LEGALZOOM.COM, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

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You should read the following discussion and analysis of our financial condition
and results of operations together with our unaudited condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q, as well as our audited consolidated financial statements
and related notes included in our Prospectus, filed with the Securities and
Exchange Commission, or SEC, in connection with our initial public offering, or
IPO.
Overview
LegalZoom, referred to herein as "we," "us," or "our", is a leading online
platform for legal and compliance solutions in the United States, or U.S. Our
core offerings include business formations, intellectual property and estate
planning services, and we have recently expanded our platform to include
professional expertise and other products, both legal and non-legal, to better
meet the needs of small businesses. Our unique position at business inception
allows us to become a trusted business advisor, supporting the evolving needs of
a new business throughout its lifecycle. Along with formations, our services
include ongoing compliance and tax advice and filings, trademark filings, and
estate plans. Additionally, we have unique insights into our customers and
leverage our product as a channel to introduce small businesses to leading
brands in our partner ecosystem, solving even more of their business needs. We
operate across all 50 states and over 3,000 counties in the U.S. and have more
than 20 years of experience navigating complex regulation and simplifying the
legal and compliance process for our customers. In 2020, 10% of new limited
liability companies, or LLCs, and 5% of new corporations in the U.S. were formed
through our platform.
Initial Public Offering
The registration statement related to our IPO was declared effective on June 29,
2021, and our common stock began trading on the Nasdaq Global Select Market on
June 30, 2021. On July 2, 2021, we completed our IPO for the sale of 19,121,000
shares of our common stock, $0.001 par value per share at an offering price of
$28.00 per share, for proceeds of $505.9 million, net of underwriting discounts
and commissions pursuant to our Prospectus. In addition, we sold 2,868,150
shares of our common stock for net proceeds of $75.9 million pursuant to the
full exercise of the underwriter's option to purchase additional shares in
connection with the IPO. In addition, on July 2, 2021, we sold 3,214,285 shares
of our common stock in a private placement with an existing related party
stockholder for proceeds of $85.0 million, net of underwriting discounts and
commissions. We raised aggregate proceeds of $666.9 million from our IPO and
private placement after deducting underwriting discounts and commissions. We
incurred stock issuance costs of $5.6 million. Proceeds raised from our IPO were
used to repay the full outstanding balance of $521.6 million on our 2018 Term
Loan.
Upon the completion of our IPO, 23,081,080 outstanding shares of redeemable
convertible preferred stock with a carrying value of $70.9 million converted
into an aggregate of 46,162,160 shares of common stock. Following the completion
of the IPO, we have one class of authorized and outstanding common stock.
Immediately upon the completion of our IPO, we filed an Amended and Restated
Certificate of Incorporation, which authorized a total of 1,000,000,000 shares
of common stock, $0.001 par value per share and 100,000,000 shares of preferred
stock, par value $0.001 per share.
Our Business Model and Growth Strategy
Our business model is to acquire customers at the time of business formation and
then continue to serve their legal and compliance needs over the life of their
businesses with our mix of transaction, subscription, and partner offerings.
Transaction products include legal documents, business filings, and related
services for small business owners and their families, such as business
formations, annual compliance filings, intellectual property, estate planning
documents, forms, and agreements. Subscription products include compliance
solutions and credentialed professional subscription services, including legal
and tax advisory services. We also introduce our customers to a variety of
third-party partners, giving them access to critical services they need to start
and run their businesses, such as business license services, bookkeeping
services, banking services, productivity tools, and business insurance, among
others.
Going forward, our strategy is to scale our existing business and gain market
share by investing in core products and sales and marketing; expand our
addressable market while increasing conversion and average order value, or AOV;
by integrating our independent attorney network and tax professionals into our
core product set; and growing average revenue per subscription unit, or ARPU,
and partnership revenue through building in-house adjacencies and expanding our
partner ecosystem to provide new recurring revenue streams.
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Key Business Metrics
In addition to the measures presented in our consolidated financial statements,
we regularly monitor the following financial and operating metrics to evaluate
the growth of our business, measure the effectiveness of our marketing efforts,
identify trends, formulate financial forecasts and make strategic decisions.
Number of business formations
We define the number of business formations in a given period as the number of
global LLC, incorporation, not-for-profit and other formation orders placed on
our platform in such period. We consider the number of business formations to be
an important metric considering that it is typically the first product or
service small business customers purchase on our platform, creating the
foundation for additional products and subsequent subscription and partner
revenue as they adopt additional products and services throughout their business
lifecycles.
The below table sets forth the number of business formations for the three and
nine months ended September 30, 2021 and 2020:
                                                     Three Months Ended September 30,                         Nine Months Ended September 30,
                                                    2021                            2020                    2021                            2020
                                                                                          (in thousands)
Number of business formations                         106                               117                   351                               290


We experienced a 9% reduction in business formations from the three months ended
September 30, 2020 compared to the three months ended September 30, 2021, and a
21% increase from the nine months ended September 30, 2020 compared to the nine
months ended September 30, 2021. While we generally see demand for our services
decline toward the beginning of the third quarter as a result of summer
vacations, the third quarter of 2020 deviated from this seasonal trend as
pent-up demand from COVID-19-related shelter-in-place directives was realized
and the economy re-opened. For the three months ended September 30, 2021, we saw
a return to the historical seasonal reduction in overall U.S. business
formations, leading to a year-over-year decline in the number of business
formations on our platform. The increase in the number of business formations on
our platform during the nine months ended September 30, 2021 reflected
year-over-year growth in overall U.S. business formations during the first half
of 2021 as well as the year-to-date increase in business generated from our
sales and marketing investments.
Number of transactions
We define the number of transactions in a given period as gross transaction
order volume, prior to refunds, on our platform during such period, excluding
transactions from our subsidiary, Beaumont ABS Limited, or Beaumont, which was
divested in April 2020. Transactions may include one or more services purchased
at the same time. For example, a customer of our business formation services may
choose to form an LLC and purchase an operating agreement and business licenses
at the same time. This constitutes a single transaction. Refunds, or partial
refunds, may be issued under certain circumstances pursuant to the terms of our
customer satisfaction guarantee. We consider the number of transactions to be an
important metric considering that our customers generally begin their LegalZoom
journey with a transaction, creating the foundation for generating subsequent
subscription and partner revenue.
The below table sets forth the number of transactions for the three and nine
months ended September 30, 2021 and 2020:
                                                       Three Months Ended September 30,                         Nine Months Ended September 30,
                                                      2021                            2020                    2021                            2020
                                                                                            (in thousands)
Number of transactions                                  229                               254                   765                               696


We experienced a 10% reduction in transactions from the three months ended
September 30, 2020 compared to the three months ended September 30, 2021, and a
10% increase from the nine months ended September 30, 2020 compared to the nine
months ended September 30, 2021. While we generally see demand for our services
decline toward the beginning of the third quarter as a result of summer
vacations, the third quarter of 2020 deviated from this seasonal trend as
pent-up demand from COVID-19-related shelter-in-place directives was realized
and the economy re-opened. For the three months ended September 30, 2021, we saw
a return to the historical seasonal
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reduction in overall U.S. business formations, leading to a year-over-year
decline in the number of transactions on our platform. The increase in the
number of transactions during the nine months ended September 30, 2021 resulted
from year-over-year growth in overall U.S. business formations during the first
half of 2021. Our estate planning and other consumer transactions continued to
decline as a percentage of total transactions in both the three and nine month
periods. We expect the proportion of consumer transactions to continue to
decrease over time as we focus more of our investment in small business
formations, which have a significantly higher order value. Estate planning
transactions benefited from tailwinds driven by the COVID-19 pandemic in the
prior year, as individuals turned to our online services given the relative
inaccessibility of offline alternatives. We expect to continue to grow
transactions; however, the growth may fluctuate period-over-period based on the
variability of overall business formations and estate planning transactions.
Average order value
We define average order value for a given period as total transaction revenue
divided by total number of transactions in such period, excluding revenue and
related transactions from our Beaumont subsidiary. We consider average order
value to be an important metric given it indicates how much customers are
spending on our platform. Estate planning transactions are generally at a lower
price point, making our overall average order value lower than our typical price
point for small business formations.
The below table sets forth the average order value for the three and nine months
ended September 30, 2021 and 2020:
                                             Three Months Ended September 30,               Nine Months Ended September 30,
                                                  2021                   2020                   2021                   2020
Average order value                       $             291          $     251          $             263          $     227


Average order value increased by 16% from the three months ended September 30,
2020 compared to the three months ended September 30, 2021 and increased 16%
from the nine months ended September 30, 2020 compared to the nine months ended
September 30, 2021. Growth in average order value for the three and nine months
ended September 30, 2021 was primarily driven by an increase in the proportion
of business formations and other small business transactions, which have a
significantly higher order value compared to other transactions relative to
total transactions, the timing of transaction revenue recognition and increased
customer adoption of our attorney-led trademark product. Transaction revenue
recognized in the third quarter of 2020 was negatively impacted by capacity
constraints related to the COVID-19 pandemic, including delays at various
secretaries of state, which pushed fulfillment of transaction orders placed in
the third quarter to subsequent periods. Growth may fluctuate period-over-period
based on estate planning transactions, the timing of transaction revenue
recognition, and our ability to introduce and sell higher-value products. While
we expect continued strength in average order value as business formations
continue to account for a larger share of overall transaction units, we expect
year-over-year average order value growth to taper in the fourth quarter of
2021. Our goal is to grow average order value as we increase the average number
of transactional products purchased in a single order and the mix of
higher-value credentialed professional-assisted products.
Number of subscription units
We define the number of subscription units in a given period as the paid
subscriptions that remain active at the end of such period, including those that
are not yet 60 days past their subscription order dates, excluding subscriptions
from our employer group legal plan and small business concierge subscription
service, for which we ceased acquiring new subscribers in October 2020. Refunds,
or partial refunds, may be issued under certain circumstances pursuant to the
terms of our customer satisfaction guarantee.
We consider the number of subscription units to be an important metric since
subscriptions enable us to increase lifetime value through deeper, longer-term
relationships with customers. Subscriptions typically range from 30 days to one
year in duration and the vast majority of our new subscriptions originate from
business formation orders and have an annual term. Our customers can have
multiple subscriptions at the end of a period. For example, a popular
combination for a new small business owner is attorney advice and registered
agent subscriptions. Our registered agent offering comprised approximately 60%
of our subscription units for the three and nine months ended September 30, 2021
and 2020.
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The below table sets forth the number of subscription units as of September 30,
2021 and 2020:
                                     September 30,
                                 2021             2020
                                    (in thousands)
Number of subscription units      1,264            1,043


We achieved 21% growth in our number of subscription units from September 30,
2020 to September 30, 2021, reflecting strong growth from our registered agent,
compliance, and attorney advice subscriptions primarily due to the year-to-date
increase in business formations compared to the same period last year. The
number of subscriptions units as of September 30, 2021 increased 16% from
1,085,000 units as of December 31, 2020. We aim to continue to grow subscription
units by increasing the proportion of our small business customers that purchase
a subscription service at the time of their initial formation purchase and
improving retention rates.
Average revenue per subscription unit
We define ARPU as of a given date as subscription revenue for the 12-month
period ended on such date, or LTM, divided by the average number of subscription
units at the beginning and end of the LTM period, excluding revenue and
subscriptions from our employer group legal plan and small business concierge
subscription service, for which we ceased acquiring new subscribers in October
2020. We consider ARPU to be an important metric because it helps to illustrate
our ability to deepen our relationship with our existing customers as they
purchase incremental and higher-value services. We have expanded ARPU in recent
periods, and for the three months ended September 30, 2021, ARPU increased 5%
from the same period in 2020.
The below table sets forth ARPU as at September 30, 2021 and 2020:
                                            September 30,
                                           2021        2020

Average income per subscription unit $ 231 $ 221


We expect ARPU to remain relatively stable over time, as we plan to focus more
of our efforts on increasing the number of subscription units rather than
routinely increasing pricing on existing subscription plans.
Key Factors Affecting Our Performance
The details of key factors affecting our performance are included in our
Prospectus.
Key Components of our Results of Operations
Revenue
We generate revenue from the sources identified below.
Transaction revenue. Transaction revenue is primarily generated from our
customized legal document services upon fulfillment of these services.
Transaction revenue includes filing fees and is net of cancellations,
promotional discounts, sales allowances and credit reserves. Until April 2020,
when we ceased providing such services, we also generated transaction revenue
from our residential and commercial conveyancing business in the United Kingdom,
or U.K., and revenue for these services was recognized when delivered to the
customer. In the fourth quarter of 2020, we commenced providing tax preparation
services in the U.S. which are recognized at the point in time when the
customer's tax return is filed and accepted by the applicable government
authority.
Subscription revenue. Subscription revenue is generated primarily from
subscriptions to our registered agent services, compliance packages, attorney
advice, and legal forms services, in addition to software-as-a-service, or SaaS,
subscriptions in the U.K. In the fourth quarter of 2020, we commenced providing
tax, bookkeeping and payroll subscription services. We generally recognize
revenue from our subscriptions ratably over the subscription term. Subscription
terms generally range from thirty days to one year. Subscription revenue
includes the value allocated to bundled free trials for our subscription
services and is net of promotional discounts, cancellations, sales allowances
and credit reserves and payments to third-party service providers such as legal
plan law firms and tax service providers.
For transaction and subscription revenue, we generally collect payments and fees
at the time orders are placed and prior to services being rendered. We record
amounts collected for services that have not been performed as deferred revenue
on our consolidated balance sheet. The transaction price that we record is
generally based on the
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contractual amounts in our contracts and is reduced for estimated sales
allowances for price concessions, charge-backs, sales credits and refunds, which
are accounted for as variable consideration when estimating the amount of
revenue to recognize.
Partner revenue. Partner revenue consists primarily of one-time or recurring
fees earned from third-party providers from leads generated to such providers
through our online legal platform. Revenue is recognized when the related
performance-based criteria have been met. We assess whether performance criteria
have been met on a cost-per-click or cost-per-action basis. In the near term, we
expect lower performance in partner revenue as we transition away from legacy
partners that do not align with our new strategic direction, and we focus more
on long-term opportunities to have strategic partnerships that build on
recurring revenue models.
Cost of revenue
Cost of revenue includes all costs of providing and fulfilling our services.
Cost of revenue primarily includes government filing fees; costs of fulfillment,
customer care and credentialed professionals, and related benefits, including
stock-based compensation; and costs of independent contractors for document
preparation; telecommunications and data center costs, amortization of acquired
developed technology; depreciation and amortization of network computers,
equipment and internal-use software; printing, shipping and handling charges;
credit and debit card fees; allocated overhead; legal document kit expenses; and
sales and use taxes. We defer direct and incremental costs primarily related to
government filing fees incurred prior to the associated service meeting the
criteria for revenue recognition. These contract assets are recognized as cost
of revenue in the same period the related revenue is recognized.
We expect our cost of revenue to increase in absolute dollars as we continue to
invest in enhancing our customer experience and in new product development,
including expert-assisted offerings for our Tax and Attorney-Assisted services.
Gross profit and gross margin
Gross profit, or revenue less cost of revenue, and gross margin, or gross profit
as a percentage of revenue, have been and will continue to be affected by
various factors, primarily the mix between transaction, subscription and partner
revenue. Our gross margin on subscription and partner revenue is higher than our
gross margin on transaction revenue. Our gross margin expansion is also driven
by automation improvements and digitization efforts. Further, our acquisitions
of other companies have negatively impacted our gross margin in the short term,
and any such future acquisitions could have a similar effect.
We expect our gross profit to increase in absolute dollars and our gross margin
to increase modestly over the long term as we continue to focus on growing
higher-margin subscription revenue and invest in fulfillment automation
technologies. However, our gross margin could fluctuate from period to period
due to fulfillment rates and seasonality.
Operating expenses
Our operating expenses consist primarily of sales and marketing, technology and
development, general and administrative expenses, and to a lesser extent,
impairments of goodwill, long-lived assets and other assets, in addition to a
loss on sale of a business in the second quarter of 2020.
Sales and marketing
Sales and marketing expenses consist; of customer acquisition media costs;
compensation and related benefits, including stock-based compensation for
marketing and sales personnel; media production; public relations and other
promotional activities; general business development activities; an allocation
of depreciation and amortization and allocated overhead. Customer acquisition
media costs consist primarily of search engine marketing, television and radio
costs. Marketing and advertising costs to promote our services are expensed in
the period incurred. Media production costs are expensed the first time the
advertisement is aired.
We intend to continue to make significant investments in sales and marketing to
drive additional revenue, further penetrate our expanding addressable market,
and build on our digital brand leadership and awareness. As a result, we expect
our sales and marketing expenses to continue to increase in absolute dollars and
to be our largest operating expense category for the foreseeable future.
Technology and development
Technology and development expenses consist primarily of personnel costs and
related benefits, including stock-based compensation, expenses for outside
consultants, an allocation of depreciation and amortization and allocated
overhead. These expenses include costs incurred in the development and
implementation of our websites,
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mobile applications, online legal platform, research and development and related
infrastructure. Technology and development expenses are expensed as incurred,
except to the extent that such costs are associated with internal-use software
costs that qualify for capitalization.
We expect our technology and development expenses to continue to increase in
absolute dollars for the foreseeable future as we invest in new products and
services, enhancing our customer experience, and in production automation
technologies. We expect our technology and development expenses to remain
relatively consistent or increase as a percentage of our revenue over the long
term, although our technology and development expenses may fluctuate as a
percentage of our revenue from period-to-period due to seasonality and the
timing and extent of these expenses.
General and administrative
Our general and administrative expenses relate primarily to compensation and
related benefits, including stock-based compensation, for executive and
corporate personnel, professional and consulting fees, an allocation of
depreciation and amortization, allocated overhead and legal costs. We expense
legal costs for defending legal proceedings as incurred.
We expect our general and administrative expenses to increase in absolute
dollars for the foreseeable future due to additional costs associated with
accounting, compliance, insurance and investor relations as we have recently
become a public company. Over the next three years, we will incur significant
stock-based compensation expense as a result of certain modifications to equity
awards that occurred in connection with our IPO; however, we expect our general
and administrative expenses to decrease as a percentage of our revenue over the
longer term, although our general and administrative expenses may fluctuate as a
percentage of our revenue from period-to-period due to seasonality and the
timing and extent of these expenses.
Interest expense, net
Interest expense, net, consists primarily of interest expense on our 2018 Credit
Facility, hedging instruments, capital lease obligations and amortization of
debt issuance costs. Interest expense, net, decreased in 2020 primarily due to a
decrease in London Interbank Offered Rate, or LIBOR, on our 2018 Term Loan.
We expect interest expense, net, to decrease significantly in the near term as a
result of the full repayment of our outstanding indebtedness under our 2018 Term
Loan in July 2021 after the completion of our IPO and the extinguishment of
hedging instruments.
Income taxes
Our provision for income taxes consists of current and deferred federal, state
and foreign income taxes.
At December 31, 2020, we had federal net operating loss, or NOL, carryforwards
of $11.7 million which will begin to expire in 2031. In 2020, we had state NOL
carryforwards of $49.8 million, which will begin to expire in 2022 and we had
foreign NOL carryforwards of $32.4 million, which can be carried forward
indefinitely and are not subject to expiration. In general, under Sections 382
and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a
corporation undergoes an "ownership change," generally defined as a greater than
50% change, by value, in its equity ownership by certain stockholders over a
three-year period, the corporation's ability to use its pre-change NOLs and
other pre-change tax attributes, such as research tax credits, to offset its
post-change income or taxes may be limited.
We had an ownership change in prior years, and as a result certain federal and
state NOLs were limited pursuant to Section 382 of the Code. This limitation has
been accounted for in calculating our available NOL carryforwards. We may
experience an ownership change in the future or subsequent changes in our stock
ownership, some of which changes are outside our control. If we undergo another
ownership change, our ability to further utilize federal NOLs could be limited
by Section 382 of the Code. Furthermore, for federal NOLs arising in tax years
beginning after December 31, 2020, the 2017 Tax Cuts and Jobs Act, or Tax Act,
limits a taxpayer's ability to utilize federal NOL carryforwards to 80% of
taxable income. In addition, NOLs arising in tax years beginning after December
31, 2017 can be carried forward indefinitely. However, carryback of such NOLs is
generally prohibited, except that, under the CARES Act, federal NOLs generated
in 2018, 2019 and 2020 may be carried back to each of the five taxable years
preceding the taxable year in which the loss arises. For these reasons, we may
not be able to utilize a material portion of any NOLs that are generated in tax
years ending after December 31, 2020. In addition, at the state level, there may
be periods during which the use of NOLs is suspended or otherwise limited, which
could accelerate or increase our state taxes we owe.
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Results of Operations
The following table sets forth our consolidated statement of operations data for
each of the periods indicated. The period-to-period comparison of financial
results should not be considered as a prediction or indicative of our future
results.
                                                     Three Months Ended September 30         Nine Months Ended September 30
                                                         2021                2020               2021                2020
                                                                                 (in thousands)
Revenue                                              $  147,879          $ 131,595          $  432,943          $ 348,397
Cost of revenue (1)(2)                                   47,267             43,841             141,086            114,712
Gross profit                                            100,612             87,754             291,857            233,685
Operating expenses:
Sales and marketing (1)(2)                               72,572             46,833             209,364            130,487
Technology and development (1)(2)                        26,865             10,911              65,790             31,619
General and administrative (1)(2)                        28,192             10,424              75,202             35,697
Impairment of long-lived and other assets                   493                  -                 872                555
Loss on sale of business                                      -                  -                   -              1,764
Total operating expenses                                128,122             68,168             351,228            200,122
(Loss) income from operations                           (27,510)            19,586             (59,371)            33,563
Interest expense, net                                    (9,957)            (8,658)            (27,923)           (26,785)
Other (expense) income, net                                (368)             1,610                 300                149
Loss on debt extinguishment                              (7,748)                 -              (7,748)                 -
Impairment of available-for-sale debt securities              -                  -                   -             (4,818)
(Loss) income before income taxes                       (45,583)            12,538             (94,742)             2,109
(Benefit from) provision for income taxes                (5,908)             3,126              (6,849)             1,634
Net (loss) income                                    $  (39,675)         $   9,412          $  (87,893)         $     475

(1) Includes stock-based compensation expense as follows:

                                                 Three Months Ended September 30,        Nine Months Ended September 30,
                                                      2021                2020               2021                2020
                                                                              (in thousands)
Cost of revenue                                  $       764          $      48          $    1,585          $     131
Sales and marketing                                    6,356                163              11,706                950
Technology and development                            14,446                600              32,591              2,153
General and administrative                            16,499              2,118              41,079              7,383
Total stock-based compensation                   $    38,065          $   

2 929 $ 86,961 $ 10,617


Stock-based compensation expense increased significantly for the three and nine
months ended September 30, 2021 due to the modification of certain equity awards
in connection with our IPO. Refer to Note 9 of our unaudited condensed
consolidated financial statements included in this Quarterly Report on Form
10-Q.
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(2)Includes depreciation and amortization expense for our property and
equipment, including capitalized internal-use software and intangible assets as
follows:
                                                 Three Months Ended September 30,        Nine Months Ended September 30,
                                                      2021                2020               2021                2020
                                                                              (in thousands)
Cost of revenue                                  $     1,403          $   1,904          $    4,479          $   5,796
Sales and marketing                                    1,401              1,377               4,199              4,988
Technology and development                               538                656               1,709              1,973
General and administrative                               433                478               1,217              1,405

Total depreciation expense $ 3,775 $ 4,415 $ 11,604 $ 14,162


Comparison of the Three Months Ended September 30, 2021 and 2020
Revenue
                          Three Months Ended September 30,
                                2021                      2020         $ change      % change
                                       (in thousands, except percentages)
Revenue by type
Transaction       $          66,873                    $  63,850      $  3,023            5  %
Subscription                 73,317                       59,348        13,969           24  %
Partner                       7,689                        8,397          (708)          (8) %
Total revenue     $         147,879                    $ 131,595      $ 16,284           12  %


Total revenue for the three months ended September 30, 2021 increased $16.3
million, or 12%, compared to the three months ended September 30, 2020. The
increase was primarily driven by increases in transaction revenue and
subscription revenue. Transaction revenue was 45% and 49% of total revenue for
the three months ended September 30, 2021 and 2020, respectively, and
subscription revenue was 50% and 45% of total revenue for the three months ended
September 30, 2021 and 2020, respectively.
Transaction revenue for the three months ended September 30, 2021 increased $3.0
million, or 5%, compared to the three months ended September 30, 2020, driven by
a 16% improvement in average order value, partially offset by a 10% decrease in
the number of transactions. The improvement in average order value was primarily
driven by the timing of transaction revenue recognition, an increase in the
proportion of small business formations, which have a significantly higher order
value compared to other transactions, relative to total transactions and
increased customer adoption of our attorney-led trademark product.
Subscription revenue for the three months ended September 30, 2021 increased
$14.0 million, or 24%, compared to the three months ended September 30, 2020.
The increase was primarily due to a 21% increase in the number of subscription
units. The increase in subscription units was primarily driven by increased
business formations. Strong performance from our registered agent subscription
services drove the largest contribution of growth in the number of subscription
units.
Partner revenue for the three months ended September 30, 2021 decreased $0.7
million, or 8%, compared to the three months ended September 30, 2020. The
decrease was primarily due to lower transaction volumes and our transition away
from legacy partners that do not align with our new strategic direction.
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Cost of revenue
                          Three Months Ended September 30,
                                 2021                      2020        $ change      % change
                                       (in thousands, except percentage)
Cost of revenue   $         47,267                      $ 43,841      $  3,426            8  %

Cost of turnover for the three months ended September 30, 2021 increase $ 3.4 million, or 8%, compared to the three months ended September 30, 2020. The increase is mainly due to higher execution costs as we increased our production capacity to improve our customer experience. Gross profit

                       Three Months Ended September 30,
                              2021                       2020        $ change      % change
                                     (in thousands, except percentage)
Gross profit   $          100,612                     $ 87,754      $ 12,858           15  %


Gross profit for the three months ended September 30, 2021 increased $12.9
million, or 15%. The increase was primarily due to the increase in revenue and a
change in our revenue mix toward subscriptions, which have higher gross margins
than transactions, partially offset by higher fulfillment costs.
Sales and marketing
                                Three Months Ended September 30,
                                       2021                      2020        $ change      % change
                                             (in thousands, except percentage)
Sales and marketing     $         72,572                      $ 46,833      $ 25,739           55  %


Sales and marketing expenses for the three months ended September 30, 2021
increased $25.7 million, or 55%, compared to the three months ended
September 30, 2020. The increase was primarily due to an increase in customer
acquisition marketing spend of $15.7 million, an increase in stock-based
compensation of $6.2 million, mainly in connection with our IPO, and increased
payroll and related costs due to increased head count in our sales organization
of $2.6 million to support higher revenue. Customer acquisition marketing spend
was $49.7 million and $34.0 million for the three months ended September 30,
2021 and September 30, 2020, respectively, an increase of 46% as we invested to
expand our customer base and build our digital brand leadership and awareness.
Technology and development
                                                    Three Months Ended September 30,
                                                        2021                2020             $ change              % change
                                                                         (in thousands, except percentage)
Technology and development                          $   26,865          $  10,911          $  15,954                      146  %


Technology and development expenses for the three months ended September 30,
2021 increased $16.0 million, or 146%, compared to the three months ended
September 30, 2020. This growth was primarily due to an increase in stock-based
compensation of $13.8 million mainly in connection with our IPO, and an increase
in payroll and related benefits of $1.4 million, mainly due to increased
headcount as we added staff to support our investment in new products and
services.
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General and administrative
                                                    Three Months Ended September 30,
                                                        2021                2020             $ change              % change
                                                                         (in thousands, except percentage)
General and administrative                          $   28,192          $  10,424          $  17,768                      170  %


General and administrative expenses for the three months ended September 30,
2021 increased $17.8 million, or 170%, compared to the three months ended
September 30, 2020. The increase was primarily due to an increase in stock-based
compensation of $14.4 million and professional services costs of $1.3 million
related to pre-development costs for our financial systems infrastructure,
recruiting costs for new hires, as well as accounting, compliance and insurance
costs associated with becoming a public company and a $1 million increase in
payroll and related benefits largely due to increased headcount.
Impairment of long-lived and other assets
                                           Three Months Ended September 30,
                                               2021                 2020              $ change               % change
                                                                 (in thousands, except percentage)
Impairment of long-lived and other assets $        493          $        -          $      493                      100  %


In the three months ended September 30, 2021, we recorded an impairment charge
of $0.5 million related to capitalized software projects for certain product
initiatives that were no longer aligned with our go-forward strategy.
Interest expense, net
                                 Three Months Ended September 30,
                                        2021                       2020        $ change      % change
                                              (in thousands, except percentage)
Interest expense, net   $           9,957                        $ 8,658      $  1,299           15  %


Interest expense, net, for the three months ended September 30, 2021 increased
$1.3 million, or 15%, compared to the three months ended September 30, 2020. The
increase was primarily related to charges associated with the early
extinguishment of our interest rate swaps during the most recent quarter,
partially offset by a reduction in interest expense on our 2018 Term Loan, which
was extinguished on July 2, 2021.
Other income (expense), net
                                                       Three Months Ended September 30,
                                                           2021                   2020             $ change              % change
                                                                            (in thousands, except percentage)
Other income (expense), net                         $           (368)         $   1,610          $  (1,978)                    (123) %


Other income, net, for the three months ended September 30, 2020 decreased by
$2.0 million, or 123%, resulting in Other (expense), net, for the three months
ended September 30, 2021. The change was primarily due to foreign currency
movements related to our intercompany loans which are denominated in GBP.

Loss on debt extinguishment
                                                     Three Months Ended September 30,
                                                         2021                 2020              $ change               % change
                                                                           (in thousands, except percentage)
Loss on debt extinguishment                         $      7,748          $        -          $    7,748                      100  %


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Loss on debt extinguishment for the three months ended September 30, 2021
increased $7.7 million, or 100%, compared to the three months ended September
30, 2020. The increase was due to the write down of unamortized debt issuance
costs associated with the extinguishment of our 2018 Term Loan in July 2021.
(Benefit from) provision for income taxes
                                        Three Months Ended September 30,
                                             2021                2020             $ change              % change
                                                              (in thousands, except percentage)
(Benefit from) provision for income
taxes                                   $    (5,908)         $   3,126          $  (9,034)                    (289) %


The benefit from income taxes for the three months ended September 30, 2021
resulted from a $9.0 million change in our income taxes from the three months
ended September 30, 2020, primarily due to the tax impact from the decrease in
U.S income compared to the three months ended September 30, 2020, as well as the
increased benefit from the exercise of non-qualified stock options in 2021 over
2020, partially offset by non-deductible share-based compensation.
Comparison of the Nine Months Ended September 30, 2021 and 2020
Revenue
                         Nine Months Ended September 30,
                               2021                     2020         $ change      % change
                                      (in thousands, except percentages)
Revenue by type
Transaction       $        201,621                   $ 159,865      $ 41,756           26  %
Subscription               208,194                     167,415        40,779           24  %
Partner                     23,128                      21,117         2,011           10  %
Total revenue     $        432,943                   $ 348,397      $ 84,546           24  %


Total revenue for the nine months ended September 30, 2021 increased $84.5
million, or 24%, to $432.9 million compared to the nine months ended
September 30, 2020. The increase was primarily driven by increases in
transaction revenue and subscription revenue. Transaction revenue was 47% and
46% of total revenue for the nine months ended September 30, 2021 and 2020,
respectively, and subscription revenue was 48% of total revenue for the nine
months ended September 30, 2021 and 2020, respectively.
Transaction revenue for the nine months ended September 30, 2021 increased $41.8
million, or 26%, compared to the nine months ended September 30, 2020, driven by
a 10% increase in the number of transactions and a 16% improvement in average
order value.
Subscription revenue for the nine months ended September 30, 2021 increased
$40.8 million, or 24%, compared to the nine months ended September 30, 2020. The
increase was primarily due to a 21% increase in the number of subscription
units. The increase in subscription units was primarily driven by increased
business formations. Strong performance from our registered agent subscription
services drove the largest contribution of growth to the number of subscription
units.
Partner revenue for the nine months ended September 30, 2021 increased $2.0
million, or 10%, compared to the nine months ended September 30, 2020. The
increase was primarily due to higher transaction volumes.
Cost of revenue
                         Nine Months Ended September 30,
                               2021                     2020         $ change      % change
                                      (in thousands, except percentage)
Cost of revenue   $        141,086                   $ 114,712      $ 26,374           23  %


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Cost of revenue for the nine months ended September 30, 2021 increased $26.4
million, or 23%, compared to the nine months ended September 30, 2020. The
increase was primarily due to higher filing fees and fulfillment costs related
to the increased transaction volumes and increased production capacity to
improve our customer experience.
Gross profit
                      Nine Months Ended September 30,
                            2021                     2020         $ change      % change
                                   (in thousands, except percentage)
Gross profit   $        291,857                   $ 233,685      $ 58,172           25  %

Gross margin for the nine months ended September 30, 2021 increase $ 58.2 million, or 25%. The increase is due to an increase in revenues partially offset by higher filing fees and execution costs.

Sales and marketing
                             Nine Months Ended September 30,
                                   2021                     2020         $ change      % change
                                          (in thousands, except percentage)
Sales and marketing   $        209,364                   $ 130,487      $ 78,877           60  %


Sales and marketing expenses for the nine months ended September 30, 2021
increased $78.9 million, or 60%, compared to the nine months ended September 30,
2020. The increase was primarily due to an increase in customer acquisition
marketing spend of $56.2 million, an increase in stock-based compensation of
$10.8 million, mainly in connection with our IPO, increased payroll and related
costs in our sales organization due to increased headcount of $7.9 million to
support higher revenue and an increase in media production spend of $3.2
million. Customer acquisition marketing spend was $147.9 million and $91.7
million for the nine months ended September 30, 2021 and September 30, 2020,
respectively, as we invested to expand our customer base and build our digital
brand leadership and awareness.

Technology and development
                                              Nine Months Ended September 30,
                                                  2021                2020             $ change              % change
                                                                   (in thousands, except percentage)
Technology and development                    $   65,790          $  31,619          $  34,171                      108  %


Technology and development expenses for the nine months ended September 30, 2021
increased $34.2 million, or 108%, compared to the nine months ended
September 30, 2020. The increase was primarily due to an increase in stock-based
compensation of $30.4 million, mainly in connection with our IPO, and an
increase in payroll and related benefits of $2.5 million, mainly due to
increased headcount as we added staff to support our investment in new products
and services.
General and administrative
                                                 Nine Months Ended September 30,
                                                     2021                2020             $ change              % change
                                                                      (in thousands, except percentage)
General and administrative                       $   75,202          $  35,697          $  39,505                      111  %


General and administrative expenses for the nine months ended September 30, 2021
increased $39.5 million, or 111%, compared to the nine months ended
September 30, 2020. The increase was primarily due to a $33.7 million increase
in stock-based compensation, mainly in connection with our IPO, and an increase
in professional service
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costs $5.3 million related to pre-development costs for our financial systems
infrastructure, recruiting costs for new hires, as well as accounting, legal,
compliance and insurance costs associated with becoming a public company.
Impairment of long-lived and other assets
                                                 Nine Months Ended September 30,
                                                     2021                   2020             $ change               % change
                                                                      (in thousands, except percentage)
Impairment of long-lived and other assets    $             872          $     555          $      317                       57  %


In 2021 and 2020, we recorded non-cash charges related to the impairment of
internal-use software projects that were no longer aligned with our go-forward
strategy.
Loss on sale of business
                                   Nine Months Ended September 30,
                                          2021                     2020        $ change      % change
                                                (in thousands, except percentage)
Loss on sale of business   $         -                           $ 1,764    

$ (1,764) (100)%


In April 2020, in connection with our sale of our Beaumont subsidiary, we
incurred a loss of $1.8 million.
Interest expense, net
                                Nine Months Ended September 30,
                                      2021                      2020        $ change      % change
                                             (in thousands, except percentage)
Interest expense, net   $         27,923                     $ 26,785      $  1,138            4  %


Interest expense, net, increased by $1.1 million to $27.9 million in 2021. The
increase was primarily related to charges of $12.1 million associated with the
early extinguishment of our interest rate swaps in July 2021, partially offset
by a decrease in interest expense due to the $10.9 million repayment of the 2018
Term Loan.

Other income (expense), net
                                                 Nine Months Ended September 30,
                                                     2021                   2020             $ change               % change
                                                                      (in thousands, except percentage)
Other income (expense), net                  $             300          $     149          $      151                      101  %


The change in other income, net between 2021 and 2020 was primarily due to
changes in foreign currency movements related to our intercompany loans which
are denominated in GBP.
Loss on debt extinguishment
                                                      Nine Months Ended September 30,
                                                         2021                 2020              $ change               % change
                                                                           (in thousands, except percentage)
Loss on debt extinguishment                         $      7,748          $        -          $    7,748                      100  %


Loss on debt extinguishment for the nine months ended September 30, 2021
increased $7.7 million, or 100%, compared to the nine months ended September 30,
2020. The increase was due to the write down of unamortized debt issuance costs
associated with the full repayment of our 2018 Term Loan in July 2021.
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Impairment of available-for-sale debt securities
                                                       Nine Months Ended September 30,
                                                           2021                2020             $ change               % change
                                                                           

(in thousands, except percentage) Depreciation of debt securities available for purchase $ – $ (4,818) $ 4,818

                     (100) %


In 2020, we fully impaired our investment in firma.de Firmenbaukasten AG, a
German limited liability company. We incurred a loss of $4.8 million as the
present value of cash flows expected to be collected was less than the amortized
cost basis of the investment.
(Benefit from) provision for income taxes
                                             Nine Months Ended September 30,
                                                 2021                2020             $ change              % change
                                                                  (in thousands, except percentage)
(Benefit from) provision for income taxes   $    (6,849)         $   1,634          $  (8,483)                    (519) %


The benefit from income taxes for the nine months ended September 30, 2021
resulted from an $8.5 million, or 519%, change in our income taxes as compared
to the nine months ended September 30, 2020. The increase was primarily due to
the tax impact from the decrease in the U.S. income compared to the nine months
ended September 30, 2020 as well as the increased benefits from the exercise of
non-qualified stock options in 2021 over 2020 .
Liquidity and Capital Resources
Overview
Since inception, we have funded our operations and capital expenditures
primarily from private sales of equity securities, cash flows provided by
operating activities and equity and debt financing arrangements. Our primary
requirements for liquidity and capital are to finance working capital, capital
expenditures and general corporate purposes. At September 30, 2021, our
principal sources of liquidity were cash and cash equivalents of $310.7 million,
which consisted of cash on deposit with banks and money market funds, of which
$1.0 million related to our foreign subsidiaries. Our cash and cash equivalents
increased by $171.2 million from December 31, 2020 to September 30, 2021,
primarily from raising $666.9 million from our IPO, net of underwriting
discounts and commissions, and after repayment in full of the principal
outstanding of $521.6 million of our 2018 Term Loan in July 2021, and the lapse
of restrictions on $25.0 million in a cash equivalent upon the release of
collateral related to a personal loan by a former executive in June 2021.
We currently anticipate that our available cash and cash equivalents and cash
provided by operating activities will be sufficient to meet our operational cash
needs for at least the next twelve months. We may supplement our liquidity needs
with borrowings under our 2021 Revolving Facility.
We have historically considered the undistributed earnings of our foreign
subsidiaries to be indefinitely reinvested, and accordingly no taxes have been
provided on such earnings. We continue to evaluate our plans for reinvestment or
repatriation of unremitting foreign earnings and have not changed our previous
indefinite reinvestment determination following the enactment of the Tax Act. We
have not repatriated funds to the U.S. to satisfy domestic liquidity needs, nor
do we anticipate the need to do so. If we determine that all or a portion of our
foreign earnings are no longer indefinitely reinvested, we may be subject to
foreign withholding taxes and U.S. state income taxes.
Borrowings
2021 Revolving Facility
On July 2, 2021, we entered into an Amended and Restated Credit and Guaranty
Agreement, or 2021 Revolving Facility, with JPMorgan Chase Bank, N.A., as the
administrative agent. This agreement amends and restates our first lien credit
and guarantee agreement with JPMorgan Chase Bank, N.A, or 2018 Credit Facility,
and permits revolving borrowings of up to $150.0 million. The 2021 Revolving
Facility provides for the issuance of up to $20.0 million of letters of credit
as well as borrowings on same-day notice, referred to as swingline loans, in an
amount of up to $10.0 million. We have $150.0 million available for use under
our 2021 Revolving Facility.
Subject to the satisfaction of certain criteria, we will be able to increase the
facility by an amount equal to the sum of (i) the greater of $90.0 million and
75% of consolidated last twelve months Cash EBITDA, which is defined in
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the 2018 Credit Facility, or LTM Cash EBITDA, plus (ii) unused amounts under the
general debt basket (i.e., an amount equal to the greater of $50.0 million and
an equivalent percentage of consolidated LTM Cash EBITDA), plus (iii) an
unlimited amount so long as the borrower is in pro forma compliance with the
Financial Covenant (as defined below), in each case, with the consent of the
lenders participating in the increase.
We are required to pay a commitment fee in respect of unutilized commitments
under the 2021 Revolving Facility. The commitment fee is, initially, 0.35% per
annum. The commitment fee is subject to one reduction of 0.10% if the total net
first lien leverage ratio does not exceed 3.50 to 1.00. We are also required to
pay customary letter of credit fees and agency fees. The interest rate
applicable to the 2021 Revolving Facility is, at our option, at a rate equal to
the greatest of (i) the administrative agent's prime rate; (ii) the federal
funds effective rate plus 1/2 of 1.0% and (iii) one month LIBOR (subject to a
1.00% floor), plus 1.00% or LIBOR (subject to a 0.00% floor) plus 2.00%. The
interest rate margins under the 2021 Revolving Facility are subject to one
reduction of 0.25% and a further reduction of 0.25% if the total net first lien
leverage ratio does not exceed 3.50 to 1.00 and 2.50 to 1.00, respectively.
We have the option to voluntarily repay outstanding loans at any time without
premium or penalty, other than customary "breakage" costs with respect to LIBOR
loans. There is no scheduled amortization under the 2021 Revolving Facility. The
principal amount outstanding is due and payable in full at maturity, five years
from the closing date of the 2021 Revolving Facility.
Obligations under the 2021 Revolving Facility are guaranteed by our existing and
future direct and indirect material wholly-owned domestic subsidiaries, subject
to certain exceptions. The 2021 Revolving Facility is secured by a
first-priority security interest in substantially all of the assets of the
borrower and the guarantors, subject to certain exceptions.
The 2021 Revolving Facility contains a number of covenants that, among other
things and subject to certain exceptions, restrict our ability and the ability
of our restricted subsidiaries to: incur additional indebtedness and guarantee
indebtedness; create or incur liens; pay dividends and distributions or
repurchase capital stock; merge, liquidate and make asset sales; change lines of
business; change our fiscal year; incur restrictions on our subsidiaries'
ability to make distributions and create liens; modify our organizational
documents; make investments, loans and advances; and enter into certain
transactions with affiliates.
The 2021 Revolving Facility requires compliance with a total net first lien
leverage ratio of 4.50 to 1.00, or the Financial Covenant. The Financial
Covenant will be tested at quarter-end only if the total principal amount of all
revolving loans, swingline loans and drawn letters of credit that have not been
reimbursed exceeds 35% of the total commitments under the 2021 Revolving
Facility on the last day of such fiscal quarter.
Cash flows
The following table sets forth a summary of our cash flows for the periods
indicated:
                                                                      Nine Months Ended September 30,
                                                                          2021                2020
                                                                               (in thousands)
Net cash provided by operating activities                            $    60,156          $   82,069
Net cash used in investing activities                                    (11,783)             (9,013)
Net cash provided by (used in) financing activities                      122,838              (8,378)

Effect of exchange rates on cash, cash equivalents and restricted cash equivalents

                                                               23                 (89)

Net increase in restricted cash, cash equivalents and cash equivalents

                                                           $   

171,234 $ 64,589


Net cash provided by operating activities
For the nine months ended September 30, 2021, cash provided by operating
activities was $60.2 million resulting from a net loss of $87.9 million,
adjusted for stock-based compensation and other non-cash expenses of $113.3
million and net cash flow provided by changes in operating assets and
liabilities of $34.8 million. The $34.8 million of net cash flows provided from
changes in our operating assets and liabilities included a $24.0 million
increase in deferred revenue primarily as a result of the growth of our
subscription units, which are predominantly billed in advance of our revenue
recognition, and a $14.6 million increase in accounts payable and $7.4 million
increase in accrued expenses and other current liabilities due to the timing of
our payments, partially offset by an increase in accounts receivable and prepaid
and other assets of $8.6 million.
For the nine months ended September 30, 2020, cash provided by operating
activities was $82.1 million resulting from net income of $0.5 million, adjusted
for non-cash expenses of $35.3 million and net cash flow provided
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by changes in operating assets and liabilities of $46.3 million. The $46.3
million of net cash flows provided from changes in our operating assets and
liabilities included a $32.0 million increase in deferred revenue primarily as a
result of the growth of our subscription units, which are predominantly billed
in advance of our revenue recognition, and a $15.8 million increase in accounts
payable and accrued expenses due to the timing of our payments.
Net cash used in investing activities
For the nine months ended September 30, 2021 and 2020, net cash used in
investing activities was $11.8 million and $9.0 million, respectively, resulting
primarily from a $3.3 million charge for the extinguishment of interest rate
swaps in the most recent third quarter.
Net cash provided by (used in) financing activities
For the nine months ended September 30, 2021, net cash provided by financing
activities was $122.8 million, primarily from issuance of common stock for net
proceeds of $666.9 million, offset by full repayment of our 2018 Term Loan and
hybrid debt totaling $525.6 and payment of offering costs of $5.6 million.
For the nine months ended September 30, 2020, net cash used in financing
activities was $8.4 million, primarily from the partial repayment on our 2018
Term Loan of $4.0 million and the payment of tax withholding obligations of $3.5
million.
Contractual obligations and commitments
Refer to Note 8. to our unaudited condensed consolidated financial statements
included in this Quarterly Report on Form 10-Q for a discussion of material
obligations and commitments.
Off-balance sheet arrangements
We do not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes.
Non-GAAP Financial Measures
To supplement our unaudited condensed consolidated financial statements, which
are prepared and presented in accordance with U.S. generally accepted accounting
principles, or GAAP, we use certain non-GAAP financial measures, as described
below, to understand and evaluate our core operating performance. These non-GAAP
financial measures, which may be different than similarly titled measures used
by other companies, are presented to enhance investors' overall understanding of
our financial performance and should not be considered a substitute for, or
superior to, the financial information prepared and presented in accordance with
GAAP. We believe that these non-GAAP financial measures provide useful
information about our financial performance, enhance the overall understanding
of our past performance and future prospects and allow for greater transparency
with respect to important measures used by our management for financial and
operational decision-making. We are presenting these non-GAAP measures to assist
investors in seeing our financial performance using a management view and
because we believe that these measures provide an additional tool for investors
to use in comparing our core financial performance over multiple periods with
other companies in our industry.
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net (loss) income adjusted to exclude interest
expense, net, provision for (benefit from) income taxes, depreciation and
amortization, other expense (income), net, non-cash stock-based compensation,
loss on debt extinguishment, losses from impairments of long-lived and other
assets, impairments of available-for-sale debt securities, restructuring
expenses, legal expenses, acquisition related expenses, IPO-related costs and
other transaction-related expense and certain other non-recurring expenses. Our
Adjusted EBITDA financial measure differs from GAAP in that it excludes certain
items of income and expense. We define Adjusted EBITDA margin as Adjusted EBITDA
as a percentage of revenue. We define net (loss) income margin as net (loss)
income as a percentage of revenue based on our unaudited condensed consolidated
financial statements.
Adjusted EBITDA is one of the primary performance measures used by our
management and our board of directors to understand and evaluate our financial
performance and operating trends, including period-to-period comparisons,
prepare and approve our annual budget, develop short- and long-term operational
plans and determine appropriate compensation plans for our employees.
Accordingly, we believe that Adjusted EBITDA provides useful information to
investors and others in understanding and evaluating our results of operations
in the same manner as our management team and board of directors. In assessing
our performance, we exclude certain expenses that we believe are not comparable
period over period. Adjusted EBITDA should not be considered in isolation of, or
as an alternative to, measures prepared in accordance with GAAP. There are a
number of limitations related to the use of Adjusted EBITDA rather than net
(loss) income, which is the nearest GAAP equivalent of Adjusted EBITDA, and it
may
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be calculated differently by other companies in our industry, limiting its
usefulness as a comparative measure. Some of these limitations include that the
non-GAAP financial measure:
•does not reflect interest expense, or the cash requirements necessary to
service interest or principal payments, which reduces cash available to us;
•does not reflect provision for income taxes that may result in payments that
reduce cash available to us;
•excludes depreciation and amortization and, although these are non-cash
expenses, the assets being depreciated may be replaced in the future;
•does not reflect foreign currency exchange or other gains or losses, which are
included in other (expense) income, net;
•excludes stock-based compensation expense, which has been, and will continue to
be, a significant recurring expense for our business and an important part of
our compensation strategy;
•excludes losses from impairments of goodwill, long-lived and other assets and
available-for-sale debt securities;
•excludes legal expenses, which reduce cash available to us;
•excludes acquisition related expenses, which reduce cash available to us;
•excludes restructuring expenses, which reduce cash available to us;
•excludes IPO-related costs and other transaction related expenses that are not
considered representative of our underlying performance, which reduce cash
available to us;
•excludes debt extinguishment charges that represent accelerated amortization of
debt issuance costs related to the early extinguishment of our long-term debt,
which adjustments are not expected to recur and do not reflect expected ongoing
operating results; and
•does not reflect certain other non-recurring expenses that are not considered
representative of our underlying performance, which reduce cash available to us.
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The following table presents a reconciliation of net (loss) income, the most
directly comparable GAAP measure, to Adjusted EBITDA for each of the periods
indicated (unaudited):
                                                         Three Months Ended September 30,               Nine Months Ended September 30
                                                             2021                    2020                  2021                   2020
                                                                                        (in thousands)
Reconciliation of Net (loss) income to Adjusted
EBITDA
Net (loss) income                                    $       (39,675)            $   9,412          $      (87,893)           $     475
Interest expense, net                                          9,957                 8,658                  27,923               26,785
(Benefit from) provision for income taxes                     (5,908)                3,126                  (6,849)               1,634
Depreciation and amortization                                  3,775                 4,415                  11,604               14,162
Other expense (income), net                                      368                (1,610)                   (300)                (149)
Stock-based compensation                                      38,141                 2,712                  86,725                9,890
Loss on debt extinguishment                                    7,748                     -                   7,748                    -
Impairment of long-lived and other assets                        493                     -                     872                  555
Impairment of available-for-sale debt securities                   -                     -                       -                4,818
Restructuring expenses                                             -                   155                       -                  567
Legal expenses(1)                                                  -                   525                       -                  525
Acquisition related expenses                                       -                    38                       -                   38
IPO-related costs and other transaction related
expenses(2)                                                      217                     -                     852                    -
Certain other non-recurring expenses(3)                            5                     -                       5                1,764
Adjusted EBITDA                                      $        15,121             $  27,431          $       40,687            $  61,064
Net (loss) income margin                                         (27  %)                 7  %                  (20  %)                -  %
Adjusted EBITDA margin                                            10  %                 21  %                    9  %                18  %


________________

(1) Legal fees include costs accrued or paid for settling potential disputes, and are net of insurance recoveries, if any. (2) IPO costs and other transaction-related expenses include certain non-recurring expenses incurred in connection with our IPO. (3) In 2020, we incurred a loss on the sale of the disposal of Beaumont, our property transfer activity in the UK, of $ 1.8 million.

Adjusted EBITDA decreased from $27.4 million for the three months ended
September 30, 2020 to $15.1 million for the three months ended September 30,
2021. The decrease of $12.3 million was primarily driven by higher revenue of
$16.3 million offset by increases in cost of revenue of $3.2 million, customer
acquisition media spend of $15.7 million and other operating expenses of $9.8
million, excluding non-cash and non-recurring items. Adjusted EBITDA decreased
from $61.1 million for the nine months ended September 30, 2020 to $40.7 million
for the nine months ended September 30, 2021. The decrease of $20.4 million
reflects an increase in revenue of $84.5 million offset by increases in cost of
revenue of $26.3 million, customer acquisition media spend of $ 56.2 million and
other operating expenses of $22.5 million, excluding non-cash and non-recurring
items. We expect our Adjusted EBITDA to increase in absolute dollars in the
longer term, although the rate at which our Adjusted EBITDA may grow could vary
based upon the interplay of the foregoing factors.
Free Cash Flow
Free cash flow is a liquidity measure used by management in evaluating the cash
generated by our operations after purchases of property and equipment including
capitalized internal-use software. We consider free cash flow to be an important
metric because it provides useful information to management and investors about
the amount of cash generated by our business that can be used for strategic
opportunities, including investing in our business and strengthening our balance
sheet. Once our business needs and obligations are met, cash can be used to
maintain a strong balance sheet and invest in future growth. The usefulness of
free cash flow as an analytical tool has limitations because it excludes certain
items that are settled in cash, does not represent residual cash flow available
for
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discretionary expenses, does not reflect our future contractual commitments, and
may be calculated differently by other companies in our industry. Accordingly,
it should not be considered in isolation or as a substitute for analysis of
other GAAP financial measures, such as net cash provided by operating
activities.
The following table presents a reconciliation of net cash provided by operating
activities, the most directly comparable GAAP measure, to free cash flow
(unaudited):
                                                                            

Nine months ended September 30,

                                                                               2021                   2020
                                                                                    (in thousands)
Reconciliation of Net Cash Provided by Operating Activities to Free
Cash Flow
Net cash provided by operating activities                               $         60,156          $   82,069
Purchase of property and equipment                                                (8,500)             (7,819)
Free cash flow                                                          $         51,656          $   74,250


We experienced a decrease in our free cash flow from $74.3 million for the nine
months ended September 30, 2020 to $51.7 million for the nine months ended
September 30, 2021. The decrease in free cash flow was primarily due to an $10.4
million increase in our net loss adjusted for stock-based compensation and other
non-cash items, an increase of $6.0 million in accounts receivable and prepaid
expenses and an $8.0 million reduction in growth of deferred revenue, partially
offset by a $6.3 million increase in accounts payable and accrued expenses due
to the timing of our payments. Free cash flow was also impacted by higher
capital expenditures for the purchase of property and equipment, including
capitalization of internal-use software. We expect our free cash flow to
increase in absolute dollars over the longer term, although the rate at which
our free cash flow may grow could vary based upon the interplay of the factors
discussed above.
For the nine months ended September 30, 2021 and 2020, our free cash flow
included cash payments for interest related to our 2018 Credit Facility of $12.3
million and $21.6 million, respectively.
JOBS Act Accounting Election
We are an "emerging growth company," as defined in the Jumpstart Our Business
Startups Act, or the JOBS Act. Under the JOBS Act, emerging growth companies can
delay adopting new or revised accounting standards issued subsequent to the
enactment of the JOBS Act until such time as those standards apply to private
companies. We have elected to avail ourselves of delayed adoption of new or
revised accounting standards and, therefore, we will not be subject to the same
requirements to adopt new or revised accounting standards as other public
companies that are not emerging growth companies. To the extent that we no
longer qualify as an emerging growth company we will be required to adopt
certain accounting pronouncements earlier than the adoption dates disclosed
below which are for non-public business entities.
Critical Accounting Policies and Estimates
During the three months ended September 30, 2021, there have been no significant
changes to our critical accounting policies and estimates compared with those
disclosed in described under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Critical Accounting Policies
and Estimates" and the notes to the audited consolidated financial statements
appearing in the Prospectus.
Recent Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements included
in this Quarterly Report on Form 10-Q for a discussion of recently adopted
accounting pronouncements and recently issued accounting pronouncements not yet
adopted.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have operations both within the U.S. and, to a lesser extent, in the U.K.,
and we are exposed to market risks in the ordinary course of our business. These
risks include primarily interest rate fluctuations and foreign currency exchange
risks, and to a lesser extent, inflation risk.
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Interest rate fluctuation risk
At September 30, 2021 and December 31, 2020, we had cash and cash equivalents of
$310.7 million and $114.5 million, respectively, which consisted of cash on
deposit with banks and short-term highly-liquid money market funds.
Interest-earning instruments carry a degree of interest rate risk. To date,
fluctuations in interest income have not been significant.
We also had no outstanding debt subject to interest rate risk as of
September 30, 2021 and as of December 31, 2020 we had outstanding debt subject
to interest rate risk of $524.3 million in principal. Given the repayment of our
2018 Term Loan and settlement of our interest rate swaps in July 2021, we are
not expected to be exposed to further fluctuations in interest rates for the
foreseeable future. We would be subject to fluctuation in interest rates if we
drawdown under our 2021 Revolving Facility, including issuance of any letters of
credit.
Foreign currency exchange risk
We have foreign currency risks related to our revenue and expenses denominated
in currencies other than our functional currency, the U.S. Dollar, principally
GBP. The volatility of exchange rates depends on many factors that we cannot
forecast with reliable accuracy. We have experienced and will continue to
experience fluctuations in our net (loss) income as a result of transaction
gains and losses related to translating certain cash balances, trade accounts
receivable and payable balances and intercompany loans that are denominated in
currencies other than the U.S. Dollar. We recognized foreign currency losses of
$1.0 million in the nine months ended September 30, 2021. A 10% adverse change
in foreign exchange rates on foreign-denominated accounts for the nine months
ended September 30, 2021, including intercompany balances, would have resulted
in a $0.5 million decrease in our reported foreign currency income for the nine
months ended September 30, 2021. In the event our non-U.S. Dollar-denominated
sales and expenses increase, our results of operations may be more greatly
affected by fluctuations in the exchange rates of the currencies in which we do
business. At this time, we do not, but we may in the future, enter into
derivatives or other financial instruments in an attempt to hedge our foreign
currency exchange risk. It is difficult to predict the impact hedging activities
could have on our results of operations.
Inflation risk
We do not believe that inflation has had a material effect on our business,
financial condition, results of operations or future prospects. If our costs
were to become subject to significant inflationary pressures, we may not be able
to fully offset such higher costs through price increases. Our inability or
failure to do so could harm our business, financial condition, results of
operations and future prospects.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management, with the participation of our principal executive officer and
principal financial officer, evaluated, as of the end of the period covered by
this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act). Based on that evaluation because of the material weaknesses in our
internal control over financial reporting described below, our principal
executive officers and principal financial officer concluded that, as of
September 30, 2021, our disclosure controls and procedures were not effective at
the reasonable assurance level.
Material Weaknesses
During the year ended December 31, 2018, we have identified three material
weaknesses in our internal control over financial reporting. A material weakness
is a deficiency, or combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.
The material weaknesses we identified are as follows:
•We did not maintain an effective control environment. Specifically, we did not
maintain sufficient accounting resources commensurate with our structure and
financial reporting requirements. This material weakness contributed to the
additional material weaknesses described below.
•We did not design and maintain effective controls to address the initial
application of complex accounting standards and accounting of non-routine,
unusual or complex events and transactions.
•We did not design and maintain effective controls over our financial statement
close process. Specifically, we did not design and maintain effective controls
over certain account analyses and account reconciliations.
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These material weaknesses resulted in adjustments to our financial statements
for the year ended December 31, 2018 primarily related to debt extinguishment
costs, goodwill, revenue, accounts receivable, foreign exchange expense and
deferred revenue, and could result in a misstatement of any account balances or
disclosures that would result in a material misstatement to the annual or
interim consolidated financial statements that would not be prevented or
detected.
Remediation Plan
We are designing and implementing a plan to remediate the material weaknesses
identified. Our plan includes:
•hiring additional experienced accounting, financial reporting and internal
control personnel and changing roles and responsibilities of our personnel as we
transitioned to being a public company and are required to comply with Section
404 of the Sarbanes Oxley Act of 2002;
•implementing controls to enhance our review of significant accounting
transactions and other new technical accounting and financial reporting issues
and preparing and reviewing accounting memoranda addressing these issues; and
•implementing controls to enable an effective and timely review of account
analyses and account reconciliations.

Ongoing remediation efforts
In the quarter ended September 30, 2021, we have continued to hire additional
experienced accounting personnel to supplement the current team, and we plan to
provide internal control training programs for all accounting personnel in the
forthcoming quarter to strengthen our overall internal controls environment. We
have also enhanced our documentation procedures around complex accounting
transactions.
In the quarter ended September 30, 2021, we have also designed and implemented
new controls around account reconciliations to specifically address the timely
preparation and review, and identification of relevant supporting documentation
to be utilized in the performance of any key balance sheet account
reconciliation and to develop proper evidence of any such review.

Status of remediation efforts
We believe the remediation steps outlined above will improve the effectiveness
of our internal control over financial reporting. However, the material
weaknesses will not be considered remediated until a sustained period of time
has passed to allow management to test the design and operational effectiveness
of the corrective actions. The implementation of these remediation measures will
require validation and testing of the design and operating effectiveness of
internal controls over a sustained period of financial reporting cycles and as a
result, the timing of when we will be able to fully remediate the material
weaknesses is uncertain. Accordingly, we likely will not fully remediate these
material weaknesses during 2021 and may not do so in 2022. If the steps we take
do not remediate the material weaknesses in a timely manner, there could
continue to be a reasonable possibility that these control deficiencies or
others would result in a material misstatement of our annual or interim
financial statements that would not be prevented or detected on a timely basis.
This, in turn, could jeopardize our ability to comply with our reporting
obligations, limit our ability to access the capital markets or adversely impact
our stock price.
Limitations on effectiveness of controls and procedures
In designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives. In addition, the design of disclosure controls and procedures must
reflect the fact that there are resource constraints and that management is
required to apply judgment in evaluating the benefits of possible controls and
procedures relative to their costs.
Changes in internal control over financial reporting
The third quarter remediation activities described above are changes in our
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the quarter ended September 30, 2021
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
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