015, we surpassed 500 employees and crossed$100 million in bookings. •In 2016, we began generating net income. •In 2019, we completed our first three acquisitions, continued to expand our commerce functionality and introduced Scheduling, Social, Marketing and Email Campaigns, which broadened our suite of solutions and points of entry to our platform. •In 2020, we reached$664.7 million in bookings and 1,200 employees. •OnMarch 31, 2021 ,Squarespace acquiredTock, Inc. , a reservation management system tool for time slotted businesses primarily serving restaurants and hospitality businesses. •InMay 2021 ,Squarespace became a public company through a direct listing on the NYSE. We primarily derive revenue from monthly and annual subscriptions to our presence and commerce solutions. Subscription revenue accounted for 91.2% and 92.7% of our total revenue for the three and six months endedJune 30, 2021 , respectively, and 93.6% and 94.8% of our total revenue in the three and six months endedJune 30, 2020 , respectively. Payments for our subscription plans are generally collected at the beginning of the subscription period and we generally recognize the associated revenue ratably over the term of the customer contract. Non-subscription revenue primarily consists of commerce transaction fees received through revenue sharing arrangements with payment processors that handle our customers' commerce transactions as well as revenue we generate from third-party services we offer that provide additional functionality to our customers. We generated revenue of$196.0 million and$375.7 million for the three and six months endedJune 30, 2021 , respectively, and$149.6 million and$286.5 million in the three and six months endedJune 30, 2020 , respectively. We believe we have a stable and predictable business model driven by efficient customer acquisition and the adoption by our 29 -------------------------------------------------------------------------------- Table of Conten ts customers over time of higher value offerings and add-on subscriptions. Our platform serves all types of customers, from SMBs and independent creators, such as restaurants, photographers, wedding planners, artists, musicians and bloggers, to iconic brands. No individual unique subscription accounted for more than 1% of our total bookings for the three and six months endedJune 30 , 2021orJune 30, 2020 . Key Factors Affecting Our Performance Acquisition of new and retention of existing unique subscriptions The growth of new unique subscriptions to our platform is the primary driver of our revenue growth. The number of unique subscriptions to our platform has grown sequentially across 22 consecutive quarters, rising to 3.9 million unique subscriptions as ofJune 30, 2021 , representing an increase of 15.1% relative toJune 30, 2020 . In order to continue to grow the number of unique subscriptions, we intend to continue to invest in our marketing efforts, develop new points of entry to our platform and expand internationally. We increased our marketing and sales spend over 33% during the six months endedJune 30, 2021 relative to the six months endedJune 30, 2020 . We view this increased spending as a long-term investment in our business that would attract new unique subscriptions. We believe that our easy-to-customize and design-first solutions drive consistent cash retention. Our cash retention rate is the percentage of revenue share and subscription bookings received in the current period from website and domain subscriptions in existence during the same period in the prior year. In calculating cash retention, revenue share from contractual arrangements is allocated to the relevant subscription base based on the gross merchandise value ("GMV") processed on the platform. Expansion of our commerce offerings We believe that our commerce offerings significantly expand our addressable market. Our comprehensive commerce offerings enable our customers to sell anything online, attracting a differentiated set of commerce-oriented brands to our platform. OnMarch 31, 2021 , we acquiredTock, Inc. , which expanded our commerce offerings by adding a platform for reservations, take-out, delivery and events for the hospitality industry. We are continuing to invest and innovate in our commerce offerings to enable customers to build the most impactful online stores, deepen our functionality in physical commerce and establish leadership in services and hospitality commerce. Our commerce revenue was$58.7 million and$105.5 million for the three and six months endedJune 30, 2021 , representing 72.1% and 74.8% growth from the same periods in 2020, respectively. Ultimately, we believe the adoption of our commerce offerings by new and existing customers will help drive our long-term revenue growth. Investments in product innovation We rely on hiring and retaining a talented product development workforce. The success of our customers relies on the innovation tied to this workforce and our ability to remain agile to address customer needs. Our research and product development expenses were$48.9 million and$90.9 for the three and six months endedJune 30, 2021 , respectively, representing 35.7% and 26.1% growth over the same periods in 2020, respectively. As our revenue increases, we expect our research and product development expenses to continue to increase on an absolute dollar basis, but over time we expect our research and product development expenses to decrease as a percentage of revenue. Foreign currency fluctuations As ofJune 30, 2021 , we had customers in over 200 countries and territories and our international customers represented approximately 31% of our total bookings. As foreign currency exchange rates change, translation of the statements of operations of our international businesses intoU.S. dollars may affect year-over-year comparability of our operating results. Key Components of Results of Operations Revenue We primarily derive revenue from monthly and annual subscriptions. Typically, annual subscriptions represent 70% of the total subscriptions and monthly subscriptions represent 30%. Revenue is also derived from non-subscription services, including fixed percentages or fixed fees earned on revenue share arrangements with third parties and on sales made through our customers' sites. Payments received for subscriptions in advance of fulfillment of our performance obligations are recorded as deferred revenue. Subscription plans automatically renew unless advanced notice is provided to us. We primarily recognize subscription revenue ratably on a straight-line basis, net of a reserve for refunds. Transaction fee revenue and revenue generated from third parties is recognized at a point in time, when the sale has been completed. 30 -------------------------------------------------------------------------------- Table of Conten ts We disaggregate our revenue by product type in accordance with the following definitions: Presence Presence revenue primarily consists of fixed-fee subscriptions to our plans that offer core platform functionalities, currently branded "Personal" and "Business" plans in our offering. Presence revenue also consists of fixed fee subscriptions related to additional entry points for starting online such as domain managed services and social media stories. Additionally, presence revenue is derived from third-party solutions related to email services and access to third-party content to enhance online presence. For customers in need of a larger scale solution, we have an enterprise offering where revenue is recognized over the life of the contract. Commerce Commerce revenue primarily consists of fixed-fee subscriptions to our plans that offer all the features of presence plans including additional features that support end to end commerce transactions, currently branded "Basic" and "Advanced" in our plans offering. Commerce revenue also includes fixed-fee subscriptions to a number of other tools that support running an online business such as marketing, member areas, and scheduling tools. Non-subscription revenue is derived from fixed fees earned on revenue share arrangements with commerce partners, and fixed transaction fees earned on sales made through Business plan sites. Additionally, commerce revenue consists of fixed-fee subscriptions and non-recurring revenue related to hospitality services. Cost of revenue Cost of revenue consists primarily of credit card and payment processing fees, domain registration fees, hosting costs and app fees. Cost of revenue also includes customer support, employee-related expenses, allocated shared costs and depreciation and amortization. Employee-related expenses consist of salaries, taxes, benefits and stock-based compensation. We expect that cost of revenue may fluctuate as a percentage of total revenue from period to period based on the subscriptions purchased and non-subscription transactions during that particular period. Operating expenses: Research and product development Research and product development expenses are primarily employee-related expenses, costs associated with continuously developing new solutions and enhancing and maintaining our technology platform and allocated shared costs. These costs are expensed as incurred. Employee-related expenses consist of salaries, taxes, benefits and stock-based compensation. Marketing and sales Marketing and sales expenses include costs related to advertisements used to drive customer acquisition, employee-related expenses related to our brand, customer acquisition and creative assets, affiliate fees on customer referrals, sales commissions, and allocated shared costs. Depending on the nature of the advertising, costs are expensed at the time a commercial initially airs, when a promotion first appears in the media or as incurred. Affiliate fees on customer referrals are deferred and recognized ratably over the expected period of our relationship with the new customer. Sales commissions related to the compensation of hospitality sales are expensed as incurred. General and administrative General and administrative expenses are primarily employee-related expenses associated with supporting business operations as well as expenses required to comply with government regulations in the markets in which we operate. The functional elements included in general and administrative are finance, people, legal, information technology and overall corporate support. Employee-related expenses consist of salaries, taxes, benefits and stock-based compensation. In conjunction with the listing of our Class A common stock on the NYSE inMay 2021 , we incurred certain stock-based compensation expenses associated with the lapse of vesting conditions upon consummation of the listing which resulted in a one time expense of$229.3 million . We also incurred fees paid to our financial advisors in addition to other professional fees and expenses related to the Direct Listing resulting in a one time expense of$25.3 million . Following the listing of our Class A common stock on the NYSE, we expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on aU.S. securities exchange and costs related to compliance and reporting obligations pursuant to the rules and regulations of theSEC . In addition, as a public company, we expect to incur additional costs associated with accounting, compliance, insurance and investor relations. 31 -------------------------------------------------------------------------------- Table of Conten ts Interest expense Interest expense primarily consists of the interest expense related to our debt facilities as well as the expense on acquisition liabilities. For further discussion on our interest expense related to our debt facilities, see "- Liquidity and Capital Resources - Indebtedness." Other (loss)/income, net Other (loss)/income, net is primarily comprised of net investment income and realized and unrealized foreign currency gains and losses. See "- Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Exchange Risk." Benefit from/(provision for) income taxes We are subject to income taxation and fileU.S. federal income tax returns as well as income tax returns in the variousU.S. states and foreign jurisdictions in which we conduct business. During interim periods, we use the estimated annual effective tax rate approach to determine the benefit from/(provision for) income taxes except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period. The estimated annual effective tax rate is based on forecasted annual results which may fluctuate due to significant changes in the forecasted/actual results and any other transactions that results in differing tax treatment. Results of Operations The following table sets forth our consolidated statements of operations information for the three and six months endedJune 30, 2021 and 2020. Three Months Ended June 30, Six Months Ended June 30, ($ in thousands) 2021 2020 2021 2020 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue$ 196,010 $ 149,640 $ 375,656 $ 286,514 Cost of revenue(1) 32,501 23,845 59,909 47,616 Gross profit 163,509 125,795 315,747 238,898 Operating expenses: Research and product development(1) 48,912 36,032 90,923 72,118 Marketing and sales(1) 70,784 51,254 168,756 126,834 General and administrative(1) 284,730 11,823 304,246 25,609 Total operating expenses 404,426 99,109 563,925 224,561 Operating (loss)/income (240,917) 26,686 (248,178) 14,337 Interest expense (2,827) (2,456) (6,087) (5,586) Other (loss)/income, net (1,201) (1,319) 2,392 (114) (Loss)/income before benefit from/(provision for) income taxes (244,945) 22,911 (251,873) 8,637 Benefit from/(provision for) income taxes 10,413 (4,372) 16,195 (230) Net (loss)/income$ (234,532) $ 18,539 $ (235,678) $ 8,407 __________________
(1)Includes stock-based compensation as follows:
Three Months Ended June 30, Six Months Ended June 30,
($ in thousands) 2021 2020 2021 2020
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Cost of revenue $ 380 $ 205 $ 655 $ 366
Research and product development 8,245 5,269 15,038 9,946
Marketing and sales 1,569 782 2,741 1,423
General and administrative (a) 240,319 1,012 241,931 3,435
Total stock-based compensation
(a) During the three and six months endedJune 30, 2021 , we incurred$229.3 million of additional stock-based compensation expense associated with the lapse of vesting conditions upon consummation of the Direct Listing. 32 -------------------------------------------------------------------------------- Table of Conten ts The following table sets forth our consolidated statements of operations information as a percentage of total revenue for the three and six months endedJune 30, 2021 and 2020. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenue 16.6 % 15.9 % 15.9 % 16.6 % Gross profit 83.4 % 84.1 % 84.1 % 83.4 % Operating expenses: Research and product development 25.0 % 24.1 % 24.2 % 25.2 % Marketing and sales 36.1 % 34.3 % 44.9 % 44.3 % General and administrative 145.3 % 7.9 % 81.0 % 8.9 % Total operating expenses 206.3 % 66.2 % 150.1 % 78.4 % Operating (loss)/income (122.9) % 17.8 % (66.1) % 5.0 % Interest expense (1.4) % (1.6) % (1.6) % (1.9) % Other (loss)/income, net (0.6) % (0.9) % 0.6 % - % (Loss)/income before benefit from/(provision for) income taxes (125.0) % 15.3 % (67.0) % 3.0 % Benefit from/(provision for) income taxes 5.3 % (2.9) % 4.3 % (0.1) % Net (loss)/income (119.7) % 12.4 % (62.7) % 2.9 % The following table sets forth our consolidated revenue by geographic location and our consolidated revenue by geographic location as a percentage of total revenue for the three and six months endedJune 30, 2021 and 2020. Three Months Ended June 30, Change Six Months Ended June 30, Change ($ in thousands, except percentages) 2021 2020 Amount % 2021 2020 Amount % (Unaudited) (Unaudited) (Unaudited) (Unaudited) United States$ 141,517 $ 105,098 $ 36,419 34.7 %$ 268,560 $ 200,470 $ 68,090 34.0 % International 54,493 44,542 9,951 22.3 % 107,096 86,044 21,052 24.5 % Total revenue$ 196,010 $ 149,640 $ 46,370 31.0 %$ 375,656 $ 286,514 $ 89,142 31.1 % Percentage of total revenue: United States 72.2 % 70.2 % 71.5 % 70.0 % International 27.8 % 29.8 % 28.5 % 30.0 % Total revenue 100 % 100 % 100 % 100 %
Comparison of the Three Months Ended
Three Months Ended June 30, Change
($ in thousands, except percentages) 2021 2020 Amount %
(Unaudited) (Unaudited)
Presence $ 137,277 $ 115,521 $ 21,756 18.8 %
Commerce 58,733 34,119 24,614 72.1 %
Total revenue $ 196,010 $ 149,640 $ 46,370 31.0 %Percentage of total revenue: Presence 70.0 % 77.2 % Commerce 30.0 % 22.8 % Total revenue 100 % 100 % Presence Revenue Presence revenue increased$21.8 million , or 18.8%, for the three months endedJune 30, 2021 compared to the same period in 2020. We believe the increase was from sustained demand for an online presence as more brands look to operate digitally coupled with stronger cash retention from our existing subscriptions. 33 -------------------------------------------------------------------------------- Table of Conten ts Commerce Revenue Commerce revenue increased$24.6 million , or 72.1%, for the three months endedJune 30, 2021 compared to the same period in 2020. The growth was primarily driven by the retention of existing subscriptions and the addition of hospitality services. Cost of Revenue and Gross Profit Three Months Ended June 30, Change ($ in thousands, except percentages) 2021 2020 Amount % (Unaudited) (Unaudited) Cost of revenue$ 32,501 $ 23,845 $ 8,656 36.3 % Gross profit$ 163,509 $ 125,795 $ 37,714 30.0 % Percentage of total revenue: Cost of revenue 16.6 % 15.9 % Gross profit 83.4 % 84.1 % Cost of revenue Cost of revenue increased$8.7 million , or 36.3%, for the three months endedJune 30, 2021 compared to the same period in 2020. The increase was primarily driven by increased payment processing fees, third-party fees and hosting costs associated with an increase in transaction volume as well as increased payment processing fees associated with hospitality services. The increase was also driven by payroll and associated benefits expenses for customer support associated with hospitality services. Gross profit Gross profit increased$37.7 million , or 30.0%, for the three months endedJune 30, 2021 compared to the same period in 2020. As a percentage of total revenue, gross profit decreased from 84.1% to 83.4% for the three months endedJune 30, 2021 as compared to the same period in 2020. The deceleration is a reflection of increased payment processing fees associated with hospitality services. Commerce revenue comprised 30.0% of total revenue during the three months endedJune 30, 2021 as compared to 22.8% for the same period in 2020. Operating expenses: Research and product development Three Months Ended June 30, Change ($ in thousands, except percentages) 2021 2020 Amount % (Unaudited)
(Unaudited)
Research and product development$ 48,912 $ 36,032 $ 12,880 35.7 % Percentage of total revenue 25.0 % 24.1 % Research and product development expenses increased$12.9 million , or 35.7%, for the three months endedJune 30, 2021 compared to the same period in 2020, primarily due to payroll and associated benefits expenses related to increased headcount in support of our product development roadmap. Marketing and sales Three Months Ended June 30, Change ($ in thousands, except percentages) 2021 2020 Amount % (Unaudited) (Unaudited) Marketing and sales$ 70,784 $ 51,254 $ 19,530 38.1 % Percentage of total revenue 36.1 % 34.3 % Marketing and sales expenses increased$19.5 million , or 38.1%, for the three months endedJune 30, 2021 compared to the same period in 2020, primarily due to increased spend in multiple brand and direct response advertising channels both domestically and internationally. The remainder of the increase was primarily due to payroll and associated benefits related to increased headcount in support of our expanded marketing operations. 34 -------------------------------------------------------------------------------- Table of Conten ts General and administrative Three Months Ended June 30, Change ($ in thousands, except percentages) 2021 2020 Amount % (Unaudited)
(Unaudited)
General and administrative$ 284,730 $ 11,823 $ 272,907 2,308.3 % Percentage of total revenue 145.3 % 7.9 % General and administrative expenses increased$272.9 million , or 2,308.3%, for the three months endedJune 30, 2021 compared to the same period in 2020, primarily due to expenses incurred in connection with the listing of our Class A common stock on the NYSE. These costs included stock-based compensation expense of$229.3 million associated with the lapse of vesting conditions upon consummation of the Direct Listing, fees paid to our financial advisors, and additional professional fees of$25.3 million related to the Direct Listing. Indirect tax expenses and employee related expenses associated with increased headcount also contributed to the increase. Interest expense Three Months Ended June 30, Change ($ in thousands, except percentages) 2021 2020 Amount % (Unaudited) (Unaudited) Interest expense$ (2,827) $ (2,456) $ 371 15.1 % Percentage of total revenue (1.4) % (1.6) % Interest expense increased$0.4 million , or 15.1%, for the three months endedJune 30, 2021 compared to the same period in 2020. The increase was primarily due to higher total debt outstanding related to our amended credit agreement fromDecember 2020 compared to the same period in 2020. Other (loss)/income, net Three Months Ended June 30, Change ($ in thousands, except percentages) 2021 2020 Amount % (Unaudited) (Unaudited) Other (loss)/income, net$ (1,201) $ (1,319) $ (118) (8.9) % Percentage of total revenue (0.6) % (0.9) % Other (loss)/income, net decreased$0.1 million , or 8.9%, for the three months endedJune 30, 2021 compared to the same period in 2020. The decrease was primarily due to unrealized gains resulting from favorable foreign exchange rates for the three months endedJune 30, 2021 as compared to the same period in 2020. Comparison of the Six Months EndedJune 30, 2021 and 2020 Revenue Six Months Ended June 30, Change ($ in thousands, except percentages) 2021 2020 Amount % Presence$ 270,148 $ 226,143 $ 44,005 19.5 % Commerce 105,508 60,371 45,137 74.8 % Total revenue$ 375,656 $ 286,514 $ 89,142 31.1 % Percentage of total revenue: Presence 71.9 % 78.9 % Commerce 28.1 % 21.1 % Total revenue 100 % 100 % Presence Revenue Presence revenue increased$44.0 million , or 19.5%, for the six months endedJune 30, 2021 compared to the same period in 2020. The increase was primarily a result of stronger retention of our existing subscriptions, which we believe stems from sustained demand for an online presence as more brands look to operate digitally. 35 -------------------------------------------------------------------------------- Table of Conten ts Commerce Revenue Commerce revenue increased$45.1 million , or 74.8%, for the six months endedJune 30, 2021 compared to the same period in 2020. The increase was driven by the growing subscription base and hospitality services. Cost of Revenue and Gross Profit Six Months Ended June 30, Change ($ in thousands, except percentages) 2021 2020 Amount % Cost of revenue$ 59,909 $ 47,616 $ 12,293 25.8 % Gross profit$ 315,747 $ 238,898 $ 76,849 32.2 % Percentage of total revenue: Cost of revenue 15.9 % 16.6 % Gross profit 84.1 % 83.4 % Cost of revenue Cost of revenue increased$12.3 million , or 25.8%, for the six months endedJune 30, 2021 compared to the same period in 2020. The increase was primarily driven by an increase in transaction volume resulting in additional payment processing fees, third party fees and hosting costs as well as an increase in payment processing fees associated with hospitality services. The increase was also driven by payroll and associated benefits expenses for customer support associated with hospitality services. Gross profit Gross profit increased$76.8 million , or 32.2%, for the six months endedJune 30, 2021 compared to the same period in 2020. As a percentage of total revenue, gross profit increased from 83.4% to 84.1% for the six months endedJune 30, 2021 as compared to the same period in 2020, principally due to a shift in revenue mix towards commerce and additional operational efficiencies in the first quarter of 2021. Operating expenses: Research and product development Six Months Ended June 30, Change ($ in thousands, except percentages) 2021 2020 Amount % Research and product development$ 90,923 $ 72,118 $ 18,805 26.1 % Percentage of total revenue 24.2
% 25.2 %
Research and product development expenses increased$18.8 million , or 26.1%, for the six months endedJune 30, 2021 compared to the same period in 2020, primarily due to payroll and associated benefits expenses related to increased headcount in support of our product development roadmap. Marketing and sales Six Months Ended June 30, Change ($ in thousands, except percentages) 2021 2020 Amount % Marketing and sales$ 168,756 $ 126,834 $ 41,922 33.1 % Percentage of total revenue 44.9 % 44.3 % Marketing and sales expenses increased$41.9 million , or 33.1%, for the six months endedJune 30, 2021 compared to the same period in 2020, primarily due to increased spend in multiple brand and direct response advertising channels in domestic and international markets. The remainder of the increase was primarily due to payroll and associated benefits related to increased headcount in support of our expanded marketing operations. General and administrative Six Months Ended June 30, Change ($ in thousands, except percentages) 2021 2020 Amount % General and administrative$ 304,246 $ 25,609 $ 278,637 1,088.0 % Percentage of total revenue 81.0 % 8.9 % 36
-------------------------------------------------------------------------------- Table of Conten ts General and administrative expenses increased$278.6 million , or 1,088.0%, for the six months endedJune 30, 2021 compared to the same period in 2020, primarily due to expenses incurred in connection with the listing of our Class A common stock on the NYSE. These costs included stock-based compensation expense of$229.3 million associated with the lapse of vesting conditions upon consummation of the Direct Listing, fees paid to our financial advisors, and additional professional fees of$25.3 million related to such listing. Additionally, increases in payroll and associated benefits expenses due to increased headcount, as well as increases in indirect tax expenses contributed to the increase. Following the completion of the Direct Listing on the NYSE we began incurring additional general and administrative expenses as a result of operating as a public company, including increased expenses for insurance, costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of theSEC , investor relations and professional services expenses, and increased stock-based compensation expense. Interest expense Six Months Ended June 30, Change ($ in thousands, except percentages) 2021 2020 Amount % Interest expense$ (6,087) $ (5,586) $ 501 9.0 % Percentage of total revenue (1.6) % (1.9) % Interest expense increased$0.5 million , or 9.0%, for the six months endedJune 30, 2021 compared to the same period in 2020 due to higher total debt outstanding related to our amended credit agreement fromDecember 2020 compared to the same period in 2020. Other (loss)/income, net Six Months Ended June 30, Change ($ in thousands, except percentages) 2021 2020 Amount % Other income/(loss), net$ 2,392 $ (114) $ 2,506 (2,198.2) % Percentage of total revenue 0.6 % - % Other income/(loss), net increased$2.5 million , or 2,198.2%, for the six months endedJune 30, 2021 compared to the same period in 2020, primarily due to unrealized gains resulting from favorable foreign exchange rates for the six months endedJune 30, 2021 as compared to the same period in 2020. Quarterly Results of Operations The following tables set forth selected unaudited quarterly statements of operations data for each of the nine fiscal quarters endedJune 30, 2021 , as well as the percentage of revenues that each line item represents for each quarter. The information for each of these quarters has been prepared in accordance with GAAP on the same basis as our audited historical consolidated financial information and includes, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This data should be read in conjunction with our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. These quarterly results are not necessarily indicative of our results of operations to be expected for any future period.
Three Months Ended (Unaudited)
June 30, March 31, December
31,
2021 2021 2020 2020 2020 2020 2019 2019
Revenue $ 196,010 $ 179,646 $ 172,300
32,501 27,408 26,171 24,550 23,845 23,771 22,151 20,709
Gross profit 163,509 152,238 146,129 137,785 125,795 113,103 111,021 104,310 Operating expenses: Research and product development(1) 48,912 42,011 57,409 38,379 36,032 36,086 31,271
29,403
Marketing and sales(1) 70,784 97,972 73,549 59,656 51,254 75,580 57,316
42,427
General and administrative(1) 284,730 19,516 17,077 11,961 11,823 13,786 15,661
11,929
Total operating expenses 404,426 159,499 148,035 109,996 99,109 125,452 104,248
83,759 Operating income (240,917) (7,261) (1,906) 27,789 26,686 (12,349) 6,773 20,551 Interest expense (2,827) (3,260) (1,997) (2,460) (2,456) (3,130) (802) (157) Other income/(loss), net (1,201) 3,593 (4,076) (3,488) (1,319) 1,205 (2,458) 4,931
Income/(loss) before (provision for)/benefit from income taxes (244,945) (6,928) (7,979)
21,841 22,911 (14,274) 3,513 25,325
(Provision for)/benefit from income taxes 10,413 5,782 12,236 (3,917) (4,372) 4,142 9,770 (6,919) Net income/(loss)$ (234,532) $ (1,146) $ 4,257 $ 17,924 $ 18,539 $ (10,132) $ 13,283 $ 18,406 37
--------------------------------------------------------------------------------
Table of Conten ts
_________________
(1)Includes stock-based compensation as follows:
Three Months Ended (Unaudited)
June 30, March 31, December 31, September 30, June 30, March 31, December 31, September 30,
($ in thousands) 2021 2021 2020 2020 2020 2020 2019 2019
Cost of revenue $ 380 $ 275 $ 212 $ 202 $ 205 $ 161 $ 148 $ 144
Research and product
development 8,245 6,793 6,151 5,522 5,269 4,677 4,030 3,719
Marketing and sales 1,569 1,172 839 882 782 641 529 487
General and administrative
(a) 240,319 1,612 1,229 1,047 1,012 2,423 1,303 862
Total stock-based
compensation $ 250,513 $ 9,852 $ 8,431 $ 7,653 $ 7,268 $ 7,902 $ 6,010 $ 5,212
(a) During the three months ended June 30, 2021 , we incurred $229.3 million of
additional stock-based compensation expense associated
with the lapse of vesting conditions upon consummation of the Direct Listing.
The following table sets forth our consolidated statements of operations
information as a percentage of total revenue for the three month periods
indicated below.
Three Months Ended (Unaudited)
June 30, March 31, December 31, September 30, June 30, March 31, December 31, September 30,
($ in thousands) 2021 2021 2020 2020 2020 2020 2019 2019
Revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue(1) 16.6 % 15.3 % 15.2 % 15.1 % 15.9 % 17.4 % 16.6 % 16.6 %
Gross profit 83.4 % 84.7 % 84.8 % 84.9 % 84.1 % 82.6 % 83.4 % 83.4 %
Operating expenses:
Research and product
development(1) 25.0 % 23.4 % 33.3 % 23.6 % 24.1 % 26.4 % 23.5 % 23.5 %
Marketing and sales(1) 36.1 % 54.5 % 42.7 % 36.7 % 34.3 % 55.2 % 43.0 % 33.9 %
General and administrative(1) 145.3 % 10.9 % 9.9 % 7.4 % 7.9 % 10.1 % 11.8 % 9.5 %
Total operating expenses 206.3 % 88.8 % 85.9 % 67.8 % 66.2 % 91.7 % 78.3 % 67.0 %
Operating income (122.9) % (4.0) % (1.1) % 17.1 % 17.8 % (9.0) % 5.1 % 16.4 %
Interest expense (1.4) % (1.8) % (1.2) % (1.5) % (1.6) % (2.3) % (0.6) % (0.1) %
Other income/(loss), net (0.6) % 2.0 % (2.4) % (2.1) % (0.9) % 0.9 % (1.8) % 3.9 %
Income/(loss) before (provision
for)/benefit from income taxes (125.0) % (3.9) % (4.6) % 13.5 % 15.3 % (10.4) % 2.6 % 20.3 %
(Provision for)/benefit from
income taxes 5.3 % 3.2 % 7.1 % (2.4) % (2.9) % 3.0 % 7.3 % (5.5) %
Net income/(loss) (119.7) % (0.6) % 2.5 % 11.0 % 12.4 % (7.4) % 10.0 % 14.7 %
Quarterly Trends
Our business is impacted by seasonal fluctuations. We typically register a
greater number of new unique subscriptions during the first quarter of a year.
We believe this is related to, among other things, our customers' buying habits
and our increased marketing and sales spend in the first quarter of most years.
We have also typically experienced a seasonal peak in the third quarter when
customers engage more frequently with their users in advance of the holiday
shopping season. In the future, seasonal trends may cause fluctuations in our
quarterly results, which may impact the predictability of our business and
operating results.
Liquidity and Capital Resources
To date, we have primarily financed our operations through cash flows from
operations.
As of June 30, 2021 , we had cash and cash equivalents and investment in
marketable securities of $196.7 million and $17.9 million of available borrowing
capacity under our Revolving Credit Facility as defined below. During July 2021 ,
we were issued an additional letter of credit for $2.5 million relating to a
security deposit for a new operating lease in Chicago, Illinois which reduced
the amount available under our Revolving Credit Facility to $15.4 million ; see
"- Item 1. Financial Information - Item 1. Financial Statements - Note 19.
Subsequent Events" included elsewhere in this Quarterly Report on Form 10-Q. We
believe our existing cash and cash equivalents and investment in marketable
securities will be sufficient to meet our operating working capital and capital
expenditure requirements over the next 12 months. Our future financing
requirements will depend on many factors, including our growth rate,
subscription renewal activity, the timing and extent of spending to support
development of our platform, the expansion of marketing and sales activities and
any future investments or acquisitions we may make. Although we currently are
not a party to any agreement and do not have any understanding with any third
parties with respect to future investments in, or acquisitions of, businesses or
technologies, we may enter into these types of arrangements from time to time,
which could also require us to seek additional equity or debt
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Table of Conten ts
financing. Additional funds may not be available on terms favorable to us or at
all, including as a result of disruptions in the credit markets. See "Risk
Factors."
The following table summarizes our operating, investing and financing activities
for the three and six months ended June 30, 2021 and 2020.
Six Months Ended June 30,
($ in thousands) 2021 2020
Net cash provided by/(used in):
Operating activities $ 58,823 $ 98,914
Investing activities $ (204,306) $ 7,586
Financing activities $ 275,080 $ (29,568)
Net cash provided by operating activities
Net cash provided by operating activities in the six months ended June 30, 2021
was $58.8 million , which reflected our net loss of $235.7 million , which was
increased by certain non-cash items primarily consisting of $260.4 million of
stock-based compensation and $16.2 million of depreciation and amortization,
partially offset by $17.0 million of deferred income taxes. Cash provided by
operating activities included $4.3 million in accounts payable and accrued
liabilities, $30.8 million in deferred revenue and $10.1 million in funds
payable to customers, which was primarily offset by $10.8 million in prepaid
expenses and other current assets.
Net cash provided by operating activities in the six months ended June 30, 2020
was $98.9 million , which reflected our net income of $8.4 million , which was
increased by certain non-cash items primarily consisting of $15.2 million of
stock-based compensation and $11.2 million of depreciation and amortization.
Cash provided by operating activities included $15.3 million in prepaid expenses
and other current assets, $16.8 million in accounts payable and accrued
liabilities and $36.0 million in deferred revenue, which was primarily offset by
$4.6 million in accounts receivable and due from vendors.
Net cash (used in)/provided by investing activities
Net cash used in investing activities in the six months ended June 30, 2021 was
$204.3 million , which reflected $202.5 million , net of acquired cash, used to
pay for the acquisition of Tock, Inc. and $14.2 million used to purchase
marketable securities, which was partially offset by $14.8 million in proceeds
from the sale and maturities of marketable securities. We additionally spent
$2.4 million in connection with the purchase of property and equipment.
Net cash provided by investing activities in the six months ended June 30, 2020
was $7.6 million , which reflected $46.5 million in proceeds from the sale and
maturities of marketable securities, partially offset by $36.6 million used to
purchase marketable securities. We additionally spent $2.2 million in connection
with the purchase of property and equipment.
Net cash provided by/(used in) financing activities
Net cash provided by financing activities in the six months ended June 30, 2020
was $275.1 million , which primarily reflected $304.4 million in proceeds from
the issuance of 4,452,023 shares of Class C common stock, net of issuance costs.
These proceeds were partially offset by $25.7 million in stock purchases related
to equity incentive plans and $6.8 million in principal payments on our Term
Loan as defined below.
Net cash used in financing activities in the six months ended June 30, 2020 was
$29.6 million , which primarily reflected $15.0 million for contingent
consideration associated with the Acuity Scheduling, Inc. acquisition, $10.8
million in stock purchases related to equity incentive plans and $4.4 million in
principal payments on our Term Loan as defined below.
Indebtedness
On December 12, 2019 , we entered into a credit agreement with various financial
institutions that provided for a $350.0 million term loan (the "Term Loan") and
a $25.0 million revolving credit facility ("Revolving Credit Facility"), which
included a $15.0 million letter of credit sub-facility. On December 11, 2020 , we
amended the credit agreement (as amended, the "Credit Agreement") to increase
the size of the Term Loan to $550.0 million and extend the maturity date for the
Term Loan and the Revolving Credit Facility to December 11, 2025 .
The original borrowings under the Term Loan were used to provide for the
repurchase, and subsequent retirement, of outstanding capital stock in 2019. The
additional borrowings were used to provide for a dividend on all outstanding
capital stock.
Borrowings under the Credit Agreement are subject to an interest rate equal to,
at our option, LIBOR or the bank's alternative base rate (the "ABR"), in either
case, plus an applicable margin. The ABR is the greater of the prime rate, the
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Table of Conten ts
federal funds effective rate plus 0.5% or the LIBOR quoted rate plus 1.00%. The
applicable margin is based on an indebtedness to consolidated EBITDA ratio as
prescribed under the Credit Agreement and ranges from 1.25% to 2.25% on
applicable LIBOR loans and 0.25% to 1.25% on ABR loans. In addition, the
Revolving Credit Facility is subject to an unused commitment fee, payable
quarterly, in an aggregate amount equal to 0.25% of the unutilized commitments
(subject to reduction in certain circumstances). Consolidated EBITDA is defined
in the Credit Agreement and is not comparable to our definition of adjusted
EBITDA used elsewhere in the Quarterly Report on Form 10-Q since the Credit
Agreement allows for additional adjustments to net income/(loss) including the
exclusion of transaction costs, changes in deferred revenue, and other costs
that may be considered non-recurring. Further, consolidated EBITDA, as defined
in the Credit Agreement, may be different from similarly titled EBITDA financial
measures used by other companies. The definition of consolidated EBITDA is
contained in Section 1.1 of the Credit Agreement.
As of June 30, 2021 , $536.6 million was outstanding under the Term Loan. The
Term Loan requires scheduled quarterly principal payments beginning March 31,
2021 in aggregate annual amounts equal to 2.50% for 2021 and 2022, 7.50% for
2023 and 2024 and 10.00% for 2025, in each case, on the amended Term Loan
principal amount, with the balance due at maturity. In addition, the Credit
Agreement includes certain customary prepayment requirements for the Term Loan,
which are triggered by events such as asset sales, incurrences of indebtedness
and sale leasebacks.
As of June 30, 2021 , $7.1 million was outstanding under the Revolving Credit
Facility in the form of outstanding letters of credit and $17.9 million remained
available for borrowing by us. The outstanding letters of credit relate to
security deposits for certain of our leased locations.
The Credit Agreement contains certain customary affirmative covenants and events
of default. The negative covenants in the Credit Agreement include, among
others, limitations on our ability (subject to negotiated exceptions) to incur
additional indebtedness or issue additional preferred stock, incur liens on
assets, enter into agreements related to mergers and acquisitions, dispose of
assets or pay dividends and distributions. In addition, commencing with the
fiscal quarter ending December 31, 2020 , we are required to maintain an
indebtedness to consolidated EBITDA ratio of not more than 4.50, tested as of
the last day of each fiscal quarter, with a step-down to 4.25 for the fiscal
quarters ending March 31, 2022 and June 30, 2022 , a further step-down to 4.00
for the fiscal quarters ending September 30, 2022 and December 31, 2022 and a
final step-down to 3.75 for the fiscal quarter ending March 31, 2023 and each
fiscal quarter thereafter (the "Financial Covenant"), subject to customary
equity cure rights. The Financial Covenant is subject to a $0.50 step-up in the
event of a material permitted acquisition, which we can elect to implement up to
two times during the life of the facility. We did not elect to implement this
step-up as a result of the acquisition of Tock. If we are not in compliance with
the covenants under the Credit Agreement or we otherwise experience an event of
default, the lenders would be entitled to take various actions, including
acceleration of amounts due under the Credit Agreement. As of June 30, 2021 , the
Company was in compliance with all applicable covenants, including the Financial
Covenant.
The obligations under the Credit Agreement are guaranteed by our wholly-owned
domestic subsidiaries and are secured by substantially all of the assets of the
guarantors, subject to certain exceptions.
Total interest expense related to our indebtedness was $2.8 million and $6.1
million for the three and six months ended June 30, 2021 , respectively, and $2.4
million and $5.4 million for the three and six months ended June 30, 2020 ,
respectively.
Key Performance Indicators and Non-GAAP Financial Measures
We review the following key performance indicators and non-GAAP financial
measures to evaluate our business, measure our performance, identify trends
affecting our business, formulate financial projections and make strategic
decisions. Increases or decreases in our key performance indicators and non-GAAP
financial measures may not correspond with increases or decreases in our revenue
and our key performance indicators and non-GAAP financial measures may be
calculated in a manner different than similar key performance indicators and
non-GAAP financial measures, respectively, used by other companies.
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Unique subscriptions (in thousands) 3,937 3,422 3,937 3,422
Total bookings (in thousands) $ 206,645 $ 167,425 $ 405,592 $ 323,293
ARRR (in thousands) $ 777,940 $ 605,917 $ 777,940 $ 605,917
ARPUS $ 193 $
182 $ 193
$ 42,640 $
39,505
$ 47,270 $ 62,036 $ 100,634 GMV (in thousands)$ 1,440,442 $ 1,028,947 $ 2,666,430 $ 1,641,537
Unique subscriptions. Unique subscriptions represent the number of unique sites, standalone scheduling subscriptions, Unfold (social) and hospitality subscriptions, as of the end of a period. A unique site represents a single
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subscription and/or group of related subscriptions, including a website
subscription and/or a domain subscription, and other subscriptions related to a
single website or domain. Every unique site contains at least one domain
subscription or one website subscription. For instance, an active website
subscription, a custom domain subscription and a Google Workspace subscription
that represent services for a single website would count as one unique site, as
all of these subscriptions work together and are in service of a single entity's
online presence. Unique subscriptions do not account for one-time purchases in
Unfold or for hospitality services. The total number of unique subscriptions is
a key indicator of the scale of our business and is a critical factor in our
ability to increase our revenue base.
Unique subscriptions increased 0.5 million, or 15.0% as of June 30, 2021
compared to the same period in 2020. These increases were primarily a result of
continued growth in new subscriptions and the retention of existing
subscriptions.
Total bookings. Total bookings includes cash receipts for all subscriptions
purchased, as well as payments due under the terms of contractual agreements for
obligations to be fulfilled. In the case of multi-year contracts, total bookings
only includes one year of committed revenue. Total bookings provides insight
into the sales of our solutions and the performance of our business because, for
a large portion of our business, we collect payment at the time of sale and
recognize revenue ratably over the term of our subscription agreements.
Total bookings increased $39.2 million , or 23.4%, for the three months ended
June 30, 2021 compared to the same period in 2020 and increased $82.3 million ,
or 25.5%, for the six months ended June 30, 2021 compared to the same period in
2020. These increases were primarily a result of an increase in unique
subscriptions and an increase in GMV processed through our platform.
Annual run rate revenue ("ARRR"). We calculate ARRR as the monthly revenue from
subscription fees and revenue generated in conjunction with associated fees
(fees taken or assessed in conjunction with commerce transactions) in the last
month of the period multiplied by 12. We believe that ARRR is a key indicator of
our future revenue potential. However, ARRR should be viewed independently of
revenue, and does not represent our GAAP revenue on an annualized basis, as it
is an operating metric that can be impacted by subscription start and end dates
and renewal rates. ARRR is not intended to be a replacement or forecast of
revenue.
ARRR increased $172.0 million , or 28.4% as of June 30, 2021 compared to the same
period in 2020. This increase was primarily a result of an increase in unique
subscriptions and an increase in commerce revenue.
Average revenue per unique subscription. We calculate ARPUS as the total
revenue during the preceding 12-month period divided by the average of the
number of total unique subscriptions at the beginning and end of the period. We
believe ARPUS is a useful metric in evaluating our ability to sell higher-value
plans and add-on subscriptions.
ARPUS increased $11 , or 6.0% as of June 30, 2021 compared to June 30, 2020 .
These increases were primarily a result of a shift in revenue mix toward
commerce and hospitality services.
Adjusted EBITDA. Adjusted EBITDA is a supplemental performance measure that our
management uses to assess our operating performance. We calculate adjusted
EBITDA as net income/(loss) excluding interest expense, other income/(loss),
net, provision for/(benefit from) income taxes, depreciation and amortization,
stock-based compensation expense and other items that we do not consider
indicative of our ongoing operating performance. The following is a
reconciliation of adjusted EBITDA to the most comparable GAAP measure, net
income/(loss):
Three Months Ended June 30, Six Months Ended June 30,
($ in thousands) 2021 2020 2021 2020
Net income/(loss) $ (234,532) $ 18,539 $ (235,678) $ 8,407
Interest expense 2,827 2,456 6,087 5,586
Provision for/(benefit from) income taxes (10,413) 4,372 (16,195) 230
Depreciation and amortization 7,726 5,551 16,232 11,188
Stock-based compensation expense 250,513 7,268 260,365 15,170
Other income/(loss), net 1,201 1,319 (2,392) 114
Direct listing costs 25,318 - 25,318 -
Adjusted EBITDA $ 42,640 $ 39,505 $ 53,737 $ 40,695
Adjusted EBITDA increased $3.1 million , or 7.9%, for the three months ended June
30, 2021 compared to the same period in 2020. The increase was primarily a
result of increased revenue partially offset by additional investments in
marketing expenses and payroll related investments. Adjusted EBITDA increased
$13.0 million , or 32.0%, for the six months ended June 30, 2021 compared to the
same period in 2020. The increase was primarily a result of increased revenue
partially offset primarily by investments in marketing spend.
Unlevered free cash flow. Unlevered free cash flow is a supplemental liquidity
measure that our management uses to evaluate our core operating business and our
ability to meet our current and future financing and investing needs. We define
unlevered free cash flow as cash flow from operating activities less cash paid
for capital expenditures increased by
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Table of Conten ts
cash paid for interest expense net of the associated tax benefit. The following
is a reconciliation of unlevered free cash flow to the most comparable GAAP
measure, cash flows from operating activities:
Three Months Ended June 30, Six Months Ended June 30,
($ in thousands) 2021 2020 2021 2020
Cash flows from operating activities
(1,758) (944) (2,415) (2,218)
Free cash flow 6,934 45,501 56,408 96,696
Cash paid for interest, net of the associated
tax benefit 3,320 1,769 5,628 3,938
Unlevered free cash flow $ 10,254 $
47,270
Unlevered free cash flow decreased$37.0 million , or 78.3%, for the three months endedJune 30, 2021 compared to the same period in 2020. The decrease was driven primarily by a decline in net working capital which was impacted by the expenses related to the Direct Listing and an increase in prepayments. Unlevered free cash flow decreased$38.6 million , or 38.4%, for the six months endedJune 30, 2021 compared to the same period in 2020. The decrease was primarily driven by the expenses related to the Direct Listing and the timing of payments associated with advertising, insurance and federal and state income taxes compared to the prior year. For the three and six months endedJune 30, 2021 , we benefited from a lower tax rate on our cash paid for interest due to operating losses as compared to operating income in the three and six months endedJune 30, 2020 . Gross Merchandise Value. GMV represents the value of merchandise, physical goods, content and time sold, including hospitality services, net of refunds, on our platform over a given period of time. GMV processed on our platform increased$411.5 million , or 40.0%, for the three months endedJune 30, 2021 compared to the same period in 2020 and increased$1,024.9 million , or 62.4%, for the six months endedJune 30, 2021 compared to the same period in 2020. Contractual Obligations During the six months endedJune 30, 2021 , there were no material changes in our contractual obligations. Our principal commitments consist of our obligations under our Credit Agreement and various long-term operating leases for our offices. The following table summarizes our contractual obligations as ofDecember 31, 2020 . Payments Due by Period ($ in thousands) 2021 2022 2023 2024 2025 Thereafter Total Credit Agreement obligations$ 13,586 $ 13,586 $ 40,758
$ 40,758 $ 434,749 $ -$ 543,437 Operating lease payments 13,890 14,192 14,054 14,557 13,965 72,648 143,306
Total contractual obligations
Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as ofJune 30, 2021 . Critical Accounting Policies Revenue Recognition We primarily derive revenue from monthly and annual subscriptions. Revenue is also derived from non-subscription services including fixed percentages or fixed fees earned on revenue share arrangements with third parties and on sales made through our customers' websites. Revenue is recognized when control of the promised services is transferred to the customer, in an amount reflecting the consideration we expect to be entitled to in exchange for those services. Revenue is recognized net of expected refunds and any sales or indirect taxes collected from customers, which are subsequently remitted to governmental authorities. We typically receive payment at the time of sale and our customer arrangements do not include a significant financing component. The majority of our customer arrangements and the period between customer payment and transfer of control of the service is expected to be one year or less. Payments received in advance of transfer of control or satisfaction of the related performance obligation are recorded as deferred revenue with the aggregate amount representing the transaction price allocated to those performance obligations that are partially or fully unsatisfied. Subscription plans automatically renew unless advanced notice is provided to us. Arrangements with our customers do not represent a license and do not provide our customers with the right to take possession of the software supporting our SaaS-based technology platform at any time. 42 -------------------------------------------------------------------------------- Table of Conten ts We determine revenue recognition through the following steps: •identification of the contract, or contracts, with a customer; •identification of the performance obligations in the contract; •determination of the transaction price; •allocation of the transaction price to the performance obligations in the contract; and •recognition of revenue when, or as, we satisfy a performance obligation. Subscription and domain managed services revenue is generally recognized over time with the exception of cases where we act as a reseller of third-party software solutions. We have determined that subscriptions to our platform and social stories represent a stand-ready obligation to perform over the subscription term. These performance obligations are satisfied over time as the customer simultaneously receives and consumes the benefits. Subscription revenues related to third-party software solutions are recognized on a net basis at a point in time, upon purchase of the software solution, which is when we satisfy our obligation to facilitate the transfer between the customer and the third-party developer. Domain managed services revenue consists of consideration received from customers in exchange for domain registration and management services. We recognize consideration received from domain managed services on a gross basis over the subscription term since we are obligated to manage our customers' domains over a contractual period, which is typically one year. Revenue associated with non-subscription offerings is primarily recognized at a point in time. Included in non-subscription revenue are revenue share arrangements with payment processors and third-party business applications (together "Commerce Partners "). Consideration received fromCommerce Partners is recognized at a point in time as we are acting as an agent and facilitating the sale of products between our customers and third parties. Non-subscription revenue also includes transaction fees from certain plans where we charge customers fees for sales completed on their websites. This transaction fee revenue is recognized at a point in time, when the sale has been completed. Business Combinations Assets acquired and liabilities assumed as part of a business combination are recorded at their fair value at the date of acquisition. The purchase price is allocated to the identifiable net assets acquired, including intangible assets and liabilities assumed, based on estimated fair values at the date of acquisition. The excess of purchase price over the fair value of assets acquired and liabilities assumed, if any, is recorded as goodwill. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. All subsequent changes to the estimated fair values of the acquired assets and liabilities assumed that occur within the measurement period and are based on facts and circumstances that existed at the acquisition date are recognized as an adjustment to goodwill. Determining the fair value of assets acquired and liabilities assumed requires significant judgment, including the selection of valuation methodologies, estimates of future revenue and cash flows and discount rates in determining the fair value of intangible assets acquired and liabilities assumed. The assets purchased and liabilities assumed have been reflected on our consolidated balance sheet and the results are included on the consolidated statements of operations from the date of acquisition. We amortize intangible assets over their estimated useful lives on a straight-line basis. Acquisition-related transaction costs, including legal and accounting fees and other external costs directly related to the acquisition, are recognized separately from the acquisition and expensed as incurred, primarily in general and administrative expense on the consolidated statements of operations. We record estimates as of the acquisition date and reassess the estimates at each reporting period up to one year after the acquisition date. Changes in estimates made prior to finalization of purchase accounting are recorded to goodwill.Goodwill and Long-Lived Assets Our goodwill balance is tested for impairment at least annually. We perform our annual goodwill impairment analysis during the fourth quarter. If events or indicators of impairment occur between annual impairment analyses, we perform an impairment analysis of goodwill at that date. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant asset. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis, including the identification of reporting units, identification and allocation of the assets and liabilities to reporting units and determination of fair value. In estimating the fair value of a reporting unit for the purposes of our annual or periodic impairment analyses, we make estimates and significant judgments about the future cash flows of the reporting unit. Changes in judgment on these assumptions and estimates could result in goodwill impairment 43 -------------------------------------------------------------------------------- Table of Conten ts charges. We believe that the assumptions and estimates utilized are appropriate based on the information available to management. Intangible assets with finite lives and property, plant and equipment are amortized or depreciated over their estimated useful life on a straight-line basis. We monitor conditions related to these assets to determine whether events and circumstances warrant a revision to the remaining amortization or depreciation period. We test these assets for potential impairment whenever we conclude events or changes in circumstances (triggering event) indicate that the carrying amount may not be recoverable. The impairment test requires a comparison of the estimated undiscounted future cash flows expected to be generated over the useful life of an asset group to the carrying amount of the asset group. An asset group is generally established by identifying the lowest level of cash flows generated by a group of assets that are largely independent of the cash flows of other assets. If the carrying amount of an asset group exceeds the estimated undiscounted future cash flows, an impairment is measured as the difference between the fair value of the asset group and the carrying amount of the asset group. Determining whether a long-lived asset is impaired requires various estimates and assumptions, including whether a triggering event has occurred, the identification of asset groups, estimates of future cash flows and the discount rate used to determine fair values. Stock-Based Compensation We account for stock-based compensation in accordance with ASC 718, Stock-Based Compensation. Under the fair value recognition provisions of this accounting guidance, compensation cost for service-based awards, including options to purchase stock and restricted stock units, is measured at fair value on the date of grant and recognized over the service period, net of forfeitures. Forfeitures are recorded as they occur if the employee fails to meet the requisite service period. Compensation cost for performance-based awards is measured at fair value on the grant date and is recognized when the vesting trigger becomes probable. The fair value of stock options were estimated on the date of grant using a Black-Scholes option pricing model; stock options are no longer issued to our employees as of 2017. The fair value of restricted stock units is estimated on the date of grant based on the fair value of our common stock. Stock-based compensation is allocated on a specific identification basis per each individual employee recipient and is classified into the corresponding line item where the related employee's cash compensation and benefits reside within the consolidated statements of operations. Common Stock Valuations Prior to the Direct Listing, there was no public market for our Class A common stock, Class B common stock and Class C common stock. The estimated fair value of our common stock had been determined by our board of directors at all relevant times. We and our board of directors utilized various valuation methodologies in accordance with the framework of theAmerican Institute of Certified Public Accountants' Technical Practice Aid , Valuation of Privately Held Company Equity Securities Issued as Compensation, to estimate the fair value of our common stock. Each valuation methodology included estimates and assumptions that require judgment. These estimates and assumptions included a number of objective and subjective factors used to determine the value of our common stock at each grant date, including the following factors: (1) prices paid for our redeemable convertible preferred stock, which we had sold to outside investors in arm's length transactions, and the rights, preferences and privileges of our redeemable convertible preferred stock and common stock; (2) valuations performed by an independent valuation specialist; (3) our stage of development and revenue growth; (4) the fact that the grants of stock-based awards involved illiquid securities in a private company; and (5) the likelihood of achieving a liquidity event for the common stock underlying the stock-based awards, such as an initial public offering, listing of our common stock on a stock exchange or sale of the company, given prevailing market conditions. In valuing our common stock, our board of directors determined the value using both the income and the market value approach valuation methods. For each valuation, the equity value determined was then allocated to the common stock using the option pricing method ("OPM"). The OPM is based on a binomial lattice model, which allows for the identification of a range of possible future outcomes, each with an associated probability. The OPM is appropriate to use when the range of possible future outcomes is difficult to predict and thus creates highly speculative forecasts. We believe this methodology was reasonable based upon our internal peer company analysis and further supported by arm's length transactions involving our redeemable convertible preferred stock and common stock. As our common stock was not actively traded, the determination of fair value involved assumptions, judgments and estimates. Application of these approaches involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and cash flows, discount rates, market multiples, the selection of comparable companies and the probability of possible future events. If different assumptions had been made, the valuation of our common stock, stock-based compensation expense, consolidated net income and consolidated net income per share could have been significantly different. For valuations after our Direct Listing, the fair value of each underlying share of Class A common stock is based on the closing price of our Class A common stock as reported on the date of grant. 44 -------------------------------------------------------------------------------- Table of Conten ts Income Taxes We recognize deferred income tax assets and liabilities for the expected future tax consequences attributable to both differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis as well as the existence of any net operating losses and certain income tax credit carryforwards. Income tax assets and liabilities are determined based on the differences between the financial statement and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse as well as the expected income tax effects of net operating loss and certain income tax credit carryforwards. Valuation allowances are established, when necessary, to reduce deferred tax assets when we expect the amount of tax benefit to be realized is less than the carrying value of the deferred tax asset. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. We account for uncertainty in income taxes using a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate audit settlement. Any interest expense and penalties related to income tax matters are included as a component of the benefit from/(provision for) income taxes within the consolidated statement of operations. Recently Issued Accounting Standards A discussion of recent accounting pronouncements is included in Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Implications of Being anEmerging Growth Company As a company with less than$1.07 billion in revenue during our last fiscal year, we qualify as an "emerging growth company" as defined in the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include that: •we are required to include only two years of audited consolidated financial statements in this Quarterly Report on Form 10-Q in addition to any required interim financial statements and correspondingly required to provide only reduced disclosure in "Management's Discussion and Analysis of Financial Condition and Results of Operations"; •we are not required to engage an auditor to report on our internal controls over financial reporting pursuant to Section 404(b); •we are not required to submit certain executive compensation matters to stockholder advisory votes, such as "say-on-pay," "say-on-frequency" and "say-on-golden parachutes"; and •we are not required to disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer's compensation to our median employee compensation. We may take advantage of these provisions until the last day of the fiscal year following the fifth anniversary of the Direct Listing onMay 19, 2021 or such earlier time that we are no longer an emerging growth company. Under the JOBS Act, emerging growth companies also can delay adopting new or revised accounting standards until such time as those standards would otherwise apply to private companies. We currently intend to take advantage of this exemption. For risks related to our status as an emerging growth company, see "Risk Factors - Risks Related to Being aPublic Company - We are an "emerging growth company" and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors." Item 3. Quantitative and Qualitative Disclosures about Market Risk Foreign Currency Exchange Risk While we generate the majority of our revenue inU.S. dollars, a portion of our revenue is denominated in Euros. For the three and six months endedJune 30, 2021 , 72.2% and 71.5% of our revenue was denominated inU.S. dollars, respectively, and 70.2% and 70.0% for the same periods in 2020, respectively. For the three and six months endedJune 30, 2021 , 27.8% and 28.5% of our revenue was denominated in Euros, respectively, and 30.0% and 29.8% for the same periods in 2020, respectively. As we expand globally, we will be further exposed to fluctuations in currency exchange rates. 45 -------------------------------------------------------------------------------- Table of Conten ts In addition, the assets and liabilities of our wholly-owned Irish subsidiary are denominated in Euros. Accordingly, assets and liabilities of this subsidiary are translated intoU.S. dollars at exchange rates in effect on the applicable balance sheet date. Income and expense items are translated at average exchange rates for the applicable period. As a result, our results of operations will be impacted by any increase or decrease in the value of the Euro relative to theU.S. dollar. Transaction gains/(losses) for the three and six months endedJune 30, 2021 were$(1.3) million and$2.2 million , respectively, and for the three and six months endedJune 30, 2020 were$(1.6) million and$(0.9) million , respectively. We currently do not hedge foreign currency exposure. We may in the future hedge our foreign currency exposure and may use currency forward contracts, currency options or other common derivative financial instruments to reduce foreign currency risk. It is difficult to predict the effect that future hedging activities would have on our operating results. Interest Rate Sensitivity We had cash equivalents and marketable securities totaling$224.0 million as ofJune 30, 2021 . Our cash equivalents are held for working capital purposes. Our investments in marketable securities are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes. Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates. Our future investment income may fall short of our expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. Borrowings under the Credit Agreement are subject to an interest rate equal to, at our option, LIBOR or ABR, in either case, plus an applicable margin. Based on the outstanding balance of the Credit Agreement as ofJune 30, 2021 , for every 100 basis point increase in LIBOR or ABR, we would incur approximately$5.4 million of additional annual interest expense. We currently do not hedge interest rate exposure. We may in the future hedge our interest rate exposure and may use swaps, caps, collars, structured collars or other common derivative financial instruments to reduce interest rate risk. It is difficult to predict the effect that future hedging activities would have on our operating results. Credit Risk We maintain components of our cash and cash equivalents balance in various accounts, which from time to time exceed the federal depository insurance coverage limit. In addition, substantially all of our cash and cash equivalents, as well as our marketable securities, are held by two financial institutions that we believe are of high credit quality. We have not experienced any losses on our deposits of cash and cash equivalents and accounts are monitored by our management team to mitigate risk. We are exposed to credit risk in the event of default by the financial institution holding our cash and cash equivalents or an event of default by the issuers of the corporate bonds and commercial paper we hold. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain "disclosure controls and procedures", as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in theSEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as ofJune 30, 2021 , the end of the period covered by the Quarterly Report on Form 10-Q. Based on the evaluation of our disclosure controls and procedures our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective because of the material weakness in internal control over financial reporting discussed below. Notwithstanding the material weakness in internal control over financial reporting described below, our management has concluded that our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance withU.S. GAAP. Material Weakness A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis. As disclosed in our Final Prospectus for our Direct Listing filed with theSEC , pursuant to Rule 424(b)(4) onMay 19, 2021 , a material weakness over financial reporting was identified as ofDecember 31, 2020 forTock, Inc. (now Tock 46 -------------------------------------------------------------------------------- Table of Conten ts LLC, "Tock"). These control deficiencies could result in a misstatement of our accounts or disclosures that would result in a material misstatement of our financial results that would not be prevented or detected, and accordingly, we determined that these control deficiencies constitute a material weakness. Remediation Plan We are in the process of remediation of the material weakness which includes developing and maintaining appropriate financial reporting controls for Tock. While we have performed certain remediation activities to strengthen our controls to address the identified material weakness, control weaknesses are not considered remediated until new internal controls have been operational for a period of time, are tested, and management concludes that these controls are operating effectively. We will continue to monitor the effectiveness of our remediation measures in connection with our future assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures. We expect to complete the remediation process by the end of the fiscal year datedDecember 31, 2021 . Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act that occurred during the period covered by the Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We are continuing to remediate the material weakness in our internal control over financial reporting as discussed above. Inherent Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives. However, in designing and evaluating the disclosure controls and procedures, our management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. 47 --------------------------------------------------------------------------------
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