UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
[Mark One]
| | | | | |
☒
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended JuneSeptember 30, 20212023
OR
| | | | | |
☐
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission File Number: 001-40393
SQUARESPACE, INC.
(Exact Name of Registrant as Specified in Its Charter)
| | | | | |
Delaware (State or Other Jurisdiction of Incorporation or Organization) | 20-0375811 (I.R.S. Employer Identification No.) |
| |
225 Varick Street, 12th Floor New York, New York (Address of Principal Executive Offices) | 10014 (Zip Code) |
Registrant’sRegistrant’s Telephone Number, Including Area Code: (646) 580-3456
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock, $0.0001 par value per share | Trading Symbol(s) SQSP | Name of each exchange on which registered New York Stock Exchange |
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒☒ No ☐☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒☒ No ☐☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large“large accelerated filer,” “accelerated” “accelerated filer,” “smaller” “smaller reporting company,”” and “emerging“emerging growth company”company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer | ☐
☐ | | Accelerated filer | ☐
☒ |
Non-accelerated filer | ☒
☐ | | Smaller reporting company | ☐
☐ |
Emerging Growth Company | ☒
☒ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐☐ No ☒☒
As of JuneSeptember 30, 2021,2023, the registrant had 90,149,96688,124,267 shares of Class A Common Stock, 48,344,75547,844,755 shares of Class B Common Stock, and 0no shares of Class C Common Stock, each with a par value of $0.0001 per share, outstanding.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that reflect our current views with respect to, among other things, future events and our future business, financial condition and results of operations. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will“may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would”” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,”“outlook,” or the negative version of those words or phrases or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not statements of historical fact, and are based on current expectations, estimates and projections about our industry as well as certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, which you should consider and read carefully, including but not limited to:
•• our ability to attract and retain customers and expand our customers’customers’ use of our platform;
• •our ability to anticipate market needs and develop new or enhanced solutions to meet those needs;
• •our ability to improve and enhance the functionality, performance, reliability, design, security and scalability of our existing solutions;
•our ability to compete successfully in our industry against current and future competitors;
• •the impact of the COVID-19 pandemic on how we, our providers, and consumers operate and the associated economic uncertainty on us,extent to which this will affect our customersbusiness, future results of operations, and their users;financial condition;
• •our ability to manage growth and maintain demand for our solutions;
• •our ability to protect and promote our brand;
• •our ability to generate new customers through our marketing and selling activities;
•our ability to successfully identify, manage and integrate any existing and potential acquisitions;
• •our ability to hire, integrate and retain highly skilled personnel;
• •our ability to adapt to and comply with existing and emerging regulatory developments, technological changes and cybersecurity needs;
• •our compliance with privacy and data protection laws and regulations as well as contractual privacy and data protection obligations;
•our ability to establish and maintain intellectual property rights;
• •our ability to manage expansion into international markets;
•the expected timing, amount, and effect of our share repurchases; and
•• the other risks and uncertainties described under “Risk“Risk Factors.””
This list of factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Quarterly Report on Form 10-Q. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q, and our future levels of activity and performance, may not occur and actual results could differ materially and adversely from those described or implied in the forward-looking statements. As a result, you should not regard any of these forward-looking statements as a representation or warranty by us or any other person or place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
In addition, statements that contain “we believe”“we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that this information provides a reasonable basis for these statements, this information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
You should read this Quarterly Report on Form 10-Q and the documents that we reference herein and have filed as exhibits to the Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be
materially different from what we expect. We qualify all of our forward-looking statements by the cautionary statements contained in this section and elsewhere in this Quarterly Report on Form 10-Q.
PART 1.1 - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
SQUARESPACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
| | | June 30, 2021 | | December 31, 2020 | | September 30, 2023 | | December 31, 2022 |
Assets | Assets | | | | Assets | | | |
| Current assets: | Current assets: | | Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 160,142 | | | $ | 57,891 | | Cash and cash equivalents | $ | 216,464 | | | $ | 197,037 | |
| Restricted cash | Restricted cash | 27,308 | | | 0 | | Restricted cash | 40,671 | | | 35,583 | |
| Investment in marketable securities | Investment in marketable securities | 36,582 | | | 37,462 | | Investment in marketable securities | — | | | 31,757 | |
| Accounts receivable, net | Accounts receivable, net | 8,416 | | | 7,516 | | Accounts receivable, net | 21,999 | | | 10,748 | |
| Due from vendors | Due from vendors | 2,200 | | | 0 | | Due from vendors | 4,292 | | | 4,442 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 48,839 | | | 37,384 | | Prepaid expenses and other current assets | 57,398 | | | 48,326 | |
| Total current assets | Total current assets | 283,487 | | | 140,253 | | Total current assets | 340,824 | | | 327,893 | |
| Property and equipment, net | Property and equipment, net | 45,979 | | | 49,249 | | Property and equipment, net | 57,245 | | | 51,633 | |
| Deferred income taxes | 6,823 | | | 7,773 | | |
| Operating lease right-of-use assets | | Operating lease right-of-use assets | 79,810 | | | 86,824 | |
| Goodwill | Goodwill | 421,076 | | | 83,171 | | Goodwill | 210,438 | | | 210,438 | |
| Intangible assets, net | Intangible assets, net | 102,342 | | | 18,868 | | Intangible assets, net | 205,147 | | | 42,808 | |
| Other assets | Other assets | 7,525 | | | 7,452 | | Other assets | 11,432 | | | 10,921 | |
| Total assets | Total assets | $ | 867,232 | | | $ | 306,766 | | Total assets | $ | 904,896 | | | $ | 730,517 | |
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Deficit | | | | |
| Liabilities and Stockholders’ Deficit | | Liabilities and Stockholders’ Deficit | | | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Accounts payable | Accounts payable | $ | 14,895 | | | $ | 16,758 | | Accounts payable | $ | 10,561 | | | $ | 12,987 | |
| Accrued liabilities | Accrued liabilities | 62,622 | | | 46,779 | | Accrued liabilities | 113,733 | | | 64,360 | |
| Deferred revenue | Deferred revenue | 238,888 | | | 210,392 | | Deferred revenue | 315,603 | | | 269,689 | |
| Funds payable to customers | Funds payable to customers | 29,508 | | | 0 | | Funds payable to customers | 44,208 | | | 38,845 | |
| Debt, current portion | Debt, current portion | 13,586 | | | 13,586 | | Debt, current portion | 48,977 | | | 40,758 | |
| Deferred rent and lease incentives, current portion | 1,265 | | | 1,197 | | |
| Operating lease liabilities, current portion | | Operating lease liabilities, current portion | 12,352 | | | 11,514 | |
| Total current liabilities | Total current liabilities | 360,764 | | | 288,712 | | Total current liabilities | 545,434 | | | 438,153 | |
| Deferred income taxes, non-current portion | | Deferred income taxes, non-current portion | 978 | | | 788 | |
| Debt, non-current portion | Debt, non-current portion | 519,400 | | | 525,752 | | Debt, non-current portion | 531,714 | | | 473,167 | |
| Deferred rent and lease incentives, non-current portion | 24,667 | | | 24,856 | | |
| | Operating lease liabilities, non-current portion | | Operating lease liabilities, non-current portion | 100,710 | | | 110,169 | |
| Other liabilities | Other liabilities | 551 | | | 262 | | Other liabilities | 14,022 | | | 11,231 | |
| Total liabilities | Total liabilities | 905,382 | | | 839,582 | | Total liabilities | 1,192,858 | | | 1,033,508 | |
| Commitments and contingencies (see Note 12) | Commitments and contingencies (see Note 12) | 0 | | 0 | Commitments and contingencies (see Note 12) | |
Redeemable convertible preferred stock, par value of $0.0001; 0 and 118,117,738 shares authorized as of June 30, 2021 and December 31, 2020, respectively; 0 and 104,446,332 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | 0 | | | 131,390 | | |
Preferred stock, par value of $0.0001; 100,000,000 and 0 shares authorized as of June 30, 2021 and December 31, 2020, respectively; 0 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | 0 | | | 0 | | |
| Stockholders’ deficit: | | |
Class A common stock, par value of $0.0001; 1,000,000,000 and 159,000,000 shares authorized as of June 30, 2021 and December 31, 2020, respectively; 90,149,966 and 8,903,770 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | 9 | | | 1 | | |
Class B common stock, par value of $0.0001; 100,000,000 and 93,782,222 shares authorized as of June 30, 2021 and December 31, 2020, respectively; 48,344,755 and 14,368,532 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | 5 | | | 1 | | |
Class C common stock (authorized March 15, 2021), par value of $0.0001; 0 shares authorized as of June 30, 2021 and December 31, 2020, respectively; 0 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | 0 | | | 0 | | |
Class C common stock (authorized May 10, 2021), par value of $0.0001; 1,000,000,000 and 0 shares authorized as of June 30, 2021 and December 31, 2020, respectively; 0 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | 0 | | | 0 | | |
| Stockholders’ deficit: | | Stockholders’ deficit: | |
Class A common stock, par value of $0.0001; 1,000,000,000 shares authorized as of September 30, 2023 and December 31, 2022, respectively; 88,124,267 and 87,754,534 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | | Class A common stock, par value of $0.0001; 1,000,000,000 shares authorized as of September 30, 2023 and December 31, 2022, respectively; 88,124,267 and 87,754,534 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | 8 | | | 8 | |
| Class B common stock, par value of $0.0001; 100,000,000 shares authorized as of September 30, 2023 and December 31, 2022, respectively; 47,844,755 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | | Class B common stock, par value of $0.0001; 100,000,000 shares authorized as of September 30, 2023 and December 31, 2022, respectively; 47,844,755 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | 5 | | | 5 | |
| Class C common stock (authorized May 10, 2021), par value of $0.0001; 1,000,000,000 shares authorized as of September 30, 2023 and December 31, 2022, respectively; zero shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | | Class C common stock (authorized May 10, 2021), par value of $0.0001; 1,000,000,000 shares authorized as of September 30, 2023 and December 31, 2022, respectively; zero shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | — | | | — | |
| Additional paid in capital | Additional paid in capital | 871,350 | | | 9,043 | | Additional paid in capital | 905,069 | | | 875,737 | |
| Accumulated other comprehensive income | 1,870 | | | 2,455 | | |
| Accumulated other comprehensive loss | | Accumulated other comprehensive loss | (3,631) | | | (1,665) | |
| Accumulated deficit | Accumulated deficit | (911,384) | | | (675,706) | | Accumulated deficit | (1,189,413) | | | (1,177,076) | |
| Total stockholders’ deficit | (38,150) | | | (664,206) | | |
| Total liabilities, redeemable convertible preferred stock and stockholders’ deficit | $ | 867,232 | | | $ | 306,766 | | |
| Total stockholders’ deficit | | Total stockholders’ deficit | (287,962) | | | (302,991) | |
| Total liabilities and stockholders’ deficit | | Total liabilities and stockholders’ deficit | $ | 904,896 | | | $ | 730,517 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SQUARESPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Revenue | $ | 196,010 | | | $ | 149,640 | | | $ | 375,656 | | | $ | 286,514 | |
| Cost of revenue | 32,501 | | | 23,845 | | | 59,909 | | | 47,616 | |
| Gross profit | 163,509 | | | 125,795 | | | 315,747 | | | 238,898 | |
| Operating expenses: | | | | | | | |
| Research and product development | 48,912 | | | 36,032 | | | 90,923 | | | 72,118 | |
| Marketing and sales | 70,784 | | | 51,254 | | | 168,756 | | | 126,834 | |
| General and administrative | 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 | |
| Less: accretion of redeemable convertible preferred stock to redemption value | 0 | | | (1,196) | | | 0 | | | (2,377) | |
| Less: undistributed earnings to participating securities | 0 | | | (14,297) | | | 0 | | | (4,978) | |
| Net (loss)/income attributable to Class A, Class B, and Class C common stockholders, basic | $ | (234,532) | | | $ | 3,046 | | | $ | (235,678) | | | $ | 1,052 | |
| Add: reallocation of net income attributable to participating securities | 0 | | | 764 | | | 0 | | | 278 | |
| Net (loss)/income attributable to Class A, Class B, and Class C common stockholders, dilutive | $ | (234,532) | | | $ | 3,810 | | | $ | (235,678) | | | $ | 1,330 | |
| | | | | | | |
| Net (loss)/income per share attributable to Class A, Class B, and Class C common stockholders, basic | $ | (3.22) | | | $ | 0.14 | | | $ | (4.54) | | | $ | 0.05 | |
| Net (loss)/income per share attributable to Class A, Class B, and Class C common stockholders, dilutive | $ | (3.22) | | | $ | 0.13 | | | $ | (4.54) | | | $ | 0.04 | |
| Weighted-average shares used in computing net (loss)/income per share attributable to Class A, Class B, and Class C stockholders, basic | 72,900,951 | | | 22,247,105 | | | 51,879,264 | | | 22,062,674 | |
| Weighted-average shares used in computing net (loss)/income per share attributable to Class A, Class B, and Class C stockholders, diluted | 72,900,951 | | | 29,402,966 | | | 51,879,264 | | | 29,552,132 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Revenue | $ | 257,061 | | | $ | 217,696 | | | $ | 741,618 | | | $ | 638,160 | |
| Cost of revenue | 51,753 | | | 38,907 | | | 137,870 | | | 112,549 | |
| Gross profit | 205,308 | | | 178,789 | | | 603,748 | | | 525,611 | |
| Operating expenses: | | | | | | | |
| Research and product development | 60,491 | | | 54,312 | | | 180,473 | | | 170,469 | |
| Marketing and sales | 81,016 | | | 74,248 | | | 258,061 | | | 255,897 | |
| General and administrative | 36,155 | | | 38,507 | | | 99,404 | | | 113,678 | |
| Total operating expenses | 177,662 | | | 167,067 | | | 537,938 | | | 540,044 | |
| Operating income/(loss) | 27,646 | | | 11,722 | | | 65,810 | | | (14,433) | |
| Interest expense | (9,321) | | | (5,209) | | | (26,050) | | | (10,977) | |
| Other income, net | 6,327 | | | 6,869 | | | 7,525 | | | 14,597 | |
| Income/(loss) before provision for income taxes | 24,652 | | | 13,382 | | | 47,285 | | | (10,813) | |
| Provision for income taxes | (41,151) | | | (3,277) | | | (59,622) | | | (7,446) | |
| Net (loss)/income | $ | (16,499) | | | $ | 10,105 | | | $ | (12,337) | | | $ | (18,259) | |
| | | | | | | |
| Net (loss)/income per share, basic and dilutive | $ | (0.12) | | | $ | 0.07 | | | $ | (0.09) | | | $ | (0.13) | |
| Weighted-average shares used in computing net (loss)/income per share, basic | 135,736,599 | | | 137,832,634 | | | 135,321,873 | | | 139,106,807 | |
| Weighted-average shares used in computing net (loss)/income per share, dilutive | 135,736,599 | | | 139,667,719 | | | 135,321,873 | | | 139,106,807 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SQUARESPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)/INCOME
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Net (loss)/income | $ | (234,532) | | | $ | 18,539 | | | $ | (235,678) | | | $ | 8,407 | |
| Other comprehensive income/(loss): | | | | | | | |
| Foreign currency translation adjustment | 788 | | | 670 | | | (494) | | | 317 | |
| Unrealized gain/(loss) on marketable securities, net of income taxes | (46) | | | 406 | | | (91) | | | 225 | |
| Total other comprehensive income/(loss) | 742 | | | 1,076 | | | (585) | | | 542 | |
| Total comprehensive income/(loss) | $ | (233,790) | | | $ | 19,615 | | | $ | (236,263) | | | $ | 8,949 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Net (loss)/income | $ | (16,499) | | | $ | 10,105 | | | $ | (12,337) | | | $ | (18,259) | |
| Other comprehensive loss | | | | | | | |
| Foreign currency translation adjustment | (2,144) | | | (2,275) | | | (2,182) | | | (5,113) | |
| Unrealized (loss)/gain on marketable securities, net of income taxes | — | | | (35) | | | 216 | | | (290) | |
| Total other comprehensive loss | (2,144) | | | (2,310) | | | (1,966) | | | (5,403) | |
| Total comprehensive (loss)/income | $ | (18,643) | | | $ | 7,795 | | | $ | (14,303) | | | $ | (23,662) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SQUARESPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(in thousands, except share and per share data)
(unaudited)
Three and SixNine Months Ended JuneSeptember 30, 20212023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Convertible Preferred Stock | | | Class A Common Stock | | Class B Common Stock | | Class C Common Stock | | Additional Paid in Capital | | Accumulated Other Comprehensive Income/(Loss) | | Accumulated
Deficit | | Total
Stockholders’
Deficit |
| Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
| Balance at December 31, 2020 | 104,446,332 | | | $ | 131,390 | | | | 8,903,770 | | | $ | 1 | | | 14,368,532 | | | $ | 1 | | | 0 | | | $ | 0 | | | $ | 9,043 | | | $ | 2,455 | | | $ | (675,706) | | | $ | (664,206) | |
| Stock based compensation | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,873 | | | — | | | — | | | 9,873 | |
| Stock option exercises | — | | | — | | | | — | | | — | | | 900,476 | | | — | | | — | | | — | | | 707 | | | — | | | — | | | 707 | |
Vested RSUs converted to common shares | — | | | — | | | | 525,920 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Repurchase of Class A common stock and retirement | — | | | — | | | | (270,089) | | | — | | | — | | | — | | | — | | | — | | | (13,416) | | | — | | | — | | | (13,416) | |
Issuance of Class C common stock, net of issuance costs | — | | | — | | | | — | | | — | | | — | | | — | | | 4,452,023 | | | — | | | 304,409 | | | — | | | — | | | 304,409 | |
Issuance of Class C common stock for acquisition | — | | | — | | | | — | | | — | | | — | | | — | | | 2,750,330 | | | 1 | | | 188,178 | | | — | | | — | | | 188,179 | |
Accretion of redeemable convertible preferred stock | — | | | 969 | | | | — | | | — | | | — | | | — | | | — | | | — | | | (969) | | | — | | | — | | | (969) | |
Net loss | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,146) | | | (1,146) | |
Total other comprehensive loss, net of taxes | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,327) | | | — | | | (1,327) | |
| Balance at March 31, 2021 | 104,446,332 | | | $ | 132,359 | | | | 9,159,601 | | | $ | 1 | | | 15,269,008 | | | $ | 1 | | | 7,202,353 | | | $ | 1 | | | $ | 497,825 | | | $ | 1,128 | | | $ | (676,852) | | | $ | (177,896) | |
| Stock based compensation | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | 250,534 | | | — | | | — | | | 250,534 | |
| Stock option exercises | — | | | — | | | | 1,201,066 | | | — | | | 874,695 | | | — | | | — | | | — | | | 2,962 | | | — | | | — | | | 2,962 | |
Vested RSUs converted to common shares | — | | | — | | | | 588,786 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Repurchase of Class A common stock and retirement | — | | | — | | | | (247,120) | | | — | | | — | | | — | | | — | | | — | | | (12,319) | | | — | | | — | | | (12,319) | |
| Conversion of convertible preferred stock to Class A and Class B common stock in connection with the direct listing | (104,446,332) | | | (132,359) | | | | 54,862,435 | | | 6 | | | 49,583,897 | | | 5 | | | — | | | — | | | 132,348 | | | — | | | — | | | 132,359 | |
| Conversion of Class B common stock to Class A common stock in connection with the direct listing | — | | | — | | | | 17,382,845 | | | 1 | | | (17,382,845) | | | (1) | | | — | | | — | | | — | | | — | | | — | | | 0 | |
| Conversion of Class C common stock to Class A common stock in connection with the direct listing | — | | | — | | | | 7,202,353 | | | 1 | | | — | | | — | | | (7,202,353) | | | (1) | | | — | | | — | | | — | | | 0 | |
Net loss | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (234,532) | | | (234,532) | |
Total other comprehensive loss, net of taxes | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 742 | | | — | | | 742 | |
| Balance at June 30, 2021 | 0 | | | $ | 0 | | | | 90,149,966 | | | $ | 9 | | | 48,344,755 | | | $ | 5 | | | 0 | | | $ | 0 | | | $ | 871,350 | | | $ | 1,870 | | | $ | (911,384) | | | $ | (38,150) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Class C Common Stock | | Additional Paid in Capital | | Accumulated Other Comprehensive Loss | | Accumulated
Deficit | | Total
Stockholders’
Deficit |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
| Balance at December 31, 2022 | 87,754,534 | | | $ | 8 | | | 47,844,755 | | | $ | 5 | | | — | | | $ | — | | | $ | 875,737 | | | $ | (1,665) | | | $ | (1,177,076) | | | $ | (302,991) | |
| Stock-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | 22,595 | | | — | | | — | | | 22,595 | |
| Stock option exercises | 13,050 | | | — | | | — | | | — | | | — | | | — | | | 52 | | | — | | | — | | | 52 | |
| Vested RSUs converted to common shares | 1,357,462 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Taxes paid related to net share settlement of equity awards | (573,862) | | | — | | | — | | | — | | | — | | | — | | | (13,369) | | | — | | | — | | | (13,369) | |
| Repurchase and retirement of Class A common stock | (1,256,170) | | | — | | | — | | | — | | | — | | | — | | | (25,321) | | | — | | | — | | | (25,321) | |
| Excise tax on repurchase of Class A common stock | — | | | — | | | — | | | — | | | — | | | — | | | (277) | | | — | | | — | | | (277) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 502 | | | 502 | |
| Total other comprehensive income, net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 474 | | | — | | | 474 | |
| Balance at March 31, 2023 | 87,295,014 | | | $ | 8 | | | 47,844,755 | | | $ | 5 | | | — | | | $ | — | | | $ | 859,417 | | | $ | (1,191) | | | $ | (1,176,574) | | | $ | (318,335) | |
| Stock-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | 30,648 | | | — | | | — | | | 30,648 | |
| Stock option exercises | 21,635 | | | — | | | — | | | — | | | — | | | — | | | 42 | | | — | | | — | | | 42 | |
| Vested RSUs converted to common shares | 640,562 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Taxes paid related to net share settlement of equity awards | (233,544) | | | — | | | — | | | — | | | — | | | — | | | (6,915) | | | — | | | — | | | (6,915) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,660 | | | 3,660 | |
| Total other comprehensive loss, net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (296) | | | — | | | (296) | |
| Balance at June 30, 2023 | 87,723,667 | | | $ | 8 | | | 47,844,755 | | | $ | 5 | | | — | | | $ | — | | | $ | 883,192 | | | $ | (1,487) | | | $ | (1,172,914) | | | $ | (291,196) | |
| Stock-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | 29,806 | | | — | | | — | | | 29,806 | |
| Stock option exercises | 19,564 | | | — | | | — | | | — | | | — | | | — | | | 57 | | | — | | | — | | | 57 | |
| Vested RSUs converted to common shares | 642,162 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Taxes paid related to net share settlement of equity awards | (261,126) | | | — | | | — | | | — | | | — | | | — | | | (7,986) | | | — | | | — | | | (7,986) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (16,499) | | | (16,499) | |
| Total other comprehensive loss, net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,144) | | | — | | | (2,144) | |
| Balance at September 30, 2023 | 88,124,267 | | | $ | 8 | | | 47,844,755 | | | $ | 5 | | | — | | | $ | — | | | $ | 905,069 | | | $ | (3,631) | | | $ | (1,189,413) | | | $ | (287,962) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SQUARESPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(in thousands, except share and per share data)
(unaudited)
Three and SixNine Months Ended JuneSeptember 30, 20202022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Convertible Preferred Stock | | | Class A Common Stock | | Class B Common Stock | | Class C Common Stock | | Additional Paid in Capital | | Accumulated Other Comprehensive Income/(Loss) | | Accumulated
Deficit | | Total
Stockholders’
Deficit |
| Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
| Balance at December 31, 2019 | 104,446,332 | | | $ | 126,546 | | | | 8,185,625 | | | $ | 1 | | | 13,470,755 | | | $ | 1 | | | 0 | | | $ | 0 | | | $ | 1,196 | | | $ | (108) | | | $ | (378,182) | | | $ | (377,092) | |
| Stock based compensation | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | 7,938 | | | — | | | — | | | 7,938 | |
| Stock option exercises | — | | | — | | | | — | | | — | | | 241,803 | | | — | | | — | | | — | | | 387 | | | — | | | — | | | 387 | |
Vested RSUs converted to common shares | — | | | — | | | | 414,011 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Repurchase of Class A common stock and retirement | — | | | — | | | | (221,408) | | | — | | | — | | | — | | | — | | | — | | | (5,544) | | | — | | | — | | | (5,544) | |
Accretion of redeemable convertible preferred stock | — | | | 1,181 | | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,181) | | | — | | | — | | | (1,181) | |
Net loss | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (10,132) | | | (10,132) | |
Total other comprehensive loss, net of taxes | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (534) | | | — | | | (534) | |
| Balance at March 31, 2020 | 104,446,332 | | | $ | 127,727 | | | | 8,378,228 | | | $ | 1 | | | 13,712,558 | | | $ | 1 | | | 0 | | | $ | 0 | | | $ | 2,796 | | | $ | (642) | | | $ | (388,314) | | | $ | (386,158) | |
| Stock based compensation | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | 7,302 | | | — | | | — | | | 7,302 | |
| Stock option exercises | — | | | — | | | | — | | | — | | | 76,885 | | | — | | | — | | | — | | | 240 | | | — | | | — | | | 240 | |
Vested RSUs converted to common shares | — | | | — | | | | 535,875 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Repurchase of Class A common stock and retirement | — | | | — | | | | (230,478) | | | — | | | — | | | — | | | — | | | — | | | (5,276) | | | — | | | — | | | (5,276) | |
Accretion of redeemable convertible preferred stock | — | | | 1,196 | | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,196) | | | — | | | — | | | (1,196) | |
Net income | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 18,539 | | | 18,539 | |
Total other comprehensive income, net of taxes | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,076 | | | — | | | 1,076 | |
| Balance at June 30, 2020 | 104,446,332 | | | $ | 128,923 | | | | 8,683,625 | | | $ | 1 | | | 13,789,443 | | | $ | 1 | | | 0 | | | $ | 0 | | | $ | 3,866 | | | $ | 434 | | | $ | (369,775) | | | $ | (365,473) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Class C Common Stock | | Additional Paid in Capital | | Accumulated Other Comprehensive Loss | | Accumulated
Deficit | | Total
Stockholders’
Deficit |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
| Balance at December 31, 2021 | 90,826,625 | | | $ | 9 | | | 48,344,755 | | | $ | 5 | | | — | | | $ | — | | | $ | 911,570 | | | $ | (208) | | | $ | (924,855) | | | $ | (13,479) | |
| Stock-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | 24,160 | | | — | | | — | | | 24,160 | |
| Stock option exercises | 343,687 | | | — | | | — | | | — | | | — | | | — | | | 1,141 | | | — | | | — | | | 1,141 | |
| Vested RSUs converted to common shares | 680,134 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Taxes paid related to net share settlement of equity awards | (287,455) | | | — | | | — | | | — | | | — | | | — | | | (7,672) | | | — | | | — | | | (7,672) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (92,860) | | | (92,860) | |
| Total other comprehensive loss, net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (979) | | | — | | | (979) | |
| Balance at March 31, 2022 | 91,562,991 | | | $ | 9 | | | 48,344,755 | | | $ | 5 | | | — | | | $ | — | | | $ | 929,199 | | | $ | (1,187) | | | $ | (1,017,715) | | | $ | (89,689) | |
| Stock-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | 27,056 | | | — | | | — | | | 27,056 | |
| Stock option exercises | 269,064 | | | — | | | — | | | — | | | — | | | — | | | 969 | | | — | | | — | | | 969 | |
| Vested RSUs converted to common shares | 827,149 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Taxes paid related to net share settlement of equity awards | (350,156) | | | — | | | — | | | — | | | — | | | — | | | (7,602) | | | — | | | — | | | (7,602) | |
| Repurchase and retirement of Class A common stock | (1,562,460) | | | — | | | — | | | — | | | — | | | — | | | (35,202) | | | — | | | — | | | (35,202) | |
| Conversion of Class B common stock to Class A common stock | 500,000 | | | — | | | (500,000) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 64,496 | | | 64,496 | |
| Total other comprehensive loss, net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,114) | | | — | | | (2,114) | |
| Balance at June 30, 2022 | 91,246,588 | | | $ | 9 | | | 47,844,755 | | | $ | 5 | | | — | | | $ | — | | | $ | 914,420 | | | $ | (3,301) | | | $ | (953,219) | | | $ | (42,086) | |
| Stock-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | 24,572 | | | — | | | — | | | 24,572 | |
| Stock option exercises | 29,797 | | | — | | | — | | | — | | | — | | | — | | | 48 | | | — | | | — | | | 48 | |
| Vested RSUs converted to common shares | 237,846 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Taxes paid related to net share settlement of equity awards | (97,346) | | | — | | | — | | | — | | | — | | | — | | | (2,060) | | | — | | | — | | | (2,060) | |
| Repurchase and retirement of Class A common stock | (2,431,995) | | | — | | | — | | | — | | | — | | | — | | | (50,378) | | | — | | | — | | | (50,378) | |
| Conversion of Class B common stock to Class A common stock | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 10,105 | | | 10,105 | |
| Total other comprehensive loss, net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,310) | | | — | | | (2,310) | |
| Balance at September 30, 2022 | 88,984,890 | | | $ | 9 | | | 47,844,755 | | | $ | 5 | | | — | | | $ | — | | | $ | 886,602 | | | $ | (5,611) | | | $ | (943,114) | | | $ | (62,109) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SQUARESPACE, INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| | | Six Months Ended June 30, 2020 | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2023 | | 2022 |
OPERATING ACTIVITIES: | OPERATING ACTIVITIES: | | | | OPERATING ACTIVITIES: | | | |
| Net (loss)/income | $ | (235,678) | | | $ | 8,407 | | |
| Adjustments to reconcile net (loss)/income to net cash provided by operating activities: | | |
| Net loss | | Net loss | $ | (12,337) | | | $ | (18,259) | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | Adjustments to reconcile net loss to net cash provided by operating activities: | |
| Depreciation and amortization | Depreciation and amortization | 16,232 | | | 11,188 | | Depreciation and amortization | 24,975 | | | 23,773 | |
| Stock-based compensation | Stock-based compensation | 260,365 | | | 15,170 | | Stock-based compensation | 79,922 | | | 75,051 | |
| Deferred income taxes | Deferred income taxes | (16,981) | | | 0 | | Deferred income taxes | 190 | | | — | |
| Non-cash lease (income)/expense | | Non-cash lease (income)/expense | (1,601) | | | 2,258 | |
| Other | Other | 565 | | | 2,028 | | Other | 485 | | | 700 | |
| Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
| Accounts receivable and due from vendors | Accounts receivable and due from vendors | (105) | | | (4,636) | | Accounts receivable and due from vendors | (11,151) | | | (3,099) | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | (10,786) | | | 15,282 | | Prepaid expenses and other current assets | (9,486) | | | (11,514) | |
| Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | 4,260 | | | 16,769 | | Accounts payable and accrued liabilities | 44,080 | | | 6,034 | |
| Deferred revenue | Deferred revenue | 30,766 | | | 35,986 | | Deferred revenue | 47,786 | | | 38,035 | |
| Funds payable to customers | Funds payable to customers | 10,097 | | | 0 | | Funds payable to customers | 5,364 | | | 12,936 | |
| Deferred rent and lease incentives | (133) | | | 764 | | |
| Other operating assets and liabilities | Other operating assets and liabilities | 221 | | | (2,044) | | Other operating assets and liabilities | 1,800 | | | (798) | |
| Net cash provided by operating activities | Net cash provided by operating activities | 58,823 | | | 98,914 | | Net cash provided by operating activities | 170,027 | | | 125,117 | |
INVESTING ACTIVITIES: | INVESTING ACTIVITIES: | | | | INVESTING ACTIVITIES: | | | |
| Proceeds from the sale and maturities of marketable securities | Proceeds from the sale and maturities of marketable securities | 14,805 | | | 46,489 | | Proceeds from the sale and maturities of marketable securities | 39,664 | | | 22,740 | |
| Cash paid for asset acquisition | | Cash paid for asset acquisition | (176,721) | | | — | |
| Purchases of marketable securities | Purchases of marketable securities | (14,181) | | | (36,636) | | Purchases of marketable securities | (7,824) | | | (19,444) | |
| Purchase of property and equipment | Purchase of property and equipment | (2,415) | | | (2,218) | | Purchase of property and equipment | (13,141) | | | (8,852) | |
| Cash paid for acquisitions, net of acquired cash | (202,515) | | | 0 | | |
| Other | 0 | | | (49) | | |
| Net cash (used in)/provided by investing activities | (204,306) | | | 7,586 | | |
| Net cash used in investing activities | | Net cash used in investing activities | (158,022) | | | (5,556) | |
FINANCING ACTIVITIES: | FINANCING ACTIVITIES: | | | | FINANCING ACTIVITIES: | | | |
| Borrowings on Term Loan | | Borrowings on Term Loan | 99,444 | | | — | |
| Payments of debt issuance costs | | Payments of debt issuance costs | (637) | | | — | |
| Principal payments on debt | Principal payments on debt | (6,793) | | | (4,375) | | Principal payments on debt | (32,623) | | | (10,189) | |
| Contingent consideration paid for acquisition | 0 | | | (15,000) | | |
| Payments for repurchase and retirement of Class A common stock | | Payments for repurchase and retirement of Class A common stock | (25,321) | | | (85,580) | |
| Taxes paid related to net share settlement of equity awards | Taxes paid related to net share settlement of equity awards | (25,735) | | | (10,820) | | Taxes paid related to net share settlement of equity awards | (28,306) | | | (17,334) | |
| Proceeds from exercise of stock options | Proceeds from exercise of stock options | 3,566 | | | 627 | | Proceeds from exercise of stock options | 191 | | | 2,158 | |
Proceeds from issuance of Class C (authorized on March 15, 2021) common stock, net of issuance costs | 304,409 | | | 0 | | |
| Dividends paid | (367) | | | 0 | | |
| Net cash provided by/(used in) financing activities | Net cash provided by/(used in) financing activities | 275,080 | | | (29,568) | | Net cash provided by/(used in) financing activities | 12,748 | | | (110,945) | |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (38) | | | 14 | | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (238) | | | (985) | |
| Net increase in cash, cash equivalents, and restricted cash | 129,559 | | | 76,946 | | |
| Net increase in cash, cash equivalents and restricted cash | | Net increase in cash, cash equivalents and restricted cash | 24,515 | | | 7,631 | |
| Cash, cash equivalents, and restricted cash at the beginning of the period | Cash, cash equivalents, and restricted cash at the beginning of the period | 57,891 | | | 43,649 | | Cash, cash equivalents, and restricted cash at the beginning of the period | 232,620 | | | 233,680 | |
| Cash, cash equivalents, and restricted cash at the end of the period | Cash, cash equivalents, and restricted cash at the end of the period | $ | 187,450 | | | $ | 120,595 | | Cash, cash equivalents, and restricted cash at the end of the period | $ | 257,135 | | | $ | 241,311 | |
| | Reconciliation of cash, cash equivalents, and restricted cash: | Reconciliation of cash, cash equivalents, and restricted cash: | | Reconciliation of cash, cash equivalents, and restricted cash: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 160,142 | | | $ | 120,595 | | Cash and cash equivalents | $ | 216,464 | | | $ | 200,480 | |
| Restricted cash | Restricted cash | 27,308 | | | 0 | | Restricted cash | 40,671 | | | 40,831 | |
| Cash, cash equivalents, and restricted cash at the end of the period | Cash, cash equivalents, and restricted cash at the end of the period | $ | 187,450 | | | $ | 120,595 | | Cash, cash equivalents, and restricted cash at the end of the period | $ | 257,135 | | | $ | 241,311 | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW | SUPPLEMENTAL DISCLOSURE OF CASH FLOW | | SUPPLEMENTAL DISCLOSURE OF CASH FLOW | |
| Cash paid during the year for interest | Cash paid during the year for interest | $ | 5,628 | | | $ | 5,215 | | Cash paid during the year for interest | $ | 25,407 | | | $ | 10,283 | |
| Cash paid during the year for income taxes, net of refunds | $ | 1,080 | | | $ | 908 | | |
| Cash paid during the year for income taxes | | Cash paid during the year for income taxes | $ | 31,240 | | | $ | 9,450 | |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCE ACTIVITIES | SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCE ACTIVITIES | | SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCE ACTIVITIES | |
| Purchases of property and equipment included in accounts payable and accrued expenses | $ | 1,090 | | | $ | 204 | | |
| Purchases of property and equipment included in accounts payable and accrued liabilities | | Purchases of property and equipment included in accounts payable and accrued liabilities | $ | 23 | | | $ | 1,814 | |
| Non-cash leasehold improvements | | Non-cash leasehold improvements | $ | — | | | $ | 5,863 | |
| Capitalized stock-based compensation | Capitalized stock-based compensation | $ | 42 | | | $ | 70 | | Capitalized stock-based compensation | $ | 3,127 | | | $ | 737 | |
Issuance of Class C (authorized on March 15, 2021) common stock for acquisition | $ | 188,179 | | | $ | 0 | | |
| Receivables for exercise of stock options included in prepaid expenses and other current assets | $ | 103 | | | $ | 0 | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
1.Description of Business
Squarespace, Inc., and its subsidiaries (the “Company”“Company”) is a leading all-in-one platform for businesses and independent creators to build an online presence, grow their brands and manage their businesses across the internet. The Company offers websites, domains, e-commerce, tools for managing a social media presence, marketing tools, scheduling and hospitality services. The Company is headquartered in New York, New York,NY, with additional offices operating in Portland, Oregon, Los Angeles, California, Chicago, Illinois,IL, Dublin, Ireland, and Dublin, Ireland. Aveiro, Portugal.
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”“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.
The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that the Company (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, the Company’sCompany’s condensed consolidated financial statements may not be comparable to financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards based on public company effective dates.
The Company will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the Company’sCompany’s total annual gross revenue is at least $1,070,000,$1,235,000, (ii) the last day of the fiscal year following the fifth anniversary of the completion of the Direct Listing, as discussed below,Company's direct listing, (iii) the date on which the Company issued more than $1,000,000 in non-convertible debt securities during the prior three-year period, or (iv) the date on which the Company becomes a large accelerated filer.
Acquisition of Tock, Inc.
On March 31, 2021, the Company acquired all of the equity interests in Tock, Inc. (“Tock”), a reservation platform for prepaid reservations, access to restaurant management data, and other customization features, for a total consideration of $425,710. Refer to Note 4 — Acquisitions for further information on the acquisition of Tock.
Direct Listing
On May 19, 2021, the Company completed a direct listing of its Class A common stock (the “Direct Listing”) on the New York Stock Exchange (“NYSE”). The Company incurred fees related to financial advisory service, audit, and legal expenses in connection with the Direct Listing and recorded general and administrative expenses of $25,318 for the three and six months ended June 30, 2021.
2.Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The Company’sCompany’s condensed consolidated financial statements and related notes have been prepared in accordance with generally accepted accounting principles in the United States (“(“U.S. GAAP”GAAP”) and include the Company’sCompany’s wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain information and note disclosures normally included withinin financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the applicable rules and regulations of the Securities and Exchange Commission. The condensed balance sheet data as of December 31, 20202022 was derived from the Company's audited financial statements but does not include all disclosures required by U.S. GAAP. Therefore, these unaudited, condensed, consolidated financial statements and accompanying notes should be read in conjunction with the Company's annual consolidated financial statements and related notes included withinin the Final Prospectus for the Direct ListingCompany's Annual Report on Form 10-K filed with the SEC pursuant to Rule 424(b)(4) on May 19, 2021.March 9, 2023. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of the Company’sCompany’s financial information.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Management’sManagement’s estimates are based on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates.
Significant estimates include but are not limited to (i) the recognition and measurement of loss contingencies, indirect tax liabilities and certain accrued liabilities;contingencies; (ii) the inputs used in the valuation of acquired intangible assets; (iii) the estimated useful lives of intangible and depreciable assets; (iv)inputs used in the quantitative assessment over goodwill impairment (iii) the grant date fair value of stock-based awards; and (v)(iv) the recognition, measurement and valuation of current and deferred income taxes.taxes; (v) existence of applicable indirect tax nexus in different jurisdictions and associated indirect tax liabilities; and (vi) the incremental borrowing rate for operating lease liabilities. The Company evaluates its assumptions and estimates on an ongoing basis and adjusts prospectively, if necessary.
Operating Segments and Reporting Units
Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”), who makes decisions about allocating resources and assessing
In March 2020,SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
performance. The Company defines its CODM as its Chief Executive Officer (“CEO”). An operating segment is determined to be a reporting unit if all of its components are similar or if it consists of a single component. A component consists of a business within an operating segment for which discrete financial information is available and regularly reviewed by the World Health Organization declaredCODM.
During the outbreak ofnine months ended September 30, 2023, the novel coronavirus ("COVID-19") a pandemic. The COVID-19 pandemic has created, and may continueCompany revised its operating segments to create, significant uncertainty in macroeconomic conditions. The countriesreflect changes to the manner in which the Company operates have begun easing initial measures to control the spreadCODM assesses performance and makes resource allocations. As a result of COVID-19. However,these changes, the Company is not able to estimateoperating as one operating segment with one reportable segment. Therefore, all required segment information can be found in the impact that COVID-19 will continue to have on worldwide economic activity or the Company’s results of operations,condensed consolidated financial condition, or liquidity. As of June 30, 2021, the Company has not experienced a materially adverse impact from COVID-19. The Company continues to assess the potential impacts of COVID-19 and the measures taken by governments, businesses and other organizations in response to COVID-19 as information becomes available.statements.
Concentration of Risks Related to Credit, Interest Rates and Foreign Currencies
The Company is subject to credit risk, interest rate risk on anyits outstanding indebtedness, the Company would potentially incur, market risk on investments and foreign currency risk in connection with the Company’sCompany’s operations in Ireland and Poland. internationally.
The Company maintains the components of its cash and cash equivalents balance in various accounts, which from time to time exceed the federal depository insurance coverage limit. In addition, substantially all cash and cash equivalents as well as marketable securities, are held by 2four financial institutions. The Company has not experienced any concentration losses related to its cash, cash equivalents and marketable securities to date.
As of JuneSeptember 30, 20212023 and December 31, 2020,2022, no single customer accounted for more than 10% of the Company’sCompany’s accounts receivable. As of June 30, 2021 and 2020,Additionally, no single customer accounted for more than 10% of the Company’s revenue.Company’s revenue during the three and nine months ended September 30, 2023 and 2022.
The Company is also subject to foreign currency risks that arise from normal business operations. The Company has 2 wholly-owned international subsidiaries, Squarespace Ireland Limited (“Limited”) and Videolicious Poland Sp. z o.o (“Videolicious Poland”), which are based in Ireland and Poland, respectively. Foreign currency risks include the translation of local currency and intercompany balances established in local customer currencies sold through Limited. Translations related to local currency balances of Videolicious Poland are immaterial. the Company's international subsidiaries.
Cash and Cash Equivalents
Cash and cash equivalents are stated at fair value. The Company considers all highly liquid investments purchased with an original maturity date of 90 days or less from the date of original purchase to be cash equivalents. Interest income on cash and cash equivalents was $2,274 and $4,808 for the three and nine months ended September 30, 2023, respectively, and $504 and $821 for the three and nine months ended September 30, 2022, respectively, and was included in other income, net in the condensed consolidated statements of operations.
Restricted Cash and Payment Processing Transactions
As a result of the acquisition of Tock, theThe Company processes certain payments and holds funds for its hospitality services on behalf of its restaurant customers consisting of diner prepayments for restaurant reservations, to-go orders, and events. While the Company does not have any contractual obligations to hold such cash as well as to-go orders. The dinerrestricted, the prepayments and associated sales tax are included withinin restricted cash onin the condensed consolidated balance sheetsheets as of JuneSeptember 30, 2021. 2023 and December 31, 2022.
In addition, the Company recognizes the liability due to restaurant customers withinin funds payable to customers onand the associated sales tax payable in accrued liabilities in the condensed consolidated balance sheetsheets as of JuneSeptember 30, 2021.2023 and December 31, 2022. Funds are remitted to the restaurant customers based on the stipulated contract terms. In addition to restricted cash held on behalf of restaurant customers, the Company recognizes in-transit receivables from certain third-party vendors which assist in processing and settling payment transactions due to a clearing period before the related cash is received or settled. In-transit receivables are included withinin due from vendors onin the condensed consolidated balance sheetsheets as of JuneSeptember 30, 2021. 2023 and December 31, 2022.
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
The following table represents the assets and liabilities related to payment processing transactions:
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Restricted cash | $ | 27,308 | | | $ | 0 | |
Due from vendors | 2,200 | | | 0 | |
Total payment processing assets | 29,508 | | | 0 | |
Funds payable to customers | (29,508) | | | 0 | |
Total payment processing liabilities | (29,508) | | | 0 | |
Total payment processing transactions, net | $ | 0 | | | $ | 0 | |
Refer to Note 4 — Acquisitions for further information on the acquisition of Tock. | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Restricted cash | $ | 40,671 | | | $ | 35,583 | |
| Due from vendors | 4,292 | | | 4,442 | |
| Total payment processing assets | 44,963 | | | 40,025 | |
| Funds payable to customers | (44,208) | | | (38,845) | |
| Sales tax payable | (755) | | | (1,180) | |
| Total payment processing liabilities | (44,963) | | | (40,025) | |
| Total payment processing transactions, net | $ | — | | | $ | — | |
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Accounting Standards Codification “ASC”(“ASC”) Topic 820, Fair Value Measurement, describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
The three-level hierarchy for fair value measurements is defined as follows:
Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2 Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly, including inputs in markets that are not considered to be active; and
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Refer to Note 6 — See “Note 6. Fair Value of Financial InstrumentsInstruments” for further information.
Business CombinationsAsset Acquisitions
The Company evaluates acquisitionswhether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets to determine whether ita transaction is accounted for as a business combination or an asset acquisition.
The Company accounts for business combinations under the acquisition method of accounting. The Company includes the results of operations of acquired businesses in its condensed consolidated financial statements as of the respective dates of acquisition. The purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with the excess recorded to goodwill. Critical estimates used in valuing certain acquired intangible assets include, but are not limited to, future expected cash flows (primarily from customer relationships and technology) and discount rates.
The determination of fair value requires considerable judgment and is sensitive to changes in the underlying assumptions. The Company’s estimates are preliminary and subject to adjustment, which may result in material changes to the final valuation. During the measurement period, which will not exceed one year from closing, the Company will continue to obtain information to assist in finalizing the acquisition date fair values. Any qualifying changes to the preliminary estimates will be recorded as adjustments to the respective assets and liabilities, with any residual amounts allocated to goodwill. Any transaction costs are expensed as incurred.
Assetasset acquisitions are accounted for using a cost accumulation model withwhereby the cost of the acquisition, including direct transaction costs, is allocated to the acquired assets based on their relative fair values. The asset acquisition cost or consideration transferred on the acquisition date is generally used in determining the fair value of the net assets acquired. The Company allocates the consideration transferred between the asset acquired and any separate related transactions on a relative fair value basis. Goodwill is not recognized in an asset acquisition.
Goodwill
Goodwill represents theacquisition and any excess of the purchase priceconsideration transferred over the estimated fair value of the net tangible andassets acquired is allocated to the identifiable assets based on relative fair values.
See “Note 4. Acquisitions” for further information.
Intangible Assets
The Company’s intangible assets acquiredare finite-lived and are amortized on a straight-line basis over their estimated useful lives, which are aligned to the economic benefit of the asset.
Leases
The Company adopted ASC Topic 842, Leases ("ASC Topic 842"), as of January 1, 2022. The Company determines if an arrangement is or contains a lease at inception by assessing whether the arrangement conveys the right to control the use of an identified asset. The Company classifies, measures and recognizes a lease liability on the lease commencement date based on the present value of lease payments over the remaining lease term. As of September 30, 2023, the Company's leases were classified as operating leases. The Company uses an estimated incremental borrowing rate based on information available at the lease commencement date in business combinations.determining the present value of future payments as the rate implicit in the lease is not generally known. The recognitionincremental borrowing rate is based on the rate of goodwill represents the strategic and synergistic benefitsinterest the Company expectswould have to realize from acquisitions.
Goodwill is not amortizedpay to earnings, rather, assessed for impairment annually duringborrow on a collateralized basis over a similar term an amount equal to the fourth quarter for its single reporting unit. The Company also performs an assessment at other times if events or changeslease payments in circumstances indicatea similar economic environment. Operating right-of-use assets related to operating lease liabilities equal the carrying valueamount of the assets may not be recoverable. initial measurement of the lease liability adjusted for any initial direct costs, prepaid rent and lease incentives received. Lease
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Intangible Assets
Theterms that are used in determining operating lease liabilities at lease inception may include options to extend or terminate the leases and when it is reasonably certain that the Company’s finite-lived intangible assets are amortized will exercise such options. Operating lease expense is recorded on a straight-line basis whichover the lease term. The straight-line expense is alignedallocated within the condensed consolidated statements of operations based on departmental employee headcount. Variable lease costs are recognized as incurred and allocated within the condensed consolidated statements of operations based on departmental employee headcount. The Company has applied practical expedients for lease agreements with lease and non-lease components, and in such cases, accounts for the components as a single lease component. The Company has also elected not to recognize operating right-of-use assets and operating lease liabilities for any lease with an original lease term of less than one year.
Operating lease right-of-use assets are included in non-current assets on the economic benefitcondensed consolidated balance sheets for the entire lease term. The Company includes the portion of the asset,total lease payments, net of implicit interest, that are due in the next 12 months in current liabilities and the remaining portion in non-current liabilities on the condensed consolidated balance sheets. The difference between straight-line lease expense and the cash paid for leases is included as non-cash lease expense in the adjustments to reconcile net loss to net cash provided by operating activities on the condensed consolidated statements of cash flows.
Operating sublease income is recognized on a straight-line basis over their estimated remaining life. the sublease term and is allocated within the condensed consolidated statements of operations based on departmental employee headcount.
See “Note 13. Leases” for further information on impairment losses on leases recorded during the year ended December 31, 2022.
Net (Loss)/Income Per Share Attributable to Class A, Class B and Class C Common Stockholders
The Company calculates net (loss)/income per share attributable to Class A, Class B and Class C common stockholders using the two-class method required for companies with participating securities. The Company considers redeemable convertible preferred stock to be participating securities as holders of such securities have non-forfeitable dividend rights in the event of the Company’s declaration of a dividend for shares of Class A, Class B and Class C common stock. During periods when the Company is in a net loss position, the net loss attributable to Class A, Class B and Class C common stockholders is not allocated to the redeemable convertible preferred stock and unvested Class A, Class B and Class C common stock under the two-class method as these securities do not have a contractual obligation to share in the Company’s losses. Payment in excess of the carrying value on the redemption of redeemable convertible preferred stock represents a deemed dividend to the redeemable convertible preferred stockholder. Accordingly, the difference between the amount paid upon redemption and the carrying value of the redeemable convertible preferred stock is deducted from (if a premium) or added to (if a discount) net income to arrive at net (loss)/income available to Class A, Class B and Class C common stockholders.
Distributed and undistributed earnings allocated to participating securities are subtracted from net income/(loss) in determining net (loss)/income attributable to Class A, Class B and Class C common stockholders. Basic net (loss)/income per share is computed by dividing net (loss)/income attributable to Class A, Class B and Class C common stockholders by the weighted-average number of shares of the Company’sCompany’s Class A, Class B and Class C common stock outstanding.
The dilutedDiluted net (loss)/income per share attributable to Class A, Class B and Class C common stockholders is computed by giving effect to all dilutive securities. Diluted net (loss)/income per share attributable to Class A, Class B and Class C common stockholders is computed by dividing the resulting net (loss)/income attributable to Class A, Class B and Class C common stockholders by the weighted-average number of fully diluted Class A, Class B and Class C common shares outstanding. The Company used the if-converted method as though the conversion, exchange or vesting, respectively, had occurred as of the beginning of the period or the original date of issuance, if later. During periods when there is a net loss attributable to Class A, Class B and Class C common stockholders, potentially dilutive Class A, Class B and Class C common stock equivalents are excluded from the calculation of diluted net loss per share attributable to Class A, Class B and Class C common stockholders as their effect is anti-dilutive. If the effect of a conversion of an instrument is neutral to earnings per share, the Company considers the security to be dilutive.
Recently Issued Accounting Pronouncements
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. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. Refer to Note 1 -See “Note 1. Description of BusinessBusiness” for further information on the Company's status as an emerging growth company.
Accounting Pronouncements Recently Adopted
In August 2018,October 2021, the FASB issued ASU 2018-15,2021-08, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40)Business Combinations (Topic 805): Customer’s Accounting for Implementation Costs IncurredContract Assets and Contract Liabilities from Contracts with Customers ("ASC 2021-08"). This standard requires that an entity recognize and measure contract assets and contract liabilities acquired in a Cloud Computing Arrangement That Is a Service Contract. This alignsbusiness combination in accordance with ASC Topic 606, Revenue from Contracts with Customers, as if the accounting for implementation costs incurred in cloud computing arrangements withacquirer had originated the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidancecontracts. ASU 2021-08 is effective for nonpublic companies for annual reportingfiscal years and interim periods in those years beginning after December 15, 2020 and interim periods within annual periods beginning after December 15, 20212022 for nonpublic entities with early adoption permitted. The amendments in this standard can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted this standard as of January 1, 20212023, however, as the Company has not completed any transactions subject to Topic 805 subsequent to the date of adoption, the adoption of this standard did not have a material impact on a prospective basis.the Company’s condensed consolidated financial statements.
In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This standard defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. ASU No. 2022-06 is effective upon issuance of this update for all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The Company adopted this standard as of December 31, 2022. Effective June 30, 2023, the Company replaced LIBOR as the benchmark rate with SOFR. See “Note 10. Debt" for further information. The adoption of this standard did not have a material impact on the Company’sCompany’s condensed consolidated financial statements.
Accounting Pronouncements Pending Adoption
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). This standard will require lessees to recognize a right-of-use asset and a lease liability for operating leases initially measured at the present value of the lease payments on its consolidated balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. In July 2018, the FASB issued ASU 2018-10, Leases (Topic 842): Codification Improvements (“ASU 2018-10”) and ASU 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), to provide additional guidance for the adoption of ASU
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
2016-02. ASU 2018-10 clarifies certain provisions and corrects unintended applications of the guidance. ASU 2018-11 provides an alternative transition method which allows entities the option to present all prior periods under previous lease accounting guidance while recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption. In June 2020, the FASB issued ASU No. 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Deferral of the Effective Date, which requires nonpublic companies to adopt the provisions of ASU 2016-02 for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the timing of its adoption of this standard and the impact on its consolidated financial statements. The Company currently believes the most significant impact upon adoption will be the recognition of material right-of-use assets and lease liabilities on the consolidated balance sheet associated with operating leases. The Company does not expect the adoption will have a material impact on its condensed consolidated statements of operations.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard will require entities to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. It also modifies the impairment model for available-for-sale debt securities and provides a simplified accounting model for purchased financial assets with credit deterioration since their origination. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) — Effective Dates, which requires nonpublic companies to adopt the provisions of ASU 2016-13 for fiscal years and interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the timing of its adoption of this standard and the impact on its condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the prior guidance’s goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU No. 2017-04 is effective for fiscal years and interim periods within those years beginning after December 15, 2021 for nonpublic entities with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard will simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify GAAP for other areas of ASC 740 by clarifying and amending existing guidance. This standard is effective for nonpublic entities for annual reporting periods beginning after December 15, 2021 and interim periods within annual reporting periods beginning after December 15, 2022 with early adoption permitted. The Company is currently evaluating the timing of its adoption of this standard and the impact on its condensed consolidated financial statements.
3.Revenue
The Company primarily derives revenue from monthlyannual and annualmonthly subscriptions. Revenue is also derived from non-subscription services, including fixed percentages or fixed feesfixed-fees earned on revenue share arrangements with third partiesthird-parties and on sales made through our customers’customers’ sites.
The Company has disaggregated revenue from contracts with customers by product type, subscription type, revenue recognition pattern, and geography as these categories depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic factors. The Company disaggregates revenue by product type as follows:
Presence
Presence revenue primarily consists of fixed-fee subscriptions to the Company’sCompany’s plans that offer core platform functionalities, currently branded “Personal”“Personal” and “Business”“Business” plans. Presence revenue also consists of fixed feefixed-fee subscriptions related to additional entry points for starting online such as domain managed services and social media stories.media. 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, the Company has an enterprise offering, and revenue is recognized over the life of the contract.
Commerce
Commerce revenue primarily consists of fixed-fee subscriptions to the Company’sCompany’s plans that offer all the features of presence plans includingas well as additional features that support end to end commerce transactions, currently branded “Basic”“Basic” and “Advanced”“Advanced” plans. Commerce revenue also includes fixed-fee subscriptions to a number of other tools that support running an online business such as marketing, member areas,memberships, courses, scheduling and schedulinghospitality tools. Non-subscription revenue is derived from fixed feesfixed-fees earned on revenue share arrangements with payment processors and third-party business applications, andcommerce partners as well as fixed
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
transaction fees earned on sales madegross merchandise value processed through Business plan sites. Additionally, commercesites and certain hospitality offerings. Commerce revenue consistsalso includes payment processing fees received for use of fixed-fee subscriptions and non-recurring revenue related tothe Company’s hospitality services.
Revenue by Product Type, Subscription Type and Revenue Recognition Pattern
The following tables summarize revenue by product type, subscription type, and revenue recognition pattern for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 | | Nine Months Ended September 30, 2023 |
| Presence | | Commerce | | Total | | Presence | | Commerce | | Total |
| Subscription revenue | | | | | | | | | | | |
| Transferred over time | $ | 174,542 | | | $ | 59,092 | | | $ | 233,634 | | | $ | 501,457 | | | $ | 169,955 | | | $ | 671,412 | |
| Transferred at a point in time | 4,087 | | | — | | | 4,087 | | | 12,088 | | | — | | | 12,088 | |
| Non-subscription revenue | | | | | | | | | | | |
| Transferred over time | 760 | | | 902 | | | 1,662 | | | 2,181 | | | 2,629 | | | 4,810 | |
| Transferred at a point in time | 62 | | | 17,616 | | | 17,678 | | | 190 | | | 53,118 | | | 53,308 | |
| Total revenue | $ | 179,451 | | | $ | 77,610 | | | $ | 257,061 | | | $ | 515,916 | | | $ | 225,702 | | | $ | 741,618 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
| Presence | | Commerce | | Total | | Presence | | Commerce | | Total |
| Subscription revenue | | | | | | | | | | | |
| Transferred over time | $ | 146,055 | | | $ | 50,258 | | | $ | 196,313 | | | $ | 428,434 | | | $ | 146,180 | | | $ | 574,614 | |
| Transferred at a point in time | 3,398 | | | — | | | 3,398 | | | 10,447 | | | — | | | 10,447 | |
| Non-subscription revenue | | | | | | | | | | | |
| Transferred over time | 459 | | | 890 | | | 1,349 | | | 1,299 | | | 2,641 | | | 3,940 | |
| Transferred at a point in time | 83 | | | 16,553 | | | 16,636 | | | 291 | | | 48,868 | | | 49,159 | |
| Total revenue | $ | 149,995 | | | $ | 67,701 | | | $ | 217,696 | | | $ | 440,471 | | | $ | 197,689 | | | $ | 638,160 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021Table of Contents | | Six Months Ended June 30, 2021 |
| Presence | | Commerce | | Total | | Presence | | Commerce | | Total |
Subscription revenue
| | | | | | | | | | | |
Transferred over time | $ | 133,687 | | | $ | 42,302 | | | $ | 175,989 | | | $ | 262,818 | | | $ | 79,556 | | | $ | 342,374 | |
Transferred at a point in time | 2,849 | | | 0 | | | 2,849 | | | 5,700 | | | 0 | | | 5,700 | |
Non-subscription revenue
| | | | | | | | | | | |
Transferred over time | 546 | | | 72 | | | 618 | | | 1,121 | | | 144 | | | 1,265 | |
Transferred at a point in time | 195 | | | 16,359 | | | 16,554 | | | 509 | | | 25,808 | | | 26,317 | |
Total revenue | $ | 137,277 | | | $ | 58,733 | | | $ | 196,010 | | | $ | 270,148 | | | $ | 105,508 | | | $ | 375,656 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 |
| Presence | | Commerce | | Total | | Presence | | Commerce | | Total |
Subscription revenue SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) (unaudited) | | | | | | | | | | | |
Transferred over time | $ | 112,850 | | | $ | 25,255 | | | $ | 138,105 | | | $ | 220,351 | | | $ | 46,937 | | | $ | 267,288 | |
Transferred at a point in time | 2,024 | | | 0 | | | 2,024 | | | 4,342 | | | 0 | | | 4,342 | |
Non-subscription revenue
| | | | | | | | | | | |
Transferred over time | 318 | | | 38 | | | 356 | | | 685 | | | 63 | | | 748 | |
Transferred at a point in time | 329 | | | 8,826 | | | 9,155 | | | 765 | | | 13,371 | | | 14,136 | |
Total revenue | $ | 115,521 | | | $ | 34,119 | | | $ | 149,640 | | | $ | 226,143 | | | $ | 60,371 | | | $ | 286,514 | |
Revenue by Geography
Revenue by geography is based on the customer’scustomer’s self-reported country identifier or, if not available, the billing address or IP address, and was as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2023 | | 2022 | | 2023 | | 2022 |
| United States | United States | $ | 141,517 | | | $ | 105,098 | | | $ | 268,560 | | | $ | 200,470 | | United States | $ | 184,198 | | | $ | 157,409 | | | $ | 531,147 | | | $ | 456,583 | |
| International | International | 54,493 | | | 44,542 | | | 107,096 | | | 86,044 | | International | 72,863 | | | 60,287 | | | 210,471 | | | 181,577 | |
| Total revenue | Total revenue | $ | 196,010 | | | $ | 149,640 | | | $ | 375,656 | | | $ | 286,514 | | Total revenue | $ | 257,061 | | | $ | 217,696 | | | $ | 741,618 | | | $ | 638,160 | |
There are currentlyCurrently no countries considered in International that areindividual country contributes greater than 10% of total international revenue.
Deferred Revenue
The deferred revenue balance as of JuneSeptember 30, 20212023 and December 31, 20202022 represents the Company’sCompany’s aggregate remaining performance obligations that are expected to be recognized as revenue withinin subsequent periods. Generally, the Company’sCompany’s contracts are for one year or less and the value for contracts with terms greater than one year is immaterial.not material. The change in deferred revenue primarily reflects cash payments received during the period for which the performance obligation was not satisfied prior to the end of the period partially offset by $62,500$49,745 and $159,155 of revenues recognized
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
during the three and six months ended June 30, 2021, respectively, and $48,314 and $125,453$253,589 of revenues recognized during the three and sixnine months ended JuneSeptember 30, 2020,2023, respectively, and $42,213 and $220,342 during the three and nine months ended September 30, 2022, respectively.
Capitalized Contract Costs
Assets capitalized related to referral feescontract costs consisted of the following:
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Prepaid referral fees, current | $ | 4,003 | | | $ | 3,452 | |
Prepaid referral fees, non-current | 7,228 | | | 7,018 | |
Prepaid app fees, current | 1,082 | | | 1,016 | |
Total capitalized contract costs | $ | 12,313 | | | $ | 11,486 | |
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Capitalized referral fees, current | $ | 7,750 | | | $ | 6,368 | |
| Capitalized referral fees, non-current | 9,941 | | | 8,168 | |
| Capitalized app fees, current | 880 | | | 971 | |
| Sales commissions, current | 502 | | | 479 | |
| Sales commissions, non-current | 145 | | | 159 | |
| Total capitalized contract costs | $ | 19,218 | | | $ | 16,145 | |
Amortization of referral fees were $1,057capitalized contract costs was $3,039 and $1,998$9,328 for the three and sixnine months ended JuneSeptember 30, 2021,2023, respectively, and $596$2,624 and $1,075$7,860 for the three and sixnine months ended JuneSeptember 30, 2020,2022, respectively, and werewas included in marketing and sales onin the condensed consolidated statements of operations.
Amortization of app fees were $993 and $1,954 for the three and six months ended June 30, 2021, respectively, and $657 and $1,112 for the three and six months ended June 30, 2020, respectively, and were included in marketing and sales on the condensed consolidated statements of operations.
There were 0no impairment charges recognized related to capitalized contract costs for the three and sixnine months ended JuneSeptember 30, 20212023 and 2020.2022.
Obligations for Returns, Refunds and Other Similar Obligations
The Company did not have any material change in revenue recognition from a previous period due to refunds, change in transaction price or other consideration variables. As of JuneSeptember 30, 20212023 and December 31, 2020,2022, obligations for refunds were $249$494 and $300,$400, respectively, and arewere included withinin accrued liabilities onin the condensed consolidated balance sheet.sheets.
4.Acquisitions
Acuity Scheduling, Inc.Google Domains
On April 19, 2019,June 15, 2023, the Company acquired substantiallyentered into an asset purchase agreement (the "Google Domains APA") between the Company and Google LLC (“Google”) to acquire, among other things, Google's domain assets, including all ofdomain names for which Google is the assets of Acuity Scheduling, Inc. (“Acuity”), an appointment scheduling and online bookings software solution, for $50,000 (“the Acuity Acquisition”registrar or reseller (the “Google Domains Asset Acquisition”). The Google Domains Asset Acquisition closed on September 7, 2023 (the “Closing Date”) subsequent to certain regulatory approvals and customary closing conditions.
The Company recognized the acquisition as an asset acquisition. The total considerationamount paid for the Google Domains Asset Acquisition was paid as follows: $25,000 was paid to the seller at closing, $15,000$180,721, including direct transaction costs of $721, which was paid on the first anniversaryClosing Date. The total amount paid included $100,000 in cash funded by additional term loan commitments with the remaining amount paid using cash on hand. See “Note 10. Debt” for further information on the additional term loan commitments funded during the three months ended September 30, 2023. Based on the relative fair values of the closing date (the “Acquisition Liability”) and $10,000 was paid to a third party escrow agent at the date of closing and was distributed on the second anniversary of the closing date.
The Acquisition Liability was paid by the Company on April 19, 2020 for $15,000 and is included within cash (used in)/provided by financing activitiesassets acquired in the condensed consolidated statements of cash flows. During the three and six months ended June 30, 2020 total interest expense relatedGoogle Domains APA, $176,721 was allocated to the Acquisition Liability was $32asset acquired classified as customer relationships and $188, respectively, which is included within interest expense on the condensed consolidated statement of operations.
Tock, Inc.
On March 31, 2021, the Company acquired all of the equity interests in Tock, a reservation platform for prepaid reservations, access to restaurant management data, and other customization features. The purpose of the acquisition was to expand the Company’s complementary suite of services available with a platform for reservations, take-out, delivery and events for the hospitality industry. The total consideration for the transaction was $425,710, consisting of $226,821 of cash, $188,179 of the Company’s Class C common stock, and $10,710 of net working capital adjustments. The Company recognized this transaction as a business combination. The initial purchase accounting, including the identification and allocation of consideration to assets acquired, is not complete and the preliminary purchase price allocation is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed. The Company expects to recognize approximately $93,000 of identifiable finite-lived intangible assets, and $337,905 of goodwill related tonet in the acquisition of Tock. The identifiable finite-lived intangible assets are expected to be
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
condensed consolidated balance sheet. The identifiable finite-lived intangible asset is expected to be amortized over theirits useful liveslife which areis estimated to be between 3 to 104 years. Goodwill associated with the acquisition of Tock is not amortizable for tax purposes.
The following table sets forth the preliminary allocationremaining $4,000 of the purchase pricetotal amount paid was related to the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed, with the excess recorded to goodwill:
| | | | | |
| Tock |
Net tangible assets acquired | $ | 12,728 | |
Deferred income tax liability | (17,923) | |
Customer relationships – restaurants | 64,000 | |
Customer relationships – enterprise | 19,000 | |
Tradename | 6,000 | |
Developed technology | 4,000 | |
Net assets acquired | 87,805 | |
Consideration | 425,710 | |
Goodwill | $ | 337,905 | |
| | | | | |
| Amount |
Consideration transferred | $ | 425,710 | |
Less: Issuances of Class C common stock | (188,179) | |
Less: Cash acquired | (18,350) | |
Less: Restricted cash | (17,011) | |
Add: Working capital to be paid to Squarespace, Inc. | 345 | |
Cash paid for acquisitions, net of acquired cash | $ | 202,515 | |
Actual and pro forma results for this acquisition have not been presented as the financial impact toa transaction service agreement (the "Google TSA") between the Company’s and Google and is included within prepaid expenses and other current assets in the condensed consolidated balance sheet. The Google TSA will be expensed over a period of 8 months with expenses allocated to research and product development expenses and cost of revenue in the condensed consolidated statement of operations is not material.
In additionbased on the nature of the services being provided to the consideration for Tock,Company.
As of the Closing Date, the Company issued Class C common stockagreed to reimburse Google for deposits it assumed of $11,719 for domain name registration fees remaining at certain third-party registries. As of September 30, 2023, the Company had $7,537 of these deposits remaining in prepaid expenses and other current assets and $11,719 remaining in accrued liabilities in the form of restricted stock units (“RSUs”) to certain selling shareholders, which will vest over three years contingent upon continued service. Refer to Note 16 — Stock-based Compensation for further information.
The Company did not acquire any businesses during the three and six months ended June 30, 2020. condensed consolidated balance sheet.
5.Investment in Marketable Securities
As of September 30, 2023, the Company did not own available-for-sale (“AFS”) marketable securities in the form of corporate bonds and commercial paper, asset backed securities or U.S. treasuries.
The following tables represent the amortized cost, gross unrealized gains and losses and fair market value of the Company’s available-for-sale (“Company’s AFS”) marketable securities: securities as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Amortized
Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Aggregate Fair Value |
| Corporate bonds and commercial paper | $ | 19,849 | | | $ | — | | | $ | (74) | | | $ | 19,775 | |
| Asset backed securities | 2,219 | | | 1 | | | (12) | | | 2,208 | |
| U.S. treasuries | 9,905 | | | — | | | (131) | | | 9,774 | |
| Total investment in marketable securities | $ | 31,973 | | | $ | 1 | | | $ | (217) | | | $ | 31,757 | |
The Company's gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2022, aggregated by investment category and the length of time that individual securities have been in a continuous loss position are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Less than 12 months | | 12 months or Greater | | Total |
| Aggregate Fair Value | Gross Unrealized Losses | | Aggregate Fair Value | Gross Unrealized Losses | | Aggregate Fair Value | Gross Unrealized Losses |
| Corporate bonds and commercial paper | $ | 14,768 | | $ | (25) | | | $ | 5,007 | | $ | (49) | | | $ | 19,775 | | $ | (74) | |
| Asset backed securities | $ | 2,208 | | $ | (12) | | | $ | — | | $ | — | | | $ | 2,208 | | $ | (12) | |
| U.S. treasuries | $ | 3,873 | | $ | (29) | | | $ | 5,901 | | $ | (102) | | | $ | 9,774 | | $ | (131) | |
| Total investment in marketable securities | $ | 20,849 | | $ | (66) | | | $ | 10,908 | | $ | (151) | | | $ | 31,757 | | $ | (217) | |
The Company did not recognize any unrealized losses related to marketable securities during the three months ended September 30, 2023. The Company recognized unrealized losses of $216 related to its AFS securities during the nine months ended September 30, 2023, and $35 and $290 during the three and nine months ended September 30, 2022, respectively. The unrealized losses were due to changes in market rates and were determined to be temporary in nature. These unrealized losses were classified in accumulated other comprehensive loss in the condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022.
The Company reviews AFS marketable securities on a recurring basis to evaluate whether or not any securities have experienced an other-than-temporary decline in fair value. Some factors considered in establishing an expected credit loss on AFS marketable securities are the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer, the Company's intent to sell, and whether it is more likely than not the Company will be required to sell the investment before recovery of the investments amortized cost basis. The Company did not have any AFS marketable securities for which an expected credit loss has been recorded as the Company's AFS marketable securities with an amortized cost basis lower than fair value were not considered other-than-temporary declines in fair value. In the instance that the Company has AFS marketable securities at an amortized cost basis lower than fair value, the Company does not intend to sell, nor is it more-likely-than not the Company would be required to sell the AFS marketable security prior to recovery.
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
The contractual maturities of the investments classified as marketable securities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021December 31, 2022 |
| Amortized
Cost | | Gross
Unrealized
Gains
| | Gross
Unrealized
Losses
| | Aggregate
Fair Value
|
Corporate bonds and commercial paperDue within 1 year | $ | 21,408 | | | $ | 20 | | | $ | (6) | | | $ | 21,42228,564 | |
Asset backed securitiesDue in 1 year through 5 years | 7,085 | | | 46 | | | 0 | | | 7,131 | |
U.S. treasuries | 8,028 | | | 1 | | | 0 | | | 8,0293,193 | |
| Total investment in marketable securities | $ | 36,521 | | | $ | 67 | | | $ | (6) | | | $ | 36,582 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Amortized
Cost | | Gross
Unrealized
Gains
| | Gross
Unrealized
Losses
| | Aggregate
Fair Value
|
Corporate bonds and commercial paper | $ | 21,438 | | | $ | 55 | | | $ | 0 | | | $ | 21,493 | |
Asset backed securities | 7,820 | | | 94 | | | 0 | | | 7,914 | |
U.S. treasuries | 8,053 | | | 2 | | | 0 | | | 8,055 | |
Total investment in marketable securities | $ | 37,311 | | | $ | 151 | | | $ | 0 | | | $ | 37,462 | |
AFS marketable securities that were in an unrealized loss position as of June 30, 2021 and December 31, 2020 were immaterial.
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
The contractual maturities of the investments classified as marketable securities were as follows:
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Due within 1 year | $ | 34,524 | | | $ | 32,607 | |
Due in 1 year through 5 years | 2,058 | | | 4,855 | |
Total investment in marketable securities | $ | 36,582 | | | $ | 37,46231,757 | |
6.Fair Value of Financial Instruments
A summary of the Company’sCompany’s investments in marketable securities (including, if applicable, those marketable securities classified as cash and cash equivalents) were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Cash equivalents
| | | | | | | |
Money market funds | $ | 76,389 | | | $ | 0 | | | $ | 0 | | | $ | 76,389 | |
Available-for-sale debt securities
| | | | | | | |
Corporate bonds and commercial paper | 0 | | | 21,422 | | | 0 | | | 21,422 | |
Asset backed securities | 0 | | | 7,131 | | | 0 | | | 7,131 | |
U.S. treasuries | 8,029 | | | 0 | | | 0 | | | 8,029 | |
Total | $ | 84,418 | | | $ | 28,553 | | | $ | 0 | | | $ | 112,971 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Cash equivalents | | | | | | | |
| Money market funds | $ | 154,056 | | | $ | — | | | $ | — | | | $ | 154,056 | |
| Total | $ | 154,056 | | | $ | — | | | $ | — | | | $ | 154,056 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Cash equivalents
| | | | | | | |
Money market funds | $ | 876 | | | $ | 0 | | | $ | 0 | | | $ | 876 | |
Available-for-sale debt securities
| — | | | | | | | |
Corporate bonds and commercial paper | 0 | | | 21,493 | | | 0 | | | 21,493 | |
Asset backed securities | 0 | | | 7,914 | | | 0 | | | 7,914 | |
U.S. treasuries | 8,055 | | | 0 | | | 0 | | | 8,055 | |
Total | $ | 8,931 | | | $ | 29,407 | | | $ | 0 | | | $ | 38,338 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Cash equivalents | | | | | | | |
| Money market funds | $ | 82,584 | | | $ | — | | | $ | — | | | $ | 82,584 | |
| Available-for-sale debt securities | | | | | | | |
| Corporate bonds and commercial paper | — | | | 19,775 | | | — | | | 19,775 | |
| Asset backed securities | — | | | 2,208 | | | — | | | 2,208 | |
| U.S. treasuries | 9,774 | | | — | | | — | | | 9,774 | |
| Total | $ | 92,358 | | | $ | 21,983 | | | $ | — | | | $ | 114,341 | |
The Company’sCompany’s valuation techniques used to measure the fair value of money market funds and certain available-for-saleAFS marketable securities were derived from quoted prices in active markets for identical assets. The valuation techniques used to measure the fair value of the Company’sCompany’s other debt securities, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. There were no transfers of financial instruments between Level 1, Level 2, and Level 3 during the periods presented.
For certain other financial instruments, including accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate the fair value of such instruments due to the relatively short maturity of these balances. The recorded amounts of the Company’s records debt obligations at their approximate their fair values as they are based upon rates available to the Company for obligations of similar terms and maturities.
7.Prepaid expensesExpenses and other current assetsOther Current Assets
Prepaid expenses and other current assets consisted of the following:
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Prepaid advertising | $ | 6,238 | | | $ | 9,645 | |
Prepaid income tax | 17,223 | | | 16,924 | |
Prepaid operational expenses | 14,829 | | | 5,152 | |
Other current assets | 10,549 | | | 5,663 | |
Total prepaid expenses and other current assets | $ | 48,839 | | | $ | 37,384 | |
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Prepaid domain name registration fees | 19,468 | | | 2,790 | |
| Prepaid operational expenses | 17,255 | | | 11,990 | |
| Prepaid referrals, current | 7,750 | | | 6,368 | |
| Prepaid advertising expenses | $ | 936 | | | $ | 7,045 | |
| Prepaid income taxes | — | | | 17,134 | |
| Other current assets | 11,989 | | | 2,999 | |
| Total prepaid expenses and other current assets | $ | 57,398 | | | $ | 48,326 | |
As of September 30, 2023, the Company had $7,537 in deposits for domain name registration fees remaining at certain third-party registries in relation to the Google Domains Asset Acquisition included as other current assets above. See “Note 4. Acquisitions” for further information.
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
8.Goodwill and Intangible Assets, netAccrued Liabilities
GoodwillAccrued liabilities consisted of the following:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Accrued indirect taxes | 38,473 | | | 33,486 | |
| Accrued marketing expenses | $ | 24,111 | | | $ | 14,620 | |
| Accrued product expenses | 17,124 | | | 4,524 | |
| Accrued income taxes | 8,822 | | | — | |
| Accrued payroll expense | 4,044 | | | 4,985 | |
| Other accrued expenses | 21,159 | | | 6,745 | |
| Total accrued liabilities | $ | 113,733 | | | $ | 64,360 | |
As of JuneSeptember 30, 2021 and December 31, 2020,2023, the Company had goodwilla remaining obligation of $421,076 and $83,171, respectively. The increase$11,719 for deposits for domain name registration fees in goodwill during the three and six months ended June 30, 2021 was directly relatedrelation to the acquisition of Tock. Refer to Note 4 — AcquisitionsGoogle Domains Asset Acquisition included as other accrued expenses above. See “Note 4. Acquisitions” for further information. There have been 0 impairment charges recognized relating to the goodwill recorded to date.
9.Intangible Assets, Net
Intangible assets, net
The following tables summarize the carrying value of the Company’sCompany’s finite-lived intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | |
| Useful | | | | | | | | | | | | | | | | | | | | | | | | | Useful Lives (in years) | | September 30, 2023 | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Technology | 3 to 5 | | $ | 17,533 | | | $ | (15,308) | | | $ | 2,225 | | | Customer relationships | 2 to 5 | | 238,551 | | | (38,128) | | | 200,423 | | | Tradenames | 3 to 5 | | 11,496 | | | (8,997) | | | 2,499 | | | Total intangible assets, net | | | $ | 267,580 | | | $ | (62,433) | | | $ | 205,147 | |
| | | | | | | | | | | | | | | | | | | | | | | | | Useful Lives (in years) | | December 31, 2022 | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Technology | 3 to 5 | | $ | 17,533 | | | $ | (12,386) | | | $ | 5,147 | | | Customer relationships | 2 to 5 | | 61,830 | | | (27,416) | | | 34,414 | | | Tradenames | 3 to 5 | | 11,496 | | | (8,249) | | | 3,247 | | | Total intangible assets, net | | | $ | 90,859 | | | $ | (48,051) | | | $ | 42,808 | |
Lives
(in years)
| | June 30, 2021 |
| Gross Carrying
Value
| | Accumulated
Amortization
| | Net Carrying
Value
|
Technology | 3 to 5
| | $ | 18,533 | | | $ | (6,593) | | | $ | 11,940 | |
Customer relationships | 2 to 10
| | 91,830 | | | (9,695) | | | 82,135 | |
Tradenames | 3 to 5
| | 12,496 | | | (4,229) | | | 8,267 | |
Total intangible assets, net | | | $ | 122,859 | | | $ | (20,517) | | | $ | 102,342 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Useful Lives (in years) | | December 31, 2020 |
| Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| Technology | 5 | | $ | 14,533 | | | $ | (4,818) | | | $ | 9,715 | |
| Customer relationships | 2 to 8 | | 8,830 | | | (3,348) | | | 5,482 | |
| Tradenames | 3 | | 6,496 | | | (2,825) | | | 3,671 | |
| Total intangible assets, net | | | $ | 29,859 | | | $ | (10,991) | | | $ | 18,868 | |
Technology, customer relationships and tradenames have a weighted-average remaining useful lifelives of 2.80.6 years, 9.53.8 years and 3.72.5 years, respectively. The weighted-average remaining useful life for finite-lived intangible assets was 8.33.7 years as of JuneSeptember 30, 2021. 2023.
Amortization of finite-lived intangible assets was included in the following line items onin the condensed consolidated statements of operations:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2023 | | 2022 | | 2023 | | 2022 |
| Cost of revenue | Cost of revenue | $ | 1,057 | | | $ | 724 | | | $ | 1,774 | | | $ | 1,449 | | Cost of revenue | $ | 985 | | | $ | 985 | | | $ | 2,922 | | | $ | 2,922 | |
| Marketing and sales | Marketing and sales | 2,579 | | | 545 | | | 6,348 | | | 1,090 | | Marketing and sales | 5,456 | | | 2,672 | | | 10,712 | | | 8,290 | |
| General and administrative | General and administrative | 870 | | | 539 | | | 1,404 | | | 1,119 | | General and administrative | 252 | | | 687 | | | 748 | | | 2,148 | |
| Total amortization of finite-lived intangible assets | Total amortization of finite-lived intangible assets | $ | 4,506 | | | $ | 1,808 | | | $ | 9,526 | | | $ | 3,658 | | Total amortization of finite-lived intangible assets | $ | 6,693 | | | $ | 4,344 | | | $ | 14,382 | | | $ | 13,360 | |
The increase in marketing and sales expense during the six months ended June 30, 2021 includes accelerated amortization of $3,230 associated with the Company’s acquired Videolicious, Inc. (“Videolicious”) customer relationships asset due to the change in useful life from 96 months to 26 months. The change in useful life reflects the Company’s decision to optimize presence and commerce revenues by utilizing Videolicious technology to expand products available to platform subscribers rather than through the sale of the Videolicious product to enterprise customers.
As of JuneSeptember 30, 2021,2023, the expected future amortization expense for finite-lived intangible assets was as follows:
| | | | | | | | |
Year Ending December 31, | | Amount |
Remainder of 2021 | | $ | 8,873 | |
2022 | | 15,564 | |
2023 | | 13,740 | |
2024 | | 10,849 | |
2025 | | 9,500 | |
Thereafter | | 43,816 | |
Total | | $ | 102,342 | |
| | | | | | | | |
| Year Ending December 31, | | Amount |
| Remainder of 2023 | | $ | 15,044 | |
| 2024 | | 57,174 | |
| 2025 | | 55,780 | |
| 2026 | | 47,009 | |
| Thereafter | | 30,140 | |
| Total | | $ | 205,147 | |
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
9.Accrued Liabilities
Accrued liabilities consisted of the following:
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Accrued marketing expenses | $ | 26,931 | | | $ | 26,459 | |
Accrued taxes | 19,460 | | | 13,463 | |
Other accrued expenses | 16,231 | | | 6,857 | |
Total accrued liabilities | $ | 62,622 | | | $ | 46,779 | |
10.Debt
Debt outstanding as of JuneSeptember 30, 20212023 and December 31, 20202022 was as follows:
| | | June 30, 2021 | | December 31, 2020 | | September 30, 2023 | | December 31, 2022 |
| Term Loan | Term Loan | $ | 536,644 | | | $ | 543,437 | | Term Loan | $ | 583,642 | | | $ | 516,266 | |
| Less: unamortized original issue discount | Less: unamortized original issue discount | (2,995) | | | (3,356) | | Less: unamortized original issue discount | (1,995) | | | (1,917) | |
| Less: unamortized deferred financing costs | Less: unamortized deferred financing costs | (663) | | | (743) | | Less: unamortized deferred financing costs | (956) | | | (424) | |
| Less: debt, current | Less: debt, current | (13,586) | | | (13,586) | | Less: debt, current | (48,977) | | | (40,758) | |
| Total debt, non-current | Total debt, non-current | $ | 519,400 | | | $ | 525,752 | | Total debt, non-current | $ | 531,714 | | | $ | 473,167 | |
Credit Facility
On December 12, 2019, (the “Closing Date”), the Company entered into a credit agreement (the “2019“2019 Credit Agreement”Agreement”) with certain lending institutions (the “2019 Credit Facility”“Credit Facility”) which included Initial Term A Loans for $350,000 (“2019(the "2019 Term Loan”Loan”) and Revolving Credit Loans of up to $25,000 (“2019(the "2019 Revolving Credit Facility”Facility”), which included a Letters of Credit sub-facility available up to a total of $15,000 (“2019 Letter of Credit”). The 2019 Credit Facility has a maturity of five years. $15,000.
On December 11, 2020, (the “Modification Date”), the Company amended the 2019 Credit Agreement (“2020(the “2020 Credit Agreement”Agreement”) to increase the total size of the 2019 Term Loan to $550,000 (collectively, the “2020“2020 Term Loan”Loan”) with the same lending institutions as the 2019 Credit Facility (collectively, the “Credit Facility”) and extend the maturity date for the 2020 Term Loan and the 2019 Revolving Credit Facility (as extended, the "Revolving Credit Facility") to December 11, 20252025.
On June 15, 2023, the Company amended the 2020 Credit Agreement (as amended, the "Credit Agreement") to increase the total size of the 2020 Term Loan to $650,000 (collectively, the “Modification”"Term Loan"). and, effective June 30, 2023, replace LIBOR as the benchmark rate with SOFR. The proceeds from the additional term loan commitments of $100,000 were funded on the Closing Date and used to partially fund the Google Domains Asset Acquisition, together with cash on hand. See “Note 4. Acquisitions'' for further information on the Google Domains Asset Acquisition. The Company considered the additional term loan commitments funded by existing participating lending institutions to be a modification. The term loan commitments funded by new participating lending institutions were considered new debt to the Company. For the borrowings considered as a modification, the Company capitalized $556 of fees paid to the lending institutions as a reduction to the proceeds as a debt discount and expensed the related third-party costs. For the borrowings considered new debt, the Company capitalized $319 of fees paid to the lending institutions and $318 of related third-party costs as deferred financing costs.
Borrowings under the Credit Facility were subject to an interest rate equal to LIBOR plus the applicable margin based on our Consolidated Total Debt to Consolidated EBITDA ratio prior to June 30, 2023. Effective June 30, 2023, under the Credit Agreement, LIBOR as the benchmark rate was replaced with SOFR. The 2020applicable margin was 1.60%, which includes a credit spread adjustment of 0.10%, and 1.50% as of September 30, 2023 and 2022, respectively. The effective interest rate was 6.92% and 4.63% as of September 30, 2023 and 2022, respectively.
As of September 30, 2023, $7,255 was outstanding under the Revolving Credit Facility in the form of outstanding letters of credit and $17,745 remained available for borrowing by the Company. The letters of credit issued as of September 30, 2023 were related to certain of the Company's operating lease agreements for offices that require security deposits in the form of an irrevocable letter of credit. On September 7, 2022, the letter of credit for the Company's security deposit related to its New York, NY headquarters was reduced by $2,388 due to a scheduled step-down per the lease agreement. The letters of credit issued are subject to a fee equal to the interest rate on the Credit Facility. In addition, the Revolving Credit Facility is subject to an unused commitment fee of 0.20% to 0.25%, depending on the consolidated total debt to consolidated EBITDA ratio as defined by the Credit Agreement, payable quarterly to the lenders in respect of the unutilized commitments.
The Credit Agreement contains certain customary affirmative covenants and events of default. The negative covenants in the Credit Facility include, among other items, limitations on the ability, subject to negotiated exceptions, to incur additional indebtedness or issue additional preferred stock of the Company, to create or issue certain liens on certain assets, to enter into agreements related to mergers and acquisitions, including the sale of certain assets or disposition of assets, or declare, make or pay dividends and distributions. As a result ofThe Credit Agreement contains certain negative covenants for an indebtedness to consolidated EBITDA ratio, as defined by the Modification,Credit Agreement, and commencing with December 31, 2020 and all fiscal quarters thereafter through maturity. As commenced during the fiscal quarter endingended December 31, 2020, the Company is 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”“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
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
acquisition, which the Company can elect to implement up to 2two times during the life of the facility. The Company didAs of September 30, 2023, we have not electelected to implement this step-up as a result of the acquisitionany of Tock.our acquisitions. If the Company is not in compliance with the covenants under the 2020 Credit Agreement or the Company otherwise experiences an event of default, the lenders would be entitled to take various actions, including acceleration of amounts due under the 2020 Credit Agreement. As of JuneSeptember 30, 2021,2023, the Company was in compliance with all applicable covenants, including the Financial Covenant.
Consolidated EBITDA is defined in the Credit Agreement as net income/(loss) adjusted to exclude interest expense, other income/(loss), net, benefit from/(provision for/(benefit from)for) income taxes, depreciation and amortization, and stock-based compensation expense. In addition, consolidated EBITDA also allows for other adjustments such as the exclusion of transaction costs, changes in deferred revenue, and other costs that may be considered non-recurring.
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
The scheduled principal payments required under the terms of the 2020 Credit Facility wereare as follows:
| | | | | | | | |
Year Ending December 31, | | Amount
|
Remainder of 2021 | | $ | 6,793 | |
2022 | | 13,586 | |
2023 | | 40,758 | |
2024 | | 40,758 | |
2025 | | 434,749 | |
Total | | $ | 536,644 | |
| | | | | | | | |
| Year Ending December 31, | | Amount |
| Remainder of 2023 | | $ | 12,244 | |
| 2024 | | 48,977 | |
| 2025 | | 522,421 | |
| Total | | $ | 583,642 | |
11.Income Taxes
DuringFor interim periods, the Company generally uses the estimated annual effective tax rate approach to determinemethod under which the Company determines its (provision for)/benefit from/(provision for)from income taxes except for jurisdictions for which a loss is expected forbased on the year and no benefit can be realized for those losses, andcurrent estimate of its annual effective tax rate plus 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/forecasted or actual results and any other transactionstransaction that results in differing tax treatment.
For the three and nine months ended September 30, 2022, the Company departed from the estimated annual effective tax rate method and computed its provision for income taxes using the discrete effective tax rate method (the "discrete method"), as allowed under ASC Topic 740, Income Taxes - Interim Reporting. The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The discrete method treats the year-to-date period as if it were the annual period and determines the income tax expense or benefit on that basis.
For the three months ended JuneSeptember 30, 20212023 and 2020,2022, the Company recorded an income tax benefit of $10,413 and an income tax expense of $4,372,$41,151 and $3,277, respectively, which resulted in an effective tax rate of 4.3%(166.9)% and 19.1%(24.5)%, respectively. For the sixnine months ended JuneSeptember 30, 20212023 and 2020,2022, the Company recorded an income tax benefit of $16,195 and an income tax expense of $230$59,622 and $7,446, respectively, which resulted in an effective tax rate of 6.4%(126.1)% and 2.7%68.9%, respectively.
The Company’s estimated annualCompany’s effective income tax rate for the three and sixnine months ended JuneSeptember 30, 20212023 differed from the statutory rate of 21% primarily due to the change in the valuation allowance for deferred tax assets related primarily to the capitalization of research and development expenditures, nondeductible executivestock-based compensation, nondeductible transaction expenses, minimumstate and local income taxes, unrecognized tax benefits, and global intangible low-taxed income, partially offset by research and development tax credits, deduction from foreign-derived intangible income, windfall on stock-based compensation, and research and development tax credits.the effect of foreign operations.
The Company’s estimated annualCompany’s effective income tax rate for the three and sixnine months ended JuneSeptember 30, 20202022 differed from the statutory rate of 21% primarily due to the change in the valuation allowance for deferred tax assets related primarily to the capitalization of research and development expenditures, nondeductible executive compensation, global intangible low-taxed income, unrecognized tax benefits, and nondeductible expenses, partially offset by research and development tax credits, windfall on stock-based compensation, and deduction from foreign derived intangible income.
The provision for income taxes for the three and nine months ended September 30, 2023 and 2022 also reflects a provision of the Tax Cuts and Jobs Act of 2017 becoming effective as of January 1, 2022 that requires companies to capitalize and amortize research and development expenditures rather than deduct the costs as incurred.
No provision for federal and state income taxes or foreign withholding taxes have been made on the earnings of foreign subsidiaries because it is expected that such earnings will be reinvested outside the U.S. indefinitely, unless repatriation can be done without material incremental tax credits, partially offset by state and local taxes and nondeductible expenses.expense. The Company continues to assert indefinite reinvestment on outside basis differences in our non-U.S. subsidiaries.
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
As of JuneSeptember 30, 2021,2023, the Company had unrecognized tax benefits were $5,302, allof $13,176, of which $13,098 would affect the effective tax rate if recognized. There were 0Of the $13,176 of the unrecognized tax benefits as of JuneSeptember 30, 2020.2023, $13,098 was recorded to other liabilities and the remaining balance was recorded as a reduction in the gross deferred tax assets, offset by a corresponding reduction in the valuation allowance. As of September 30, 2022, the Company had unrecognized tax benefits of $10,256, all of which would not affect the effective tax rate if recognized due to the Company's full valuation against all federal, state and foreign deferred tax assets that the Company believes will not be realizable on a more-likely-than-not basis. The increase was primarily due to tax positions taken during the current and prior periods. The Company is unable to reasonably estimate the timing of long-term payments or the amount by which the liability will increase or decrease. The Company’s believes that its unrecognized tax benefits as of September 30, 2023 will decrease by approximately $1,161 within the next twelve months due to expiring statutes of limitation. The Company’s policy is to classify accrued interest and penalties related to unrecognized tax benefits in the (provision for)/benefit from/(provision for)from income taxes withinin the condensed consolidated statementstatements of operations. AccruedAs of September 30, 2023, accrued interest and penalties were $311 as of June 30, 2021. There$746 and there were 0no accrued interest and penalties as of JuneSeptember 30, 2020.2022.
On March 11, 2021,The Company’s corporate federal income tax returns for the United States enacted the American Rescue Plan Act of 2021 (“American Rescue Plan Act”). The American Rescue Plan Act includes a wide variety of tax and non-tax provisions aimedyears ended December 31, 2012 through December 31, 2022 remain subject to provide relief to individuals and businesses adversely affectedexamination by the COVID-19 pandemic.Internal Revenue Service. The American Rescue Plan Act also expands the limitation on deductions publicly held companies may take with respect to certain employee compensation effective for tax years beginning after December 31, 2026. Although the Company is evaluating the impact of global COVID-19-related proposed and enacted legislation, as of the end of the current period no material impact to the Company's financial results is expected. The Company will continue to review and evaluate any future guidance, developments, or legislation issued by applicable tax authorities.
The Company’sCompany’s corporate income tax returns for the years ended December 31, 2017 through December 31, 2020 remain subject to examination by taxing authorities in the U.S. The Company’s corporate income tax returns for the years ended December 31, 2016 through December 31, 20202022 remain subject to examination by taxing authorities in various U.S. states and Ireland. In addition, in the U.S., any net operating losses or credits that were generated in prior years but utilized in open years may also be subject to examination.
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (the "Inflation Reduction Act") into law. The Inflation Reduction Act contains certain tax measures, including a corporate alternative minimum tax of 15% on some large corporations and a nondeductible 1% excise tax on the net value of certain share repurchases made after December 31, 2022 by covered corporations. The Company recorded $277 related to the excise tax on share repurchases in additional paid in capital in the condensed consolidated balance sheet as of September 30, 2023.
On December 15, 2022, the Ireland Finance Act 2022 was signed into Irish law. With the enactment of the Ireland Finance Act 2022, qualifying Ireland-related research and development tax credits do not depend on the generation of future taxable income. As a result, the Company determined these credits to be a credit to research and development expenses in the form of a government grant as analogized under International Accounting Standards 20, Accounting for Government Grants and Disclosure of Government Assistance. During the three and nine months ended September 30, 2023, the Company recognized Ireland-related research and development tax credits of $(219) and $395, respectively, as an (increase)/reduction to research and product development in the condensed consolidated statements of operations.
12.Commitments and Contingencies
Indirect Taxes
The Company is subject to indirect taxation in some, but not all, of the various U.S. states and foreign jurisdictions in which it conducts business. Therefore, the Company has an obligation to charge, collect and remit Value Added Tax (“VAT”(“VAT”) or Goods and Services Tax (“GST”(“GST”) in connection with certain of its foreign sales transactions and sales and use tax in connection with eligible sales to subscribers in certain U.S. states. On June 21, 2018, the U.S. Supreme Court overturned the physical presence nexus standard and held that states can require remote sellers to collect sales and use tax. In addition, U.S. states and foreign jurisdictions have and continue to enact laws which expand tax collection and remittance obligations of e-commerce platforms.that could apply to a platform like the Company's. As a result of these rulings, recently enacted laws, and the scope of the
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Company’sCompany’s operations, taxing authorities continue to provide regulations that increase the complexity and risks to comply with such laws and could result in substantial liabilities, prospectively as well as retrospectively. In accordance with ASC 450, the Company establishes accruals for contingencies, including uncertainties related to taxes not based on income, when the Company believes it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Based on the information available, the Company continues to evaluate and assess the jurisdictions in which indirect tax nexus exists and believes that the indirect tax liabilities are adequate and reasonable. However, due to the complexity and uncertainty around the application of these rules by taxing authorities, results may vary materially from the Company’sCompany’s expectations. The Company had an indirect tax liability of $17,939$38,473 and $13,039$33,486 as of JuneSeptember 30, 20212023 and December 31, 2020,2022, respectively, which is included withinin accrued liabilities onin the condensed consolidated balance sheets.
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Purchase Obligations – Cloud-Computing Services and Software-as-a-Service
On March 31, 2021,As of September 30, 2023, the Company assumedhad outstanding non-cancelable purchase obligations with a long-term operating lease originally entered into by Tock for its office space in Chicago, Illinois which expires on March 31, 2023. Asterm of June 30, 2021, the remaining minimum lease commitment is approximately $838, of which $216 is12 months or longer, mainly related to be paid during the fiscal year ended December 31, 2021. Refer to Note 4 — Acquisitions for further information on the acquisition of Tock and Note 19 — Subsequent Events for information regarding Tock's office relocation expected in early 2022.third-party cloud-computing as well as software-as-a-service services, as follows: | | | | | |
| Year Ending December 31, | Amount |
| Remainder of 2023 | $ | 3,008 | |
| 2024 | 15,500 | |
| 2025 | 18,000 | |
| Total | $ | 36,508 | |
Certain Risks and Concentrations
The Company’sCompany’s revenues were principally generated from SaaS customers used to establishestablishing their online presence. The market is highly competitive and rapidly changing. Significant changes in this industry, technological advances or changes in customer buying behavior could adversely affect the Company’sCompany’s future operating results.
Other
The Company is subject to litigation and other claims that arise in the ordinary course of business. While the ultimate result of outstanding legal matters cannot presently be determined, the Company does not expect that the ultimate disposition will have a material adverse effect on its results of operations or financial condition. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company’sCompany’s control. Based on the Company’sCompany’s current knowledge, the final outcome of any particular legal matter will not have a material adverse effect on the Company’sCompany’s financial condition.
13.Redeemable Convertible Preferred StockLeases
The Company previously issued Series A-1, Series A-2,has operating leases for its office space with lease terms through 2034. Certain lease agreements include options to extend and/or terminate the lease. The Company's lease agreements do not contain terms and Series B redeemable convertible preferred stock priorconditions of material restrictions, covenants, or residual value guarantees. Variable lease costs are comprised primarily of the Company's proportionate share of operating expenses and property taxes.
On March 10, 2022, the Company entered into an agreement to sublease a portion of one of its office spaces in Chicago, IL through the existing termination date of May 30, 2023. The Company recorded sublease income related to the Direct Listing. Immediately priorChicago, IL office space sublease of $152 during the nine months ended September 30, 2023, and $75 and $200 during the three and nine months ended September 30, 2022, respectively.
On March 31, 2022, the Company reassessed the useful life of its operating lease right-of-use asset related to its leased office space in Los Angeles, CA due to ceasing the use of the office space with no expected future benefit. As a result, the Company recorded an additional $258 of operating lease expense in the condensed consolidated statement of operations during the nine months ended September 30, 2022.
During the three months ended September 30, 2022, the Company remeasured the lease liability and adjusted the right-of-use asset related to its leased office space in Portland, OR due to a reassessment of the lease term. As a result, the associated operating lease liability and operating lease right-of-use asset were reduced by $3,213 in the condensed consolidated balance sheet as of September 30, 2022. Subsequent to the completion ofremeasurement, the registration statement in connection withCompany determined the Direct Listing being declared effective, all outstanding shares of the Company’s redeemable convertible preferred stock converted into an aggregate of 54,862,435 shares of Class A common stock and 49,583,897 shares of Class B common stock.
The authorized, issued and outstanding shares of the redeemable convertible preferred stock immediately prior to the conversion into common stock were as follows:
| | | | | | | | | | | | | | | | | |
| Authorized and
Originally Issued
Shares
| | Outstanding
Shares
| | Net Carrying
Value
|
A-1 Preferred Stock | 57,999,960 | | | 54,431,446 | | | $ | 5 | |
A-2 Preferred Stock | 47,483,380 | | | 39,134,868 | | | 63,462 | |
B Preferred Stock | 12,634,398 | | | 10,880,018 | | | 68,892 | |
Total | 118,117,738 | | | 104,446,332 | | | $ | 132,359 | |
The Company’s Series A-1 redeemable convertible preferred stock did not have any liquidation preference. The liquidation preferences for Series A-2 and Series B redeemable convertible preferred stock immediately prior to the conversion into common stock were as follows:
| | | | | | | | | | | | | | |
| | Liquidation Preferences | | Issuance Price/Liquidation Preference Per Share |
Series A-2 | | $ | 31,699 | | | $ | 0.81 | |
Series B | | 34,490 | | | $ | 3.17 | |
Total | | $ | 66,189 | | | |
The redemptioncarrying value of the redeemable convertible preferred stock immediately priorright-of-use asset was not recoverable based on undiscounted future cash flows. The Company used the income approach to determine the conversion into fair value of the right-of-use asset, including Level 3 inputs of the fair market value hierarchy, based on projected sublease income over the remaining lease term discounted at a rate that reflects the risks associated with the future cash flows. As a result, the Company recorded an impairment loss of $1,694 in general and administrative expenses in the condensed consolidated statements of operations during the three and nine months ended September 30, 2022.
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
common stock wasThe components of operating lease expense, net recognized in the condensed consolidated statements of operations were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Operating lease costs | | | | | | | |
| Operating lease costs | $ | 3,343 | | | $ | 5,231 | | | $ | 10,215 | | | $ | 12,655 | |
| Variable lease costs | 668 | | | 533 | | | 2,282 | | | 1,402 | |
| Short-term lease costs | 63 | | | 42 | | | 205 | | | 90 | |
| Operating lease income | | | | | | | |
| Sublease income | $ | 67 | | | $ | 161 | | | $ | 378 | | | $ | 471 | |
| Total operating lease expense, net | $ | 4,007 | | | $ | 5,645 | | | $ | 12,324 | | | $ | 13,676 | |
Supplemental disclosure of cash and non-cash operating activities related to operating leases were as follows: | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
| Cash paid for amounts included in the measurement of operating lease liabilities, net of cash received for lease incentives | $ | 11,793 | | | $ | 10,328 | |
| Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | — | | | $ | 255 | |
As of September 30, 2023, the weighted-average lease term and discount rate related to operating leases were as follows: | | | | | | | | |
| | Redemption ValueSeptember 30, 2023 |
Series A-2 | | $Weighted-average remaining lease term (in years) | 63,462 7.56 | |
Series B | | 68,891 | |
Total redemption value | | $Weighted-average discount rate use in measuring operating lease liabilities | 132,3533.75 | % |
On May 10, 2021, the Company amended and restated its certificateAs of incorporation which authorized the boardSeptember 30, 2023, maturities of directors to be able to issue preferred stock in one or more series without stockholder approval, unless required by law or the NYSE. The Company authorized 100,000,000 shares of preferred stock, par value $0.0001 per share. The board of directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock. The purpose of authorizing the Company's board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances including possible acquisitions, future financing and other corporate purposes.operating lease liabilities were as follows:
| | | | | |
| Year Ending December 31, | Amount |
| Remainder of 2023 | $ | 4,018 | |
| 2024 | 16,463 | |
| 2025 | 16,849 | |
| 2026 | 17,573 | |
| 2027 | 17,036 | |
| Thereafter | 58,404 | |
| Total operating lease payments | 130,343 | |
| Less: imputed interest | (17,281) | |
| Total operating lease liabilities | $ | 113,062 | |
14.Stockholders’ Equity/(Deficit)Stockholders’ Deficit
Class A Common Stock
On May 19, 2021, the Company completed the Direct ListingEach holder of itsshares of Class A common stock. In addition, the Company increasedstock shall be entitled to one vote for each share held. As of September 30, 2023, the number of authorized shares of Class A common stock, par value $0.0001 per share, toby the Company was 1,000,000,000. Each holder
On May 10, 2022, the board of sharesdirectors authorized a general share repurchase program of the Company’s Class A common stock shallof up to $200,000, with no fixed expiration (the "Stock Repurchase Plan"). These Class A common stock repurchases may occur in the open market, through privately negotiated transactions, through block purchases, other purchase techniques including the establishment of one or more plans under Rule 10b5-1 of the Securities Exchange Act of 1934 or by any combination of such methods. The timing and actual amount of shares repurchased will depend on a variety of different factors and may be entitledmodified, suspended or terminated at any time at the discretion of the board of directors.
During the three months ended September 30, 2023, the Company did not repurchase shares under the Stock Repurchase Plan. During the nine months ended September 30, 2023, the Company repurchased 1,256,170 shares and paid cash of $25,321, including commissions of $25, under the Stock Repurchase Plan through open market purchases at a weighted-average price per share of $22.04.
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
During the three and nine months ended September 30, 2022, the Company repurchased 2,431,995 and 3,994,455 shares for a total cash consideration of $50,378 and $85,580, including commissions of $49 and $80, under the Stock Repurchase Plan through open market purchases at a weighted-average price per share of $21.84 and $21.40, respectively.
As of September 30, 2023, approximately $54,486 remained available for stock repurchase pursuant to 1 vote for each share held.the Stock Repurchase Plan.
Class B Common Stock
Each holder of shares of Class B common stock shall be entitled to 10ten votes for each share held.
Each outstanding share of the Company's Class B common stock is convertible into 1one share of Class A common stock at any time. During the three and six months ended JuneAs of September 30, 2021, an aggregate of 17,382,845 shares of the Company's outstanding Class B common stock converted into an aggregate of 17,382,845 shares of Class A common stock. In addition, the Company increased2023, the number of authorized shares of Class B common stock, par value $0.0001 per share, toby the Company was 100,000,000.
Class C Common Stock
On March 15, 2021,As of September 30, 2023, the Company amended the certificatenumber of incorporation and created Class C common stock with authorized shares of 7,673,154 and a par value of $0.0001. The Class C common stock has similar rights as the Company’s Class A common stock and Class B common stock, except the Class C common stock does not have any voting rights. Each share of Class C common stock shall automatically be converted into shares of Class A common stock immediately prior to an Initial Public Event, as defined in the amended certificate of incorporation. Subsequent to the amendment, the Company issued 4,452,023 shares of its Class C common stock for proceeds of $304,609, less $200 of issuance costs.
On March 31, 2021, the Company issued 2,750,330 shares of its Class C common stock as a part of the purchase of Tock for a total consideration of $188,179. Refer to Note 4 — Acquisitions for further information on the purchase price structure.
Immediately prior to the registration statement in connection with the Direct Listing being declared effective, all outstanding shares of the Company’s Class C common stock converted into an aggregate of 7,202,353 shares of Class A common stock.
On May 10, 2021, the Company created a new Class C common stock pursuant to the Company's amended and restated certificate of incorporation. The Company authorized 1,000,000,000 shares of the new Class C common stock, par value $0.0001 per share.share, by the Company was 1,000,000,000. The board of directors has the authority, without stockholder approval except as required by the NYSE, to issue shares of ourthe Company's Class C common stock. The newCompany's Class C common stock is not convertible into shares of Class A common stock or shares of Class B common stock and has no voting rights. As of JuneSeptember 30, 2021,2023, the Company has not
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
issued any shares of the newits Class C common stock.
Dividends
The Company shall not declare or pay dividends on Class A common stock, Class B common stock or Class C common stock unless the same dividend or distribution with the same record date and payment dated shall be declared or paid on all shares of Class A, Class B and Class C common stock.
On December 7, 2020, the Company declared a one-time dividend of $2.666 per share, for a total of $328,112, for all stockholders of record as of December 14, 2020. Dividends of $327,745 were paid on December 29, 2020 to redeemable convertible preferred stockholders and Class A and Class B common stockholders. During 2021, the Company paid the remaining $367 to redeemable convertible preferred stockholders and Class A and Class B common stockholders for the dividends declared on December 7, 2020.
During the three and sixnine months ended JuneSeptember 30, 2021,2023 and 2022, the Company did not declare any dividends.
15.Accumulated Other Comprehensive Income/(Loss)Loss
Accumulated other comprehensive income/(loss)loss activity for the three and nine months ended September 30, 2023 and 2022 was as follows:
| | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Net Unrealized (Losses)/Gains on Marketable Securities | | Total Accumulated Other Comprehensive (Loss)/Income |
| Balance at December 31, 2022 | $ | (1,449) | | | $ | (216) | | | $ | (1,665) | |
| Other comprehensive income before reclassifications | 258 | | | 216 | | | 474 | |
| Other comprehensive income | 258 | | | 216 | | | 474 | |
| Balance at March 31, 2023 | $ | (1,191) | | | $ | — | | | $ | (1,191) | |
| Other comprehensive loss before reclassifications | $ | (296) | | | $ | — | | | $ | (296) | |
| Other comprehensive loss | (296) | | | — | | | (296) | |
| Balance at June 30, 2023 | $ | (1,487) | | | $ | — | | | $ | (1,487) | |
| Other comprehensive loss before reclassifications | $ | (2,144) | | | $ | — | | | $ | (2,144) | |
| Other comprehensive loss | (2,144) | | | — | | | (2,144) | |
| Balance at September 30, 2023 | $ | (3,631) | | | $ | — | | | $ | (3,631) | |
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and Six Months Ended June 30, 2021per share data)
| | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Net Unrealized gains/(losses) on marketable securities | | Total Accumulated Other Comprehensive Income (Loss) |
| Balance at December 31, 2020 | $ | 2,341 | | | $ | 114 | | | $ | 2,455 | |
| Other comprehensive loss before reclassifications | (1,282) | | | (45) | | | (1,327) | |
| Other comprehensive loss | (1,282) | | | (45) | | | (1,327) | |
| Balance at March 31, 2021 | $ | 1,059 | | | $ | 69 | | | $ | 1,128 | |
| Other comprehensive income (loss) before reclassifications | 788 | | | (46) | | | 742 | |
| Other comprehensive income (loss) | 788 | | | (46) | | | 742 | |
| Balance at June 30, 2021 | $ | 1,847 | | | $ | 23 | | | $ | 1,870 | |
Three and Six Months Ended June 30, 2020 | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Net Unrealized Losses on Marketable Securities | | Total Accumulated Other Comprehensive Loss |
| Balance at December 31, 2021 | $ | (170) | | | $ | (38) | | | $ | (208) | |
| Other comprehensive loss before reclassifications | (801) | | | (178) | | | (979) | |
| Other comprehensive loss | (801) | | | (178) | | | (979) | |
| Balance at March 31, 2022 | $ | (971) | | | $ | (216) | | | $ | (1,187) | |
| Other comprehensive loss before reclassifications | $ | (2,037) | | | $ | (77) | | | $ | (2,114) | |
| Other comprehensive loss | (2,037) | | | (77) | | | (2,114) | |
| Balance at June 30, 2022 | $ | (3,008) | | | $ | (293) | | | $ | (3,301) | |
| Other comprehensive loss before reclassifications | $ | (2,275) | | | $ | (35) | | | $ | (2,310) | |
| Other comprehensive loss | (2,275) | | | (35) | | | (2,310) | |
| Balance at September 30, 2022 | $ | (5,283) | | | $ | (328) | | | $ | (5,611) | |
| | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Net Unrealized gains/(losses) on marketable securities | | Total Accumulated Other Comprehensive Income (Loss) |
| Balance at December 31, 2019 | $ | (187) | | | $ | 79 | | | $ | (108) | |
| Other comprehensive loss before reclassifications | (353) | | | (181) | | | (534) | |
| Other comprehensive loss | (353) | | | (181) | | | (534) | |
| Balance at March 31, 2020 | $ | (540) | | | $ | (102) | | | $ | (642) | |
| Other comprehensive income before reclassifications | 670 | | | 404 | | | 1,074 | |
| Amounts reclassified from AOCI | 0 | | | 2 | | | 2 | |
| Other comprehensive income | 670 | | | 406 | | | 1,076 | |
| Balance at June 30, 2020 | $ | 130 | | | $ | 304 | | | $ | 434 | |
Amounts reclassified out of accumulated other comprehensive income,loss, net of taxes, during the three and sixnine months ended JuneSeptember 30, 20212023 and 20202022 were immaterial.not material.
16.Stock-based Compensation
Stock Options
Squarespace, Inc. Amended and Restated 2008 Equity Incentive Plan
In January 2008, the Company established and approved the Squarespace, Inc. 2008 Equity Incentive Plan which was ratified in 2010 and was subsequently amended and restated in March 2016 (“(“the 2008 Plan”Plan”). Under the 2008 Plan, which covers certain employees and consultants, the Company granted shares of its Class B common stock in the form of stock options. After November 17, 2017, there were 0no additional grants from the 2008 Plan.
Stock options in common stock exercised were 2,075,76119,564 and 2,976,23754,249 during the three and sixnine months ended JuneSeptember 30, 2021,2023, respectively, and 76,88529,797 and 318,688642,548 during the three and sixnine months ended JuneSeptember 30, 2020,2022, respectively. Cash consideration for stock options exercised were $2,858was $57 and $3,566$191 during the three and sixnine months ended JuneSeptember 30, 2021,2023, respectively, and $240$48 and $627 for$2,158 during the three and sixnine months ended JuneSeptember 30, 2020,2022, respectively.
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
Restricted Stock Units (RSUs) and Performance Stock Units (PSUs)
Squarespace, Inc. 2017 Equity Incentive Plan
On November 17, 2017, the Company’sCompany’s board of directors approved the Squarespace, Inc. 2017 Equity Incentive Plan (“(“the 2017 Plan”Plan”). Under the 2017 Plan, the Company may grant shares of its Class A common stock in the form of RSUs, PSUs, stock options, stock appreciation rights performance stock awards and other stock awards. RSUs generally vest over four years and are measured based on the fair market value of the underlying Class A common stock on the date of grant, as determined by the Company’sCompany’s board of directors. There were 232,212 and 839,044 shares that vested under the 2017 Plan of which 96,422 and 353,009 shares were reacquired in order to satisfy employee tax obligations during the three and nine months ended September 30, 2023, respectively, and 211,261 and 1,624,883 shares that vested under the 2017 Plan of which 85,992 and 697,527 shares were reacquired in order to satisfy employee tax obligations during the three and nine months ended September 30, 2022, respectively. After April 15, 2021, thereno additional grants were 0 additional grantsissued from the 2017 Plan.
Squarespace, Inc. 2021 Equity Incentive Plan
On March 25, 2021, the Company’sCompany’s board of directors adopted the Squarespace, Inc. 2021 Equity Incentive Plan (“(“the 2021 Plan”Plan”) which was approved by the stockholders on May 3, 2021 and went into effect on May 9, 2021. Under the 2021 Plan, the Company may grant shares of its Class A common stock in the form of RSUs, PSUs, stock options, stock appreciation rights performance stock awards and other stock awards.
The Company granted 495,466 and 5,799,474shares of Class A common stock in the form of RSUs under the 2021 Plan during the three and nine months ended September 30, 2023, respectively, and 659,452 and 5,851,643 shares of Class A common stock in the form of RSUs under the 2021 Plan during the three and nine months ended September 30, 2022, respectively. RSUs are subject to continuous service and generally vest over four years and subsequent to the Direct Listing, are measured based on the closing price of ourthe Company's Class A common stock as reported on the date of grant.
A summary of the Company’s RSU activity for the 2017 Plan and 2021 Plan during the three and six months ended June 30, 2021 is as follows:
| | | | | | | | | | | |
| Number of
RSUs
| | Weighted Average
Grant Date Fair
Value Per RSU
|
RSUs outstanding – December 31, 2020 | 5,441,475 | | | $ | 21.27 | |
RSUs granted | 726,673 | | | 63.73 | |
RSUs vested | (525,920) | | | 17.47 | |
RSUs forfeited and cancelled | (83,923) | | | 24.72 | |
RSUs outstanding – March 31, 2021 | 5,558,305 | | | 27.53 | |
RSUs granted | 473,541 | | | $ | 56.03 | |
RSUs vested | (607,038) | | | $ | 17.13 | |
RSUs forfeited and cancelled | (126,033) | | | $ | 26.32 | |
RSUs outstanding – June 30, 2021 | 5,298,775 | | | $ | 31.28 | |
During the three and sixnine months ended JuneSeptember 30, 2023, there were 409,950 and 1,801,142 shares that vested under the 2021 the weighted-average fair valuePlan of share units vested was $30,447which 164,704 and $56,575, respectively. As of June 30, 2021, there was $168,630 of total unrecognized compensation costs related to RSU grants that are expected to be recognized, respectively, over a weighted-average period of 3 years.
In connection with the vesting of the RSUs, the Company reacquired 247,120 and 517,209 shares for $12,319 and $25,735 during the three and six months ended June 30, 2021, respectively, in order to satisfy employee tax withholding obligations. The employees received the net number of shares after consideration to those reacquired.
Executive Restricted Stock Grant
On August 22, 2017, the Company granted its Chief Executive Officer ("CEO") 4,460,858 shares of Class B common stock with a grant date fair value of $27,434 (the “CEO Stock Grant”). Under the terms of the initial agreement, these shares were to be forfeited as of a date that is three years and six months following the date of grant unless one of the following occurs prior to that date: (1) a Liquidation Event (other than a liquidation, dissolution or winding up of the Company) as defined by the Stock Grant Agreement or (2) an IPO, as defined by the Stock Grant Agreement.
On August 24, 2020 the board of directors modified the forfeiture provision of the CEO Stock Grant by extending the forfeiture date from February 22, 2021 to August 22, 2021. The modification of the forfeiture date was accounted for as the grant of the new award, accordingly, the Company updated the fair value of the CEO Stock Grant on the modification date. The Company estimated the fair value of the Class B common stock to be $51.40 per share on the modification date.
On May 19, 2021, upon completion of the Direct Listing, 4,460,858 shares of Class B common stock vested in accordance with the CEO Stock Grant Agreement. As a result, the Company recorded compensation expense of $229,288 within general and administrative expenses on the condensed consolidated statements of operations during the three months ended June 30, 2021.
Tock Selling Shareholder RSUs
On March 31, 2021, the Company issued 438,468 shares of Class C common stock in the form of RSUs to certain selling shareholders of Tock, which will vest over three years contingent upon continued service. Immediately prior to the
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
registration statement715,523 shares were reacquired in connection withorder to satisfy employee tax obligations, respectively. During the Direct Listing being declared effective,three and nine months ended September 30, 2022, there were 26,585 and 120,246 shares that vested under the 2021 Plan of which 11,354 and 37,430 shares were reacquired in order to satisfy employee tax obligations, respectively.
During the three and nine months ended September 30, 2023, the Company granted 45,150 and 193,381 shares of Class C common stock automatically converted to Class A common stock Note 14 — Stockholders' Equity/(Deficit) for further information. These RSUs were issued outsidein the form of PSUs under the 2021 Plan, respectively. PSUs will generally vest over 3 years and are subject to continuous service and the achievement of certain unlevered free cash flow margin and revenue growth targets. The percentage of PSUs that will vest can range from 0% to 200% based on the growth targets that are achieved. PSUs are measured based on the closing price of the 2017 Plan and 2021 Plan.Company's Class A common stock as reported on the date of grant. The weighted-average grant price of these RSUs was $68.42 per share. Accordingly, the Company will recognize $30,000 asrelated stock-based compensation expenseexpenses are recorded over the vesting period or requisite 3 year service period on a straight-line basis.
Duringif the three months ended June 30, 2021, the Company recorded compensation expenseperformance conditions are probable of $2,408 related to the RSUs issued to certain selling shareholders of Tock within generalbeing met and administrative expenses onincluded in the condensed consolidated statements of operations.
Casalena Performance Award
On April 15, 2021 (“(“Grant Date”Date”), the board of directors of the Company approved an RSU grant to Anthony Casalena, CEO, of 2,750,000 Class A common shares (“(“Casalena Performance Award”Award”). The Casalena Performance Award vesting is contingent on both service- and market-based vesting conditions. The market-based vesting condition is based on the achievement of specified Class A common stock price targets during the period beginning upon the effectiveness of the registration statement and ending on the fifth anniversary of the Grant Date (“Performance Period”). The Casalena Performance Award is divided into 10 equal tranches. The market-based vesting condition is eligible to vest based on the achievement of 10 different and progressively increasing stock price targets. The targets will be deemed to have been achieved when the average closing price of a share of the Company’s Class A common stock on the trading days over any consecutive 30 calendar day period during the Performance Period equals or exceeds the applicable Class A common stock price target. The service-based vesting condition is deemed met in 4 equal installments over four years starting on the first anniversary of the Grant Date. Although the service-based vesting condition period is four years, Mr. Casalena must be employed by the Company at the time the market condition is met in order to vest in any tranche of the award.
The Company estimated the fair value of the Casalena Performance Award on the grant date to be approximately $84,450 using a Monte Carlo simulation with a weighted-average grant date fair value of $30.71$30.38 per Class A common share. The Company will recognize the fair value of the award as stock-based compensation expense using the accelerated attribution method over the longer of (i) the period of time the market condition for each tranche is expected to be met (i.e., the derived service period) or (ii) the service vesting condition of four years.
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
The applicable stock price targets are as follows:
| | | | | | | | |
Company Stock Price Target
| | Cumulative Number
of Shares of Vest
|
$105.00 | | 275,000 | |
$140.00 | | 550,000 | |
$175.00 | | 825,000 | |
$210.00 | | 1,100,000 | |
$245.00 | | 1,375,000 | |
$280.00 | | 1,650,000 | |
$315.00 | | 1,925,000 | |
$350.00 | | 2,200,000 | |
$385.00 | | 2,475,000 | |
$420.00 | | 2,750,000 | |
During the three months ended June 30, 2021, the Company recorded compensation expense of $7,247$4,923 and $14,607 during the three and nine months ended September 30, 2023, respectively, and $7,816 and $23,193 during the three and nine months ended September 30, 2022, respectively, related to the Casalena Performance Award withinin general and administrative expenses onin the condensed consolidated statements of operations.
Stock-based Compensation
Stock-Based Compensation
The classification of stock-based compensation by line item withinin the condensed consolidated statementstatements of operations iswas as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2023 | | 2022 | | 2023 | | 2022 |
| Cost of revenue | Cost of revenue | $ | 380 | | | $ | 205 | | | $ | 655 | | | $ | 366 | | Cost of revenue | $ | 1,484 | | | $ | 1,000 | | | $ | 4,085 | | | $ | 2,470 | |
| Research and product development | Research and product development | 8,245 | | | 5,269 | | | 15,038 | | | 9,946 | | Research and product development | 14,601 | | | 9,462 | | | 40,938 | | | 31,138 | |
| Marketing and sales | Marketing and sales | 1,569 | | | 782 | | | 2,741 | | | 1,423 | | Marketing and sales | 3,019 | | | 2,252 | | | 7,935 | | | 6,246 | |
| General and administrative | General and administrative | 240,319 | | | 1,012 | | | 241,931 | | | 3,435 | | General and administrative | 9,213 | | | 11,380 | | | 26,964 | | | 35,197 | |
| Total stock-based compensation | Total stock-based compensation | $ | 250,513 | | | $ | 7,268 | | | $ | 260,365 | | | $ | 15,170 | | Total stock-based compensation | $ | 28,317 | | | $ | 24,094 | | | $ | 79,922 | | | $ | 75,051 | |
The amount above excludes $21$1,490 and $42$3,127 of stock compensation capitalized as property and equipment, net, for the three and sixnine months ended JuneSeptember 30, 2021,2023, respectively, and $34$478 and $70$737 for the three and sixnine months ended JuneSeptember 30, 2020,2022, respectively.
Shares AvailableDuring the nine months ended September 30, 2022, certain RSUs were modified to allow for Future Issuance
As of May 9, 2021, all shares available underaccelerated vesting. During the 2008three and 2017 Plans will continue to remain available but will no longer be available for future issuance. The shares available will continue to include all shares forfeited and expired and reacquired to satisfy employee tax withholding obligations that were issued under the 2008 and 2017 Plans.
The following table summarizes the shares available under the 2008 and 2017 Plans:
| | | | | |
| Shares Available
Under the 2008 and 2017 Plans
|
Balance as of December 31, 2020 | 8,728,327 | |
Granted | (726,673) | |
Forfeited and expired | 87,361 | |
Reacquired to satisfy employee tax withholding obligations | 270,089 | |
Balance as of March 31, 2021 | 8,359,104 | |
| |
Casalena Performance Award granted | (2,750,000) | |
Forfeited and expired | 126,640 | |
Reacquired to satisfy employee tax withholding obligations | 247,120 | |
Balance as of June 30, 2021 | 5,982,864 | |
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
On May 9, 2021, upon effectiveness of the 2021 Plan,nine months ended September 30, 2022, the Company included an additional 19,250,000 Class A common shares available for issuance. The following table summarizesrecorded stock-based compensation expense of $1,923 and $4,098, respectively, related to the shares available for future issuance under the 2021 Plan:
| | | | | |
| Shares Available for
Future Grant
Under the 2021 Plan
|
Balance as of December 31, 2020 | 0 | |
Class A common shares available for issuance | 19,250,000 | |
RSUs granted | (473,541) | |
Balance as of June 30, 2021 | 18,776,459 | |
modified awards.17.Related Party Transactions
The Company's previous Chief Financial Officer, whose resignation was effective as of July 31, 2022, was appointed as a member of the board of directors of Avalara, Inc. on August 28, 2021. Transactions between Avalara, Inc. and the Company were not material through the previous Chief Financial Officer’s departure.
Certain former members of Tock's senior management, whose resignations were effective as of December 15, 2022, had an ownership in several of the Company's restaurant customers. For the three and nine months ended September 30, 2022, these restaurant customers contributed revenue of $330 and $895, respectively. As of September 30, 2022, the Company had a liability of $3,373 due to these restaurant customers, which primarily represents diner prepayments and sales tax, and is included in funds due to customers in the condensed consolidated balance sheets.
On September 1, 2014, the Company entered into an agreement with Getty Images to resell certain content to the Company’sCompany’s customers. The Deputy Chairman of Getty Images is a member of the Company’sCompany’s board of directors. Amounts recorded in connection with this agreement were not material for the three and nine months ended JuneSeptember 30, 20212023 and 2020. 2022.
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
18. Net (Loss)/Income per Share Attributable to Class A, Class B and Class C Common Stockholders
The Company computes net (loss)/income per share of Class A common stock, Class B common stock and Class C common stock under the two-class method required for multiple classes of common stock and participating securities.stock. The rights, including the liquidation and dividend rights, of the Class A common stock, Class B common stock and Class C common stock are substantially identical, other than voting rights. Accordingly, the Class A common stock, Class B common stock and Class C common stock share in the Company’sCompany’s net (loss)/income. Each share of Class C common stock was automatically converted into shares of Class A common stock immediately prior to the registration statement in connection with the Direct Listing being declared effective.
SQUARESPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
The following table sets forth the computation of basic and diluted lossnet (loss)/income per share attributable to Class A, Class B and Class C common stockholders: share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Numerator: | | | | | | | |
| Net (loss)/income | $ | (234,532) | | | $ | 18,539 | | | $ | (235,678) | | | $ | 8,407 | |
Less: accretion of redeemable convertible preferred stock to redemption value | 0 | | | (1,196) | | | 0 | | | (2,377) | |
Less: undistributed earnings to participating securities | 0 | | | (14,297) | | | 0 | | | (4,978) | |
| Net (loss)/income attributable to Class A, Class B, and Class C common stockholders, basic | $ | (234,532) | | | $ | 3,046 | | | $ | (235,678) | | | $ | 1,052 | |
| Add: reallocation of net income attributable to participating securities | 0 | | | 764 | | | 0 | | | 278 | |
| Net (loss)/income attributable to Class A, Class B, and Class C common stockholders, dilutive | $ | (234,532) | | | $ | 3,810 | | | $ | (235,678) | | | $ | 1,330 | |
Denominator: | | | | | | | |
| Weighted-average shares used in computing net loss per share attributable to Class A, Class B and Class C common stockholders, basic | 72,900,951 | | | 22,247,105 | | | 51,879,264 | | | 22,062,674 | |
| Effect of dilutive securities | 0 | | | 7,155,861 | | | 0 | | | 7,489,458 | |
| Weighted-average shares used in computing net loss per share attributable to Class A, Class B and Class C common stockholders, dilutive | 72,900,951 | | | 29,402,966 | | | 51,879,264 | | | 29,552,132 | |
| Net (loss)/income per share attributable to Class A, Class B, and Class C common stockholders, basic | $ | (3.22) | | | $ | 0.14 | | | $ | (4.54) | | | $ | 0.05 | |
| Net (loss)/income per share attributable to Class A, Class B, and Class C common stockholders, dilutive | $ | (3.22) | | | $ | 0.13 | | | $ | (4.54) | | | $ | 0.04 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Numerator: | | | | | | | |
| Net (loss)/income | $ | (16,499) | | | $ | 10,105 | | | $ | (12,337) | | | $ | (18,259) | |
| Denominator: | | | | | | | |
| Weighted-average shares used in computing net (loss)/income per share, basic | 135,736,599 | | | 137,832,634 | | | 135,321,873 | | | 139,106,807 | |
| Effect of dilutive securities | — | | | 1,835,085 | | | — | | | — | |
| Weighted-average shares used in computing net (loss)/income per share, dilutive | 135,736,599 | | | 139,667,719 | | | 135,321,873 | | | 139,106,807 | |
| Net (loss)/income per share, basic and dilutive | $ | (0.12) | | | $ | 0.07 | | | $ | (0.09) | | | $ | (0.13) | |
The following weighted-average outstanding shares of potentially dilutive securities were excluded from the computation of diluted net (loss)/income per share attributable to Class A, Class B and Class C common stockholders for the periods presented because including them would have been antidilutive:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
| Outstanding stock options | 2,251,021 | | | 691,766 | | | 2,251,021 | | | 11,532 | |
Restricted stock units | 5,737,243 | | | 0 | | | 5,737,243 | | | 0 | |
| | | | | | | |
Total | 7,988,264 | | | 691,766 | | | 7,988,264 | | | 11,532 | |
19.Subsequent Events
During July 2021, the Company entered a new lease agreement which will expand its office space in Chicago, Illinois. The Company expects to exit its existing Chicago office facility in early 2022. The new lease term will be 12 years from the anticipated move-in date, which is expected to occur in early 2022. Cash rental payments under the new lease agreement will approximate $25,700 over the lease term. The new lease provides for a tenant improvement allowance of $8,200 as well as a parking contribution of $400. Pursuant to the new lease agreement, the Company was issued an additional letter of credit for $2,500 related to a security deposit. This increased the amount outstanding under the 2019 Revolving Credit Facility to $9,643 and $15,357 remained available for borrowing by the Company. This additional letter of credit issued is subject to a fee equal to the interest rate on the Credit Facility. 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).
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Outstanding stock options | 1,127,278 | | | — | | | 1,127,278 | | | 1,214,344 | |
| Restricted stock units | 10,629,421 | | | 5,372,992 | | | 10,629,421 | | | 7,986,596 | |
| Total | 11,756,699 | | | 5,372,992 | | | 11,756,699 | | | 9,200,940 | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunctiontogether with our unaudited condensed consolidated financial statements and the related notes appearingand the other financial information included 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 ended March 31, 2021 included in the Final Prospectus for our Direct Listing filed with the SEC, pursuant to Rule 424(b)(4) on May 19, 2021, and our audited consolidated financial statements and the related notes and the discussion under the heading “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” for the fiscal year ended December 31, 20202022 included in the Final Prospectus for our Direct ListingAnnual Report on Form 10-K filed with the SEC, pursuant to Rule 424(b)(4)Securities and Exchange Commission ("SEC") on May 19, 2021.March 9, 2023. 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”discussed below and elsewhere 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.”particularly under “Part II. Item 1A. Risk Factors.” Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Overview
Squarespace is a leading all-in-one platformenables anyone to stand out and succeed online, providing customers in over 200 countries and territories with the tools they need for businesses and independent creators to build a beautifulan online presence grow their brandswith best-in-class design and manage their businessesa consistent brand across the internet. We offerdomains, websites, domains, e-commerce,marketing and social media. Our commerce solutions include tools for managing a social media presence, marketing tools, schedulingselling digital content, classes, appointments, reservations, physical goods 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.more.
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 from Accel 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.
•On March 31, 2021, Squarespace acquired Tock, Inc., a reservation management system tool for time slotted businesses primarily serving restaurants and hospitality businesses.
•In May 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%92.5% and 92.7%92.2% of our total revenue for the three and sixnine months ended JuneSeptember 30, 2021,2023, respectively, and 93.6% and 94.8%91.7% of our total revenue infor the three and sixnine months ended JuneSeptember 30, 2020, respectively.2022. 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’customers’ commerce transactions, payment processing fees received in exchange for use of our hospitality services 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$257.1 million and $375.7$741.6 million for the three and sixnine months ended JuneSeptember 30, 2021,2023, respectively, and $149.6net loss of $16.5 million and $286.5$12.3 million infor the three and sixnine months ended JuneSeptember 30, 2020,2023, respectively. We generated revenue of $217.7 million and $638.2 million for the three and nine months ended September 30, 2022, respectively, and net income of $10.1 million and net loss of $18.3 million for the three and nine months ended September 30, 2022, respectively. We believe we have a stable and predictableour business model is driven by efficient customerstable retention of our existing customers as well as the acquisition and the adoption by our
new customers, over time of higher valueincluding additional offerings and add-on subscriptions. Oursubscriptions which allow our customers to grow and scale with 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.their needs evolve. No individual unique subscription accounted for more than 1% of our total bookings for the three and sixnine months ended JuneSeptember 30, 2021or June 30, 2020.2023 and 2022.
On September 7, 2023, we closed an asset purchase agreement with Google LLC ("Google") to acquire, among other things, Google's domain assets, including all domain names for which Google is the registrar or reseller, for a total amount paid of $180.7 million (the "Google Domains Asset Acquisition "). See "Part I. Financial Information, Item 1. Financial Statements (Unaudited), Note 4. Acquisitions" for further information. Unique subscriptions and average revenue per unique subscription ("ARPUS") do not account for single domain subscriptions originally sold by Google as a part of the Google Domains Asset Acquisition (collectively, the "Acquired Domain Assets").
Key Factors Affecting Our Performance
Acquisition of new and retention of existing unique subscriptions
The growth of newAcquiring and retaining unique subscriptions to our platform is the primary driver of our revenue growth. The number of unique subscriptions toon our platform, has grown sequentially across 22 consecutive quarters, rising to 3.9excluding the Acquired Domain Assets, was 4.4 million unique subscriptions as of JuneSeptember 30, 2021,2023, representing an increase of 15.1%5.4% relative to JuneSeptember 30, 2020.2022. In order to continue to growsupport the numberacquisition of new unique subscriptions, we intend to continue to invest in our direct response 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 ended June 30, 2021 relative to the six months ended June 30, 2020. We view this increased spending as a long-term investment in our business that wouldto 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. On March 31, 2021, we acquired Tock, Inc., which expanded our commerce offerings by adding a platform for reservations, take-out, delivery and events for the hospitality industry.
We are continuingcontinue to invest in 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.commerce services. Our commerce revenue was $58.7$77.6 million and $105.5$225.7 million for the three and sixnine months ended JuneSeptember 30, 2021,2023, representing 72.1%14.6% and 74.8%14.2% growth from the same periodsperiod in 2020,2022, 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$60.5 million and $90.9$180.5 million for the three and sixnine months ended JuneSeptember 30, 2021, respectively,2023, representing 35.7%11.4% and 26.1%5.9% growth over the same periods in 2020,2022, 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 of JuneSeptember 30, 2021,2023, we had customers in over 200 countries and territories and our international customers represented approximately 31%30% of our total bookings. As foreign currency exchange rates change, translation of the statements of operations of our international businesses into U.S. dollars may affect year-over-year comparability of our operating results.
Key Components of Results of Operations
Revenue
We primarily derive revenue from monthlyannual and annualmonthly subscriptions. Typically, annual subscriptions represent 70% of the total subscriptions and monthly subscriptions represent 30%.75% and 25% of total subscriptions, respectively. Revenue is also derived from non-subscription services, including fixed percentages or fixed feesfixed-fees earned on revenue share arrangements with third partiesthird-parties and on sales made through our customers’customers’ sites. In addition, we earn fixed-fees on sales through certain hospitality offerings and payment processing fees in exchange for use of our hospitality services. Payments received for subscriptions in advance of fulfillment of our performance obligations are recorded as deferred revenue. Subscription plans automatically renew unless advancedadvance 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, payment processing revenue and revenue generated from third partiesthird-parties is recognized at a point in time, when the sale has been completed.
We disaggregate our revenue by product type in accordance with the following definitions:
Presence revenue
Presence revenue primarily consists of fixed-fee subscriptions to our plans that offer core platform functionalities, currently branded “Personal”“Personal” and “Business”“Business” plans in our offering.offerings. Presence revenue also consists of fixed feefixed-fee subscriptions related to additional entry points for starting online such as domain managed services and social media stories.media. 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 revenue
Commerce revenue primarily consists of fixed-fee subscriptions to our plans that offer all the features of presence plans includingas well as additional features that support end to end commerce transactions, currently branded “Basic”“Basic” and “Advanced”“Advanced” in our plans offering.plan offerings. Commerce revenue also includes fixed-fee subscriptions to a number of other tools that support running an online business such as marketing, member areas,memberships, courses, scheduling and schedulinghospitality tools. Non-subscription revenue is derived from fixed feesfixed-fees earned on revenue share arrangements with commerce partners andas well as fixed transaction fees earned on sales madegross merchandise value ("GMV") processed through Business plan sites. Additionally, commercesites and certain hospitality offerings. Commerce revenue consistsalso includes payment processing fees received in exchange for use of fixed-fee subscriptions and non-recurring revenue related toour hospitality services.
Cost of revenue
Cost of revenue consists primarily of credit card and payment processing fees, domain registration fees, and web hosting costs and app fees.costs. Cost of revenue also includes customer support, employee-related expenses, allocated shared costsamortization and depreciation, and amortization.allocated shared costs. 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 andas well as allocated shared costs. These costs are expensed as incurred. Employee-related expenses consist of salaries, taxes, benefits and stock-based compensation. In addition, we capitalize employee-related expenses relating to software development costs incurred in
connection with adding functionality to our platform, as well as internal-use projects during the application development stage. These capitalized software development costs are deferred and amortized ratably over three years.
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. Employee-related expenses consist of salaries, sales commissions related to our brand and sales of hospitality services, taxes, benefits and stock-based compensation. Allocated shared costs include customer support costs related to assistance provided by our customer service team to customers during their trial periods on our platform. 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. SalesIn addition, we capitalize sales commissions relatedpaid to internal sales personnel relating to obtaining customer contracts. These capitalized sales commissions are deferred and amortized ratably over the compensationexpected life of hospitalitythe new customer.
Marketing and sales are expensed as incurred.expenses also include amortization of acquisition-related intangible assets associated with acquired customer relationships.
General and administrative
General and administrative expenses are primarily employee-related expenses, which consist of salaries, taxes, benefits and stock-based compensation associated with supporting business operationsoperations. General and administrative expenses also include software and subscription services, insurance, as well as expenses required to comply with government regulations in the markets in which we operate.external accounting and legal professional service fees. 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 in May 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 a U.S. securities exchange and costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC. In addition, as a public company, we expect to incur additional costs associated with accounting, compliance, insurance and investor relations.
Interest expense
Interest expense primarily consists of the interest expense related to our debt facilities as well as the expense on acquisition liabilities.facilities. For further discussion on our interest expense related to our debt facilities, see “— Liquidity"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 “—“Item 3. Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency Exchange Risk.””
Benefit from/(provision for)Provision for income taxes
We are subject to income taxation and file U.S. federal income tax returns as well as income tax returns in the various U.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)The Company accounts for income taxes exceptunder the asset and liability method, and deferred tax assets and liabilities are recognized for jurisdictions for which a loss is expectedthe future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The Company recognizes deferred tax assets to the extent it believes these assets are more likely than not to be realized. In making such a determination, the Company considers all positive and no benefit cannegative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. A valuation allowance is provided if it is determined that it is more likely than not that the deferred tax asset will not be realized.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax positions will be sustained on examination by the tax authority. The tax benefits recognized in the financial statements from such positions are measured based on the largest amount that is more than 50% likely to be realized for those losses,upon ultimate settlement. The Company recognizes interest and penalties, where appropriate, related to unrecognized tax benefits in income tax expense.
Effective December 1, 2018, the Company became subject to a U.S. tax effect of discrete items occurring during the period. The estimated annual effective tax rate is based on forecasted annual results which may fluctuate duerequirement that certain income earned by foreign subsidiaries, referred to significant changesas Global Intangible Low-Taxed Income (“GILTI”), must be included in the forecasted/actual results and any other transactions that resultsgross income of the subsidiary’s U.S. shareholder. Accounting principles generally accepted in differing tax treatment.the U.S. provide for an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current period expense when incurred. The Company elected to treat GILTI as a current period expense when incurred.
Results of Operationsoperations
The following table sets forth our condensed consolidated statements of operations information for the three and sixnine months ended JuneSeptember 30, 20212023 and 2020.2022.
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| ($ in thousands) | ($ in thousands) | 2021 | | 2020 | | 2021 | | 2020 | ($ in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| | (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) |
| Revenue | Revenue | $ | 196,010 | | | $ | 149,640 | | | $ | 375,656 | | | $ | 286,514 | | Revenue | $ | 257,061 | | | $ | 217,696 | | | $ | 741,618 | | | $ | 638,160 | |
Cost of revenue(1) | 32,501 | | | 23,845 | | | 59,909 | | | 47,616 | | |
| Cost of revenue(1) | | Cost of revenue(1) | 51,753 | | | 38,907 | | | 137,870 | | | 112,549 | |
| Gross profit | Gross profit | 163,509 | | | 125,795 | | | 315,747 | | | 238,898 | | Gross profit | 205,308 | | | 178,789 | | | 603,748 | | | 525,611 | |
| Operating expenses: | Operating expenses: | | 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 | | |
| Research and product development(1) | | Research and product development(1) | 60,491 | | | 54,312 | | | 180,473 | | | 170,469 | |
| Marketing and sales(1) | | Marketing and sales(1) | 81,016 | | | 74,248 | | | 258,061 | | | 255,897 | |
| General and administrative(1) | | General and administrative(1) | 36,155 | | | 38,507 | | | 99,404 | | | 113,678 | |
| Total operating expenses | Total operating expenses | 404,426 | | | 99,109 | | | 563,925 | | | 224,561 | | Total operating expenses | 177,662 | | | 167,067 | | | 537,938 | | | 540,044 | |
| Operating (loss)/income | (240,917) | | | 26,686 | | | (248,178) | | | 14,337 | | |
| Operating income/(loss) | | Operating income/(loss) | 27,646 | | | 11,722 | | | 65,810 | | | (14,433) | |
| Interest expense | Interest expense | (2,827) | | | (2,456) | | | (6,087) | | | (5,586) | | Interest expense | (9,321) | | | (5,209) | | | (26,050) | | | (10,977) | |
| 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) | | |
| Other income, net | | Other income, net | 6,327 | | | 6,869 | | | 7,525 | | | 14,597 | |
| Income/(loss) before provision for income taxes | | Income/(loss) before provision for income taxes | 24,652 | | | 13,382 | | | 47,285 | | | (10,813) | |
| Provision for income taxes | | Provision for income taxes | (41,151) | | | (3,277) | | | (59,622) | | | (7,446) | |
| Net (loss)/income | Net (loss)/income | $ | (234,532) | | | $ | 18,539 | | | $ | (235,678) | | | $ | 8,407 | | Net (loss)/income | $ | (16,499) | | | $ | 10,105 | | | $ | (12,337) | | | $ | (18,259) | |
__________________
__________________
(1)Includes stock-based compensation as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| ($ in thousands) | ($ in thousands) | 2021 | | 2020 | | 2021 | | 2020 | ($ in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| | (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) |
| Cost of revenue | Cost of revenue | $ | 380 | | | $ | 205 | | | $ | 655 | | | $ | 366 | | Cost of revenue | $ | 1,484 | | | $ | 1,000 | | | $ | 4,085 | | | $ | 2,470 | |
| Research and product development | Research and product development | 8,245 | | | 5,269 | | | 15,038 | | | 9,946 | | Research and product development | 14,601 | | | 9,462 | | | 40,938 | | | 31,138 | |
| Marketing and sales | Marketing and sales | 1,569 | | | 782 | | | 2,741 | | | 1,423 | | Marketing and sales | 3,019 | | | 2,252 | | | 7,935 | | | 6,246 | |
General and administrative (a) | General and administrative (a) | 240,319 | | | 1,012 | | | 241,931 | | | 3,435 | | General and administrative (a) | 9,213 | | | 11,380 | | | 26,964 | | | 35,197 | |
| Total stock-based compensation | Total stock-based compensation | $ | 250,513 | | | $ | 7,268 | | | $ | 260,365 | | | $ | 15,170 | | Total stock-based compensation | $ | 28,317 | | | $ | 24,094 | | | $ | 79,922 | | | $ | 75,051 | |
(a) During the three and six 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 condensed consolidated statements of operations information as a percentage of total revenue for the three and sixnine months ended JuneSeptember 30, 20212023 and 2020.2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) |
| Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of revenue | 20.1 | % | | 17.9 | % | | 18.6 | % | | 17.6 | % |
| Gross profit | 79.9 | % | | 82.1 | % | | 81.4 | % | | 82.4 | % |
| Operating expenses: | | | | | | | |
| Research and product development | 23.5 | % | | 24.9 | % | | 24.3 | % | | 26.7 | % |
| Marketing and sales | 31.5 | % | | 34.1 | % | | 34.8 | % | | 40.1 | % |
| General and administrative | 14.1 | % | | 17.7 | % | | 13.4 | % | | 17.8 | % |
| Total operating expenses | 69.1 | % | | 76.7 | % | | 72.5 | % | | 84.6 | % |
| Operating income/(loss) | 10.8 | % | | 5.4 | % | | 8.9 | % | | (2.2) | % |
| Interest expense | (3.6) | % | | (2.4) | % | | (3.5) | % | | (1.7) | % |
| Other income, net | 2.5 | % | | 3.2 | % | | 1.0 | % | | 2.3 | % |
| Income/(loss) before provision for income taxes | 9.7 | % | | 6.2 | % | | 6.4 | % | | (1.6) | % |
| Provision for income taxes | (16.0) | % | | (1.5) | % | | (8.0) | % | | (1.2) | % |
| Net (loss)/income | (6.3) | % | | 4.7 | % | | (1.6) | % | | (2.8) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 condensed consolidated revenue by geographic location and our condensed consolidated revenue by geographic location as a percentage of total revenue for the three and sixnine months ended JuneSeptember 30, 20212023 and 2020.2022.
| | | Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change | | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
($ in thousands, except percentages) | ($ in thousands, except percentages) | 2021 | | 2020 | | Amount | | % | | 2021 | | 2020 | | Amount | | % | ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % | | 2023 | | 2022 | | Amount | | % |
| | (Unaudited) | | (Unaudited) | | | | | | (Unaudited) | | (Unaudited) | | | | | | (Unaudited) | | (Unaudited) | | | | | | (Unaudited) | | (Unaudited) | | | | |
| United States | United States | $ | 141,517 | | | $ | 105,098 | | | $ | 36,419 | | | 34.7 | % | | $ | 268,560 | | | $ | 200,470 | | | $ | 68,090 | | | 34.0 | % | United States | $ | 184,198 | | | $ | 157,409 | | | $ | 26,789 | | | 17.0 | % | | $ | 531,147 | | | $ | 456,583 | | | $ | 74,564 | | | 16.3 | % |
| International | International | 54,493 | | | 44,542 | | | 9,951 | | | 22.3 | % | | 107,096 | | | 86,044 | | | 21,052 | | | 24.5 | % | International | 72,863 | | | 60,287 | | | 12,576 | | | 20.9 | % | | 210,471 | | | 181,577 | | | 28,894 | | | 15.9 | % |
| Total revenue | Total revenue | $ | 196,010 | | | $ | 149,640 | | | $ | 46,370 | | | 31.0 | % | | $ | 375,656 | | | $ | 286,514 | | | $ | 89,142 | | | 31.1 | % | Total revenue | $ | 257,061 | | | $ | 217,696 | | | $ | 39,365 | | | 18.1 | % | | $ | 741,618 | | | $ | 638,160 | | | $ | 103,458 | | | 16.2 | % |
| Percentage of total revenue: | Percentage of total revenue: | | | | | | | | | | | | | | | | Percentage of total revenue: | | | | | | | | | | | | | | | |
| United States | United States | 72.2 | % | | 70.2 | % | | 71.5 | % | | 70.0 | % | | United States | 71.7 | % | | 72.3 | % | | 71.6 | % | | 71.5 | % | |
| International | International | 27.8 | % | | 29.8 | % | | 28.5 | % | | 30.0 | % | | International | 28.3 | % | | 27.7 | % | | 28.4 | % | | 28.5 | % | |
| Total revenue | Total revenue | 100 | % | | 100 | % | | | | | | 100 | % | | 100 | % | | | | | Total revenue | 100 | % | | 100 | % | | | | | | 100 | % | | 100 | % | | | | |
Comparison of the Three Months Ended JuneSeptember 30, 20212023 and 20202022
Revenue
| | | Three Months Ended June 30, | | Change | | Three Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | ($ in thousands, except percentages) | 2021 | | 2020 | | Amount | | % | ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| | (Unaudited) | | (Unaudited) | | | | | | (Unaudited) | | (Unaudited) | | | | |
| Presence | Presence | $ | 137,277 | | | $ | 115,521 | | | $ | 21,756 | | | 18.8 | % | Presence | $ | 179,451 | | | $ | 149,995 | | | $ | 29,456 | | | 19.6 | % |
| Commerce | Commerce | 58,733 | | | 34,119 | | | 24,614 | | | 72.1 | % | Commerce | 77,610 | | | 67,701 | | | 9,909 | | | 14.6 | % |
| Total revenue | Total revenue | $ | 196,010 | | | $ | 149,640 | | | $ | 46,370 | | | 31.0 | % | Total revenue | $ | 257,061 | | | $ | 217,696 | | | $ | 39,365 | | | 18.1 | % |
| Percentage of total revenue: | Percentage of total revenue: | | | | | | | | Percentage of total revenue: | | | | | | | |
| Presence | Presence | 70.0 | % | | 77.2 | % | | Presence | 69.8 | % | | 68.9 | % | |
| Commerce | Commerce | 30.0 | % | | 22.8 | % | | Commerce | 30.2 | % | | 31.1 | % | |
| Total revenue | Total revenue | 100 | % | | 100 | % | | Total revenue | 100 | % | | 100 | % | |
Presence Revenuerevenue
Presence revenue increased $21.8$29.5 million, or 18.8%19.6%, for the three months ended JuneSeptember 30, 20212023 compared to the same period in 2020. We believe the2022. This increase was from sustained demandprimarily the result of price increases across our website subscription plans, which contributed approximately $11.7 million, or 39.7%. Additionally, the growth of our unique subscriptions contributed approximately $10.8 million, or 36.7%, driven by retention of existing subscriptions and continued acquisition of new subscriptions across our presence offerings. As described below, unique subscriptions do not include the Acquired Domain Assets.
Commerce revenue
Commerce revenue increased $9.9 million, or 14.6%, for an online presence as more brands lookthe three months ended September 30, 2023 compared to operate digitally coupled with stronger cashthe same period in 2022. This increase was primarily the result of the growth of our unique subscriptions, which contributed approximately $6.7 million, or 67.8%, driven by retention fromof existing subscriptions and continued acquisition of new subscriptions across our existing subscriptions.commerce offerings, including subscriptions for our scheduling and hospitality services.
Cost of revenue and gross profit
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| (Unaudited) | | (Unaudited) | | | | |
| Cost of revenue | $ | 51,753 | | | $ | 38,907 | | | $ | 12,846 | | | 33.0 | % |
| Gross profit | $ | 205,308 | | | $ | 178,789 | | | $ | 26,519 | | | 14.8 | % |
| Percentage of total revenue: | | | | | | | |
| Cost of revenue | 20.1 | % | | 17.9 | % | | | | |
| Gross profit | 79.9 | % | | 82.1 | % | | | | |
Commerce RevenueCost of revenue
CommerceCost of revenue increased $24.6$12.8 million, or 72.1%33.0%, for the three months ended JuneSeptember 30, 20212023 compared to the same period in 2020.2022. The growthincrease was primarily driven bydue to increases in domain name registration fees of $8.1 million, mainly associated with the retentionGoogle Domain Asset Acquisition, payroll and associated benefit expenses for customer support of existing subscriptions$2.3 million, credit card and the additionpayment processing fees of hospitality services.$1.5 million, and hosting costs of $1.0 million, as a result of our growing subscription base.
Cost of Revenue and Gross Profitprofit
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change |
| ($ 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 revenueGross profit increased $8.7$26.5 million, or 36.3%14.8%, for the three months ended JuneSeptember 30, 20212023 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 $37.7 million, or 30.0%, for the three months ended June 30, 2021 compared to the same period in 2020.2022. As a percentage of total revenue, gross profit decreased from 84.1% to 83.4%was 79.9% and 82.1% for the three months ended JuneSeptember 30, 2021 as2023 and 2022, respectively.
Operating expenses:
Research and product development
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| (Unaudited) | | (Unaudited) | | | | |
| Research and product development | $ | 60,491 | | | $ | 54,312 | | | $ | 6,179 | | | 11.4 | % |
| Percentage of total revenue | 23.5 | % | | 24.9 | % | | | | |
Research and product development expenses increased $6.2 million, or 11.4%, for the three months ended September 30, 2023 compared to the same period in 2020.2022. The decelerationincrease is a reflectionprimarily due to increased payroll and associated benefit expenses of $6.7 million, partially offset by increased payment processing fees associated with hospitality services. Commerce revenue comprised 30.0%capitalized internally developed software costs of total revenue during the three months ended June 30, 2021 as compared to 22.8% for the same period$0.9 million, in 2020.support of our product development.
Operating expenses:Marketing and sales
Research | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| (Unaudited) | | (Unaudited) | | | | |
| Marketing and sales | $ | 81,016 | | | $ | 74,248 | | | $ | 6,768 | | | 9.1 | % |
| Percentage of total revenue | 31.5 | % | | 34.1 | % | | | | |
Marketing 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 developmentsales expenses increased $12.9$6.8 million, or 35.7%9.1%, for the three months ended JuneSeptember 30, 20212023 compared to the same period in 2020,2022, primarily due to payroll and associated benefitsincreased advertising expenses relatedof $4.4 million, which were mainly driven by increases in direct response channels, partially offset by decreases in partnerships. The increase was also due to increased headcount in supportamortization expense of our product development roadmap.$2.8 million primarily associated with finite-lived intangible assets acquired as part of the Google Domains Asset Acquisition.
MarketingGeneral and salesadministrative
| | | Three Months Ended June 30, | | Change | | Three Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | ($ in thousands, except percentages) | 2021 | | 2020 | | Amount | | % | ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| | (Unaudited) | | (Unaudited) | | | | | | (Unaudited) | | (Unaudited) | | | | |
| Marketing and sales | $ | 70,784 | | | $ | 51,254 | | | $ | 19,530 | | | 38.1 | % | |
| General and administrative | | General and administrative | $ | 36,155 | | | $ | 38,507 | | | $ | (2,352) | | | (6.1) | % |
| Percentage of total revenue | Percentage of total revenue | 36.1 | % | | 34.3 | % | | Percentage of total revenue | 14.1 | % | | 17.7 | % | |
MarketingGeneral and salesadministrative expenses increased $19.5decreased $2.4 million, or 38.1%6.1%, for the three months ended JuneSeptember 30, 20212023 compared to the same period in 2020,2022, primarily due to increased spenddecreased stock-based compensation expenses of $2.2 million mainly driven by the market-performance grant issued to our CEO, as well as impairment charges recorded during the three months ended September 30, 2022 associated with our operating lease right-of-use assets of $1.7 million that did not recur in multiple brand and direct response advertising channels both domestically and internationally. The remainder2023. Additionally, these decreases were partially offset by a write-off of capitalized cloud software implementation fees of $1.5 million during the increase was primarily due to payroll and associated benefits related to increased headcount in support of our expanded marketing operations.three months ended September 30, 2023.
General and administrativeInterest expense
| | | Three Months Ended June 30, | | Change | | Three Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | ($ in thousands, except percentages) | 2021 | | 2020 | | Amount | | % | ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| | (Unaudited) | | (Unaudited) | | | | | | (Unaudited) | | (Unaudited) | | | | |
| General and administrative | $ | 284,730 | | | $ | 11,823 | | | $ | 272,907 | | | 2,308.3 | % | |
| Interest expense | | Interest expense | $ | (9,321) | | | $ | (5,209) | | | $ | 4,112 | | | 78.9 | % |
| Percentage of total revenue | Percentage of total revenue | 145.3 | % | | 7.9 | % | | Percentage of total revenue | (3.6) | % | | (2.4) | % | |
General and administrative expensesInterest expense increased $272.9$4.1 million or 2,308.3%, for the three months ended JuneSeptember 30, 20212023 compared to the same period in 2020,2022 primarily due to expenses incurred in connection withhigher interest rates, driven by increased benchmark rates, on our total debt outstanding, as well as additional term loan commitments received during 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 $25.3 million related to the Direct Listing. Indirect tax expenses and employee related expenses associated with increased headcount also contributed to the increase. three months ended September 30, 2023.
Other income, net
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| (Unaudited) | | (Unaudited) | | | | |
| Other income, net | $ | 6,327 | | | $ | 6,869 | | | $ | (542) | | | (7.9) | % |
| Percentage of total revenue | 2.5 | % | | 3.2 | % | | | | |
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 $0.4Other income, net was $6.3 million or 15.1%, for the three months ended JuneSeptember 30, 20212023 compared to $6.9 million during the same period in 2020.2022. The increase wasdecrease is primarily due to higher total debt outstanding related to our amended credit agreement from December 2020 compared to the same period in 2020.
Other (loss)/income, net
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change |
| ($ 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 $0.1 million, or 8.9%, for the three months ended June 30, 2021 compared to the same period in 2020. The decrease was primarily due to unrealized gains resulting from favorableunfavorable foreign exchange rates for the three months ended JuneSeptember 30, 20212023 compared tothe same period in 2022.
Provision for income taxes
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| (Unaudited) | | (Unaudited) | | | | |
| Income before provision for income taxes | $ | 24,652 | | | $ | 13,382 | | | $ | 11,270 | | | 84.2 | % |
| Provision for income taxes | $ | (41,151) | | | $ | (3,277) | | | $ | (37,874) | | | |
| Effective tax rate | (166.9) | % | | (24.5) | % | | (142.4) | % | | |
For the three months ended September 30, 2023, we applied the estimated annual tax rate in accordance with ASC Topic 740, Income Taxes ("ASC Topic 740"), Subtopics 270-30-6 through 8 to year-to-date results to determine the provision for income taxes. The estimated annual effective tax rate is based on forecasted annual results which fluctuate due to significant changes in the forecasted or actual results and any other transaction that results in differing tax treatment.
For the three months ended September 30, 2022, we departed from the estimated annual effective tax rate method and computed our income tax benefit using the discrete effective tax rate method (the "discrete method"). The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The discrete method treats the year-to-date period as if it were the annual period and determines the income tax expense or benefit on that basis.
The provision for income taxes increased for the three months ended September 30, 2023 compared to the same period in 2022, primarily driven by an increase in forecasted annual income as of September 30, 2023 as compared to the income before provision for income taxes for the three months ended September 30, 2022. In addition, the utilization of net operating loss carryforwards as well as research and development tax credits decreased for the three months ended September 30, 2023 as compared to the same period in 2020.2022.
Comparison of the SixNine Months Ended JuneSeptember 30, 20212023 and 20202022
Revenue
| | | Six Months Ended June 30, | | Change | | Nine Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | ($ in thousands, except percentages) | 2021 | | 2020 | | Amount | | % | ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| | | (Unaudited) | | (Unaudited) | | | | |
| Presence | Presence | $ | 270,148 | | | $ | 226,143 | | | $ | 44,005 | | | 19.5 | % | Presence | $ | 515,916 | | | $ | 440,471 | | | $ | 75,445 | | | 17.1 | % |
| Commerce | Commerce | 105,508 | | | 60,371 | | | 45,137 | | | 74.8 | % | Commerce | 225,702 | | | 197,689 | | | 28,013 | | | 14.2 | % |
| Total revenue | Total revenue | $ | 375,656 | | | $ | 286,514 | | | $ | 89,142 | | | 31.1 | % | Total revenue | $ | 741,618 | | | $ | 638,160 | | | $ | 103,458 | | | 16.2 | % |
| Percentage of total revenue: | Percentage of total revenue: | | | | | | | Percentage of total revenue: | | | | | | | |
| Presence | Presence | 71.9 | % | | 78.9 | % | | Presence | 69.6 | % | | 69.0 | % | |
| Commerce | Commerce | 28.1 | % | | 21.1 | % | | Commerce | 30.4 | % | | 31.0 | % | |
| Total revenue | Total revenue | 100 | % | | 100 | % | | | | | Total revenue | 100 | % | | 100 | % | |
Presence Revenue revenue
Presence revenue increased $44.0$75.4 million, or 19.5%17.1%, for the sixnine months ended JuneSeptember 30, 20212023 compared to the same period in 2020.2022. This increase was primarily the result of the growth of our unique subscriptions, which contributed $38.0 million, or 50.4%, driven by retention of existing subscriptions and continued acquisition of new subscriptions across our presence offerings. Additionally, price increases across our website subscription plans contributed $28.6 million, or 37.9%, to the year-over-year presence revenue growth. As described below, unique subscriptions do not include the Acquired Domain Assets.
Commerce revenue
Commerce revenue increased $28.0 million, or 14.2%, for the nine months ended September 30, 2023 compared to the same period in 2022. This increase was primarily the result of the growth of our unique subscriptions, which contributed approximately $20.4 million, or 72.7%, driven by retention of existing subscriptions and continued acquisition of new subscriptions across our commerce offerings, including subscriptions for our scheduling and hospitality services.
Cost of revenue and gross profit
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| (Unaudited) | | (Unaudited) | | | | |
| Cost of revenue | $ | 137,870 | | | $ | 112,549 | | | $ | 25,321 | | | 22.5 | % |
| Gross profit | $ | 603,748 | | | $ | 525,611 | | | $ | 78,137 | | | 14.9 | % |
| Percentage of total revenue: | | | | | | | |
| Cost of revenue | 18.6 | % | | 17.6 | % | | | | |
| Gross profit | 81.4 | % | | 82.4 | % | | | | |
Cost of revenue
Cost of revenue increased $25.3 million, or 22.5%, for the nine months ended September 30, 2023 compared to the same period in 2022. The increase was primarily due to increases in domain name registration fees of $10.7 million, mainly due to the Google Domain Asset Acquisition, payroll and associated benefit expenses for customer support of $7.1 million, payment processing fees of $5.2 million, as a result of stronger retentionour growing subscription base.
Gross profit
Gross profit increased $78.1 million, or 14.9%, for the nine months ended September 30, 2023 compared to the same period in 2022. As a percentage of our existing subscriptions, which we believe stems from sustained demandtotal revenue, gross profit was 81.4% and 82.4% for an online presence as more brands look to operate digitally.the nine months ended September 30, 2023 and 2022, respectively.
Commerce RevenueOperating expenses:
Commerce revenueResearch and product development
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| (Unaudited) | | (Unaudited) | | | | |
| Research and product development | $ | 180,473 | | | $ | 170,469 | | | $ | 10,004 | | | 5.9 | % |
| Percentage of total revenue | 24.3 | % | | 26.7 | % | | | | |
Research and product development expenses increased $45.1$10.0 million, or 74.8%5.9%, for the sixnine months ended JuneSeptember 30, 20212023 compared to the same period in 2020.2022. The increase was drivenis primarily due to payroll and associated benefit expenses of $12.6 million, partially offset by the growing subscription basecapitalized internally developed software costs of $2.4 million in support of our product development.
Marketing and hospitality services.sales
Cost of Revenue | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| (Unaudited) | | (Unaudited) | | | | |
| Marketing and sales | $ | 258,061 | | | $ | 255,897 | | | $ | 2,164 | | | 0.8 | % |
| Percentage of total revenue | 34.8 | % | | 40.1 | % | | | | |
Marketing 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 revenuesales expenses increased $12.3$2.2 million, or 25.8%0.8%, for the sixnine months ended JuneSeptember 30, 20212023 compared to the same period in 2020. The increase was2022, primarily driven by an increase in transaction volume resulting in additional payment processing fees, third party feesdue to increased payroll and hosting costsassociated benefit expenses of $4.8 million, as well as an increase in payment processing feesincreased amortization expense of $2.3 million primarily associated with hospitality services. The increase was also drivenfinite-lived intangible assets acquired as part of the Google Domains Asset Acquisition. Additionally, these increases were partially offset by payrolldecreased advertising expenses of $4.9 million, mainly related to decreased television advertising, production expenses, and associated benefitspartnerships partially offset by increased direct response channels.
General and administrative
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| (Unaudited) | | (Unaudited) | | | | |
| General and administrative | $ | 99,404 | | | $ | 113,678 | | | $ | (14,274) | | | (12.6) | % |
| Percentage of total revenue | 13.4 | % | | 17.8 | % | | | | |
General and administrative expenses for customer support associated with hospitality services.
Gross profit
Gross profit increased $76.8decreased $14.3 million, or 32.2%12.6%, for the sixnine months ended JuneSeptember 30, 20212023 compared to the same period in 2020. As2022, primarily due decreased stock-based compensation expenses of $8.2 million mainly related to the market-performance grant issued to our CEO, as well as a percentagedecrease in indirect tax expense and related penalties of total revenue, gross profit$4.4 million. The decrease is also due to impairment charges recorded during the nine months ended September 30, 2022 associated with our operating lease right-of-use assets of $1.7 million that did not recur in 2023, as well as decreased insurance costs of $1.2 million. Additionally, these decreases were partially offset by a write-off of capitalized cloud software implementation fees of $1.5 million during the nine months ended September 30, 2023.
Interest expense
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| (Unaudited) | | (Unaudited) | | | | |
| Interest expense | $ | (26,050) | | | $ | (10,977) | | | $ | 15,073 | | | 137.3 | % |
| Percentage of total revenue | (3.5) | % | | (1.7) | % | | | | |
Interest expense increased from 83.4% to 84.1%$15.1 million for the sixnine months ended JuneSeptember 30, 2021 as2023 compared to the same period in 2020, principally due to a shift in revenue mix towards commerce and additional operational efficiencies in the first quarter of 2021.
Operating expenses:
Research and product development
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
| ($ 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 $18.8 million, or 26.1%, for the six months ended June 30, 2021 compared to the same period in 2020,2022 primarily due to payroll and associated benefits expenses related tohigher interest rates, driven by increased headcount in support ofbenchmark rates, on our product development roadmap.
Marketing and sales
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
| ($ 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 $41.9 million, or 33.1%, fortotal debt outstanding, as well as additional term loan commitments received during the sixnine months ended JuneSeptember 30, 2021 compared to the same period in 2020, primarily due to increased spend in multiple brand and direct response advertising channels in domestic and international markets. The remainder of the increase was primarily due to payroll and associated benefits related to increased headcount in support of our expanded marketing operations.
General and administrative
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
| ($ 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 | % | | | | |
Other income, net
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| (Unaudited) | | (Unaudited) | | | | |
| Other income, net | $ | 7,525 | | | $ | 14,597 | | | $ | (7,072) | | | (48.4) | % |
| Percentage of total revenue | 1.0 | % | | 2.3 | % | | | | |
General and administrative expenses increased $278.6Other income, net was $7.5 million or 1,088.0%, for the sixnine months ended JuneSeptember 30, 20212023 compared to $14.6 million during the same period in 2022. The decrease is primarily due to decreased unrealized and realized gains of $11.0 million due to unfavorable foreign exchange rates, partially offset by increased interest earned on cash and cash equivalents of $4.0 million due to higher interest rates for the nine months ended September 30, 2023 compared tothe same period in 2022.
Provision for income taxes
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| ($ in thousands, except percentages) | 2023 | | 2022 | | Amount | | % |
| (Unaudited) | | (Unaudited) | | | | |
| Income/(loss) before provision for income taxes | $ | 47,285 | | | $ | (10,813) | | | $ | 58,098 | | | (537.3) | % |
| Provision for income taxes | $ | (59,622) | | | $ | (7,446) | | | $ | (52,176) | | | |
| Effective tax rate | (126.1) | % | | 68.9 | % | | (195.0) | % | | |
For the nine months ended September 30, 2023, we applied the estimated annual tax rate in accordance with ASC Topic 740, Subtopics 270-30-6 through 8 to year-to-date results to determine the provision for income taxes. The estimated annual effective tax rate is based on forecasted annual results which fluctuate due to significant changes in the forecasted/actual results and any other transaction that results in differing tax treatment.
For the nine months ended September 30, 2022, we departed from the estimated annual effective tax rate method and computed our income tax provision using the discrete method. The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The discrete method treats the year-to-date period as if it were the annual period and determines the income tax expense or benefit based on that basis.
The provision for income taxes increased for the nine months ended September 30, 2023 compared to the same period in 2020,2022, primarily duedriven by an increase in forecasted annual income as of September 30, 2023 as compared to expenses incurred in connection with the listingloss before provision for income taxes for the nine months ended September 30, 2022. In addition, the utilization 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 $25.3 million related to such listing. Additionally, increases in payroll and associated benefits expenses due to increased headcount,net operating loss carryforwards as well as increases in indirectresearch and development tax expenses contributed to the increase. Following the completion of the Direct Listing on the NYSE we began incurring additional general and administrative expenses as a result of operating as a public company, including increased expenses for insurance, costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, investor relations and professional services expenses, and increased stock-based compensation expense.
Interest expense
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
| ($ 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 $0.5 million, or 9.0%,credits decreased for the sixnine months ended JuneSeptember 30, 2021 compared to the same period in 2020 due to higher total debt outstanding related to our amended credit agreement from December 2020 compared to the same period in 2020.
Other (loss)/income, net
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
| ($ 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 $2.5 million, or 2,198.2%, for the six months ended June 30, 2021 compared to the same period in 2020, primarily due to unrealized gains resulting from favorable foreign exchange rates for the six months ended June 30, 20212023 as compared to the same period in 2020.2022.
Quarterly Results of Operations
The following tables set forth selected unaudited quarterly statements of operations data for each of the nineeight fiscal quarters ended JuneSeptember 30, 2021,2023, as well as the percentage of revenues that each line item represents for each quarter. The information for each of these quarters has been prepared in accordance with GAAPgenerally accepted accounting principles in the United States ("GAAP") on the same basis as our audited historical condensed consolidated financial information and includes, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This data should be read in conjunction with our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. These quarterly results are not necessarily indicative of our results of operations to be expected for any future period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended (Unaudited) |
| ($ in thousands) | June 30,
2021 | March 31,
2021 | December 31,
2020 | September 30,
2020 | June 30,
2020 | March 31,
2020 | December 31,
2019 | September 30,
2019 | |
| Revenue | $ | 196,010 | | $ | 179,646 | | $ | 172,300 | | $ | 162,335 | | $ | 149,640 | | $ | 136,874 | | $ | 133,172 | | $ | 125,019 | | |
Cost of revenue(1) | 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 | | |
_________________ | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended (Unaudited) |
| ($ in thousands) | September 30,
2023 | June 30,
2023 | March 31,
2023 | December 31,
2022 | September 30,
2022 | June 30,
2022 | March 31,
2022 | December 31,
2021 |
| Revenue | $ | 257,061 | | $ | 247,529 | | $ | 237,028 | | $ | 228,812 | | $ | 217,696 | | $ | 212,702 | | $ | 207,762 | | $ | 207,420 | |
| Cost of revenue(1) | 51,753 | | 43,167 | | 42,950 | | 40,106 | | 38,907 | | 36,993 | | 36,649 | | 33,854 | |
| Gross profit | 205,308 | | 204,362 | | 194,078 | | 188,706 | | 178,789 | | 175,709 | | 171,113 | | 173,566 | |
| Operating expenses: | | | | | | | | |
| Research and product development(1) | 60,491 | | 61,412 | | 58,570 | | 56,828 | | 54,312 | | 58,829 | | 57,328 | | 50,679 | |
| Marketing and sales(1) | 81,016 | | 75,373 | | 101,672 | | 66,154 | | 74,248 | | 68,743 | | 112,906 | | 90,960 | |
| General and administrative(1) | 36,155 | | 30,909 | | 32,340 | | 37,942 | | 38,507 | | 39,190 | | 35,981 | | 31,608 | |
| Impairment charge | — | | — | | — | | 225,163 | | — | | — | | — | | — | |
| Total operating expenses | 177,662 | | 167,694 | | 192,582 | | 386,087 | | 167,067 | | 166,762 | | 206,215 | | 173,247 | |
| Operating income/(loss) | 27,646 | | 36,668 | | 1,496 | | (197,381) | | 11,722 | | 8,947 | | (35,102) | | 319 | |
| Interest expense | (9,321) | | (8,635) | | (8,094) | | (7,230) | | (5,209) | | (3,319) | | (2,449) | | (2,503) | |
| Other income/(loss), net | 6,327 | | 2,038 | | (840) | | (9,567) | | 6,869 | | 6,217 | | 1,511 | | 2,138 | |
| Income/(loss) before (provision for)/benefit from income taxes | 24,652 | | 30,071 | | (7,438) | | (214,178) | | 13,382 | | 11,845 | | (36,040) | | (46) | |
| (Provision for)/benefit from income taxes | (41,151) | | (26,411) | | 7,940 | | (19,784) | | (3,277) | | 52,651 | | (56,820) | | (16,264) | |
| Net (loss)/income | $ | (16,499) | | $ | 3,660 | | $ | 502 | | $ | (233,962) | | $ | 10,105 | | $ | 64,496 | | $ | (92,860) | | $ | (16,310) | |
| | | | | | | | |
| Net (loss)/income per share, basic | $ | (0.12) | | $ | 0.03 | | $ | 0.00 | | $ | (1.72) | | $ | 0.07 | | $ | 0.46 | | $ | (0.67) | | $ | (0.12) | |
| Net (loss)/income per share, dilutive | $ | (0.12) | | $ | 0.03 | | $ | 0.00 | | $ | (1.72) | | $ | 0.07 | | $ | 0.45 | | $ | (0.67) | | $ | (0.12) | |
| Weighted-average shares used in computing net (loss)/income per share, basic | 135,736,599 | | 135,302,409 | | 134,917,610 | | 136,340,283 | | 137,832,634 | | 140,082,038 | | 139,423,228 | | 138,970,923 | |
| Weighted-average shares used in computing net (loss)/income per share, dilutive | 135,736,599 | | 138,771,613 | | 137,182,268 | | 136,340,283 | | 139,667,719 | | 142,133,303 | | 139,423,228 | | 138,970,923 | |
__________________
(1)Includes stock-based compensation as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended (Unaudited) |
| ($ in thousands) | September 30,
2023 | June 30,
2023 | March 31,
2023 | December 31,
2022 | September 30,
2022 | June 30,
2022 | March 31,
2022 | December 31,
2021 | |
| Cost of revenue | $ | 1,484 | | $ | 1,549 | | $ | 1,052 | | $ | 944 | | $ | 1,000 | | $ | 846 | | $ | 624 | | $ | 450 | | |
| Research and product development | 14,601 | | 15,650 | | 10,687 | | 11,099 | | 9,462 | | 11,508 | | 10,168 | | 9,210 | | |
| Marketing and sales | 3,019 | | 3,045 | | 1,871 | | 2,450 | | 2,252 | | 2,395 | | 1,599 | | 1,472 | | |
| General and administrative | 9,213 | | 9,235 | | 8,516 | | 12,989 | | 11,380 | | 12,111 | | 11,706 | | 12,693 | | |
| Total stock-based compensation | $ | 28,317 | | $ | 29,479 | | $ | 22,126 | | $ | 27,482 | | $ | 24,094 | | $ | 26,860 | | $ | 24,097 | | $ | 23,825 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended (Unaudited) |
($ in thousands) | June 30,
2021 | March 31,
2021 | December 31,
2020 | September 30,
2020 | June 30,
2020 | March 31,
2020 | December 31,
2019 | September 30,
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 $229.3 million of additional stock-based compensation expense associated
with the lapse of vesting conditions upon consummation of the Direct Listing.
The following table sets forth our condensed consolidated statements of operations information as a percentage of total revenue for the three month periods indicated below.
| | | Three Months Ended (Unaudited) | | Three Months Ended (Unaudited) |
| ($ in thousands) | ($ in thousands) | June 30,
2021 | March 31,
2021 | December 31,
2020 | September 30,
2020 | June 30,
2020 | March 31,
2020 | December 31,
2019 | September 30,
2019 | | ($ in thousands) | September 30,
2023 | June 30,
2023 | March 31,
2023 | December 31,
2022 | September 30,
2022 | June 30,
2022 | March 31,
2022 | December 31,
2021 | |
| Revenue | Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | | Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |
Cost of revenue(1) | Cost of revenue(1) | 16.6 | % | 15.3 | % | 15.2 | % | 15.1 | % | 15.9 | % | 17.4 | % | 16.6 | % | 16.6 | % | | Cost of revenue(1) | 20.1 | % | 17.4 | % | 18.1 | % | 17.5 | % | 17.9 | % | 17.4 | % | 17.6 | % | 16.3 | % | |
| Gross profit | Gross profit | 83.4 | % | 84.7 | % | 84.8 | % | 84.9 | % | 84.1 | % | 82.6 | % | 83.4 | % | 83.4 | % | | Gross profit | 79.9 | % | 82.6 | % | 81.9 | % | 82.5 | % | 82.1 | % | 82.6 | % | 82.4 | % | 83.7 | % | |
| Operating expenses: | Operating expenses: | | | Operating expenses: | | |
Research and product development(1) | Research and product development(1) | 25.0 | % | 23.4 | % | 33.3 | % | 23.6 | % | 24.1 | % | 26.4 | % | 23.5 | % | 23.5 | % | | Research and product development(1) | 23.5 | % | 24.8 | % | 24.7 | % | 24.8 | % | 24.9 | % | 27.7 | % | 27.6 | % | 24.4 | % | |
Marketing and sales(1) | Marketing and sales(1) | 36.1 | % | 54.5 | % | 42.7 | % | 36.7 | % | 34.3 | % | 55.2 | % | 43.0 | % | 33.9 | % | | Marketing and sales(1) | 31.5 | % | 30.5 | % | 42.9 | % | 28.9 | % | 34.1 | % | 32.3 | % | 54.3 | % | 43.9 | % | |
General and administrative(1) | General and administrative(1) | 145.3 | % | 10.9 | % | 9.9 | % | 7.4 | % | 7.9 | % | 10.1 | % | 11.8 | % | 9.5 | % | | General and administrative(1) | 14.1 | % | 12.5 | % | 13.6 | % | 16.6 | % | 17.7 | % | 18.4 | % | 17.3 | % | 15.2 | % | |
| Impairment charge | | Impairment charge | — | % | — | % | — | % | 98.4 | % | — | % | — | % | — | % | — | % | |
| Total operating expenses | Total operating expenses | 206.3 | % | 88.8 | % | 85.9 | % | 67.8 | % | 66.2 | % | 91.7 | % | 78.3 | % | 67.0 | % | | Total operating expenses | 69.1 | % | 67.8 | % | 81.2 | % | 168.7 | % | 76.7 | % | 78.4 | % | 99.2 | % | 83.5 | % | |
| Operating income | (122.9) | % | (4.0) | % | (1.1) | % | 17.1 | % | 17.8 | % | (9.0) | % | 5.1 | % | 16.4 | % | | |
| Operating income/(loss) | | Operating income/(loss) | 10.8 | % | 14.8 | % | 0.7 | % | (86.2) | % | 5.4 | % | 4.2 | % | (16.8) | % | 0.2 | % | |
| Interest expense | Interest expense | (1.4) | % | (1.8) | % | (1.2) | % | (1.5) | % | (1.6) | % | (2.3) | % | (0.6) | % | (0.1) | % | | Interest expense | (3.6) | % | (3.5) | % | (3.4) | % | (3.2) | % | (2.4) | % | (1.6) | % | (1.2) | % | (1.2) | % | |
| Other income/(loss), net | Other income/(loss), net | (0.6) | % | 2.0 | % | (2.4) | % | (2.1) | % | (0.9) | % | 0.9 | % | (1.8) | % | 3.9 | % | | Other income/(loss), net | 2.5 | % | 0.8 | % | (0.4) | % | (4.2) | % | 3.2 | % | 2.9 | % | 0.7 | % | 1.0 | % | |
| Income/(loss) before (provision for)/benefit from income taxes | 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 | % | | Income/(loss) before (provision for)/benefit from income taxes | 9.7 | % | 12.1 | % | (3.1) | % | (93.6) | % | 6.2 | % | 5.5 | % | (17.3) | % | — | % | |
(Provision for)/benefit from income taxes | (Provision for)/benefit from income taxes | 5.3 | % | 3.2 | % | 7.1 | % | (2.4) | % | (2.9) | % | 3.0 | % | 7.3 | % | (5.5) | % | | (Provision for)/benefit from income taxes | (16.0) | % | (10.7) | % | 3.3 | % | (8.6) | % | (1.5) | % | 24.8 | % | (27.3) | % | (7.8) | % | |
| Net income/(loss) | (119.7) | % | (0.6) | % | 2.5 | % | 11.0 | % | 12.4 | % | (7.4) | % | 10.0 | % | 14.7 | % | | |
| Net (loss)/income | | Net (loss)/income | (6.3) | % | 1.4 | % | 0.2 | % | (102.2) | % | 4.7 | % | 30.3 | % | (44.6) | % | (7.8) | % | |
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’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 JuneSeptember 30, 2021,2023, we had cash and cash equivalents and investment in marketable securities of $196.7$216.5 million and $17.9$17.7 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 newour operating lease in Chicago, Illinois whichIL. Additionally, during September 2022, the letter of credit for our security deposit related to the New York, NY headquarters was reduced by $2.4 million due to a scheduled step-down per the amount available under our Revolving Credit Facility to $15.4 million; see “—lease agreement. See “Part I. Financial Information, Item 1. Financial Information — Item 1. Financial Statements — (Unaudited), Note 19. Subsequent Events” included elsewhere in this Quarterly Report on Form 10-Q.10. Debt.” 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. On January 1, 2022, a provision of the Tax Cuts and Jobs Act of 2017 went into effect which eliminates the option to deduct research and development costs in the year incurred and instead requires taxpayers to amortize such costs over five years and 15 years for domestic and foreign costs, respectively. While we expect to pay significantly higher cash tax payments during 2023, the adverse cash flow impact will diminish in future years as our capitalized research and development expenditures continue to amortize. In addition, during the three months ended September 30, 2023, we received $8.7 million in federal tax refund claims of which $4.0 million related to a research and development tax credit carryback to 2018 and $4.7 million related to a 2020 tax overpayment. As of September 30, 2023, we had accrued $13.2 million of unrecognized tax benefits related to uncertain tax positions. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. Our principal commitments consist of payments for our Credit Facility, operating leases and purchase commitments related to cloud-computing services. On May 10, 2022, the board of directors authorized a general share repurchase program of the Company’s Class A common stock of up to $200.0 million, with no fixed expiration (the "Stock Repurchase Plan"). During the three months ended September 30, 2023, the Company did not repurchase shares under the Stock Repurchase Plan. During the nine months ended September 30, 2023, the Company repurchased 1.3 million shares and paid cash of $25.3 million, including commissions of $0.03 million, through open market purchases at a weighted-average price per share of $22.04. As of September 30, 2023, approximately $54.5 million remained available for stock repurchase. Our future financing requirements will depend on many factors, including our growth rate, subscription renewal activity, the timing and extent of spending to support development of our platform and products, the expansion of marketing and sales activities and any future investments or acquisitions we may make. Although we currently are not a party to any agreement and do not have any understanding with any third parties with respect to future investments in, or acquisitions of, businesses or technologies, we may enter into these types of arrangements from time to time, which could also require us to seek additional equity or debt
financing. Additional funds may not be available on terms favorable to us or at all, including as a result of disruptions in the credit markets. See ““Part II. Item 1A. Risk Factors.””
The following table summarizes our operating, investing and financing activities for the three and sixnine months ended JuneSeptember 30, 20212023 and 2020.2022. | | | | | | | | | | | |
| Nine Months Ended September 30, |
| ($ in thousands) | 2023 | | 2022 |
| Net cash provided by/(used in): | | | |
| Operating activities | $ | 170,027 | | | $ | 125,117 | |
| Investing activities | $ | (158,022) | | | $ | (5,556) | |
| Financing activities | $ | 12,748 | | | $ | (110,945) | |
| | | | | | | | | | | |
| 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 infor the sixnine months ended JuneSeptember 30, 20212023 was $58.8$170.0 million, which reflected our net loss of $235.7$12.3 million which was increased by certain non-cash items primarily consisting of $260.4such as $79.9 million of stock-based compensation, and $16.2$25.0 million of depreciation and amortization, and $0.5 million of other non-cash operating activities, partially offset by $17.0$1.6 million of deferred income taxes. non-cash lease income.
Cash provided by operating activities included $4.3$47.8 million in deferred revenue, primarily reflective of our growth in unique subscriptions as well as price increases across several of our subscription plans, $44.1 million of accounts payable and accrued liabilities, $30.8 millionprimarily reflective of changes in deferred revenue and $10.1the timing of payments, including product payments, $5.4 million in funds payable to customers, which was primarily related to increased reservations on our hospitality platform, $1.8 million in other operating assets and liabilities, primarily related to increased income tax liabilities partially offset by $10.8increased prepaid referral fees. These increases were partially offset by $11.2 million in prepaid expensesaccounts receivables and other current assets.
Netdue from vendors, primarily related to 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 compensationin-transit, and $11.2 million of depreciation and amortization. Cash provided by operating activities included $15.3$9.5 million in prepaid expenses and other current assets, $16.8primarily related to increased prepaid domain name registration fees partially offset by the timing of payments, including advertising prepayments.
Net cash provided by operating activities for the nine months ended September 30, 2022 was $125.1 million, which reflected our net loss of $18.3 million increased by non-cash items such as $75.1 million of stock-based compensation,
$23.8 million of depreciation and amortization, $2.3 million of non-cash lease expense, and $0.7 million of other non-cash operating activities.
Cash provided by operating activities included $38.0 million in deferred revenue, primarily reflective of our growth in unique subscriptions, $12.9 million in funds payable to customers, primarily related to increased reservations on our hospitality platform, $6.0 million of accounts payable and accrued liabilities, and $36.0primarily related to accrued tax payable. These increases were offset by $11.5 million in deferred revenue, which wasprepaid expenses and other current assets, primarily offset by $4.6related to the amortization of the Super Bowl advertising and decreased other receivables, $3.1 million in accounts receivable and due from vendors.vendors, primarily related to timing of payments received, and $0.8 million other operating assets and liabilities, primarily related to increased cloud software implementation fees.
Net cash (used in)/provided byused in investing activities
Net cash used in investing activities infor the sixnine months ended JuneSeptember 30, 20212023 was $204.3$158.0 million, which reflected $202.5$176.7 million netspent on the Google Domains Asset Acquisition, $13.1 million spent in connection with the purchase of acquired cash, used to pay for the acquisitionproperty and equipment, including $10.1 million of Tock, Inc.capitalized software development costs in support of our product development, and $14.2$7.8 million used to purchase marketable securities, which was partiallysecurities. These were offset by $14.8$39.7 million in proceeds from the sale and maturities of marketable securities. We additionally
Net cash used in investing activities for the nine months ended September 30, 2022 was $5.6 million, which reflected $8.9 million spent $2.4 million in connection with the purchase of property and equipment.
Net cash providedequipment, including $2.9 million of capitalized software development costs in support of our product development, and $19.4 million used to purchase marketable securities. These were offset by investing activities in the six months ended June 30, 2020 was $7.6 million, which reflected $46.5$22.7 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 infor the sixnine months ended JuneSeptember 30, 20202023 was $275.1$12.7 million, which primarily reflected $304.4reflects $99.4 million in proceedscash received from additional term loan borrowings used for the issuance of 4,452,023 shares of Class C common stock, net of issuance costs. These proceeds wereGoogle Domains Asset Acquisition, partially offset by $25.7 million in stock purchases related to equity incentive plans and $6.8$32.6 million in principal term loan payments, on our Term Loan as defined below.$28.3 million in payments for taxes related to net share settlement of equity awards, $25.3 million in payments for repurchase and retirement of Class A common stock, and $0.6 million in payments of debt issuance costs related to additional term loan borrowings used for the Google Domains Asset Acquisition..
Net cash used in financing activities infor the sixnine months ended JuneSeptember 30, 20202022 was $29.6$110.9 million, which primarily reflected $15.0 million for contingent consideration associated with the Acuity Scheduling, Inc. acquisition, $10.8reflects $85.6 million in payments for repurchase and retirement of Class A common stock, purchases$17.3 million in payments for taxes related to net share settlement of equity incentive plansawards, and $4.4$10.2 million in principal term loan payments, on our Term Loan as defined below.partially offset by $2.2 million in proceeds from exercises of stock options.
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 “"2019 Term Loan”Loan") and a $25.0 million revolving credit facility (“(“Revolving Credit Facility”Facility”), which included a $15.0 million letter of credit sub-facility. On December 11, 2020, we amended the credit agreement (as amended, the ““2020 Credit Agreement”Agreement”) to increase the size of the 2019 Term Loan to $550.0 million (as amended, the “2020 Term Loan”) and extend the maturity date for the 2019 Term Loan and the Revolving Credit Facility to December 11, 2025. On June 15, 2023, we amended the 2020 Credit Agreement (as amended, the “Credit Agreement”) to increase the total size of the 2020 Term Loan to $650.0 million (the “Term Loan”) upon the closing of the Google Domains Asset Acquisition and, effective June 30, 2023, replaced LIBOR as the benchmark rate with SOFR.
The original borrowings under the 2019 Term Loan were used to provide for the repurchase, and subsequent retirement, of outstanding capital stock in 2019.stock. The additional borrowings under the 2020 Term Loan were used to provide for a dividend on all outstanding capital stock. The additional borrowings of $100.0 million under the Term Loan were used to partially fund the Google Domains Asset Acquisition, together with cash on hand. See “Part I. Financial Information, Item 1. Financial Statements (Unaudited), Note 4. Acquisitions" for further information.
Borrowings under the 2020 Credit Agreement arewere subject to an interest rate equal to, at our option, LIBOR or the bank’sbank's alternative base rate (the “ABR”"ABR"), in either case, plus an applicable margin.margin prior to June 30, 2023. Effective June 30, 2023, under the Credit Agreement, LIBOR as the benchmark rate was replaced with SOFR. The ABR is the greater of the prime rate, the
federal funds effective rate plus 0.5%the applicable margin or the LIBORSOFR quoted rate plus 1.00%.the applicable margin. 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 LIBORSOFR 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 equalof 0.20% 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)/income 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 JuneSeptember 30, 2021, $536.62023, $583.6 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, incurrencesincurrence of indebtedness and sale leasebacks.
As of JuneSeptember 30, 2021, $7.12023, $7.3 million was outstanding under the Revolving Credit Facility in the form of outstanding letters of credit and $17.9$17.7 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 arewere 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”“Financial Covenant”), subject to customary equity cure rights. The Financial Covenant is subject to a $0.500.50 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 didAs of September 30, 2023, we have not electelected to implement this step-upset-up as a result of the acquisitionany of Tock.our acquisitions. 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 JuneSeptember 30, 2021, the Company was2023, we were 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$9.3 million and $6.1$26.1 million for the three and sixnine months ended JuneSeptember 30, 2021,2023, respectively, and $2.4$5.2 million and $5.4$11.0 million for the three and sixnine months ended JuneSeptember 30, 2020,2022, 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 thanfrom similar key performance indicators and non-GAAP financial measures, respectively, used by other companies.
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2023 | | 2022 | | 2023 | | 2022 |
| Unique subscriptions (in thousands) | Unique subscriptions (in thousands) | 3,937 | | | 3,422 | | | 3,937 | | | 3,422 | | Unique subscriptions (in thousands) | 4,404 | | | 4,179 | | | 4,404 | | | 4,179 | |
| Total bookings (in thousands) | Total bookings (in thousands) | $ | 206,645 | | | $ | 167,425 | | | $ | 405,592 | | | $ | 323,293 | | Total bookings (in thousands) | $ | 267,047 | | | $ | 225,460 | | | $ | 788,973 | | | $ | 673,911 | |
| ARRR (in thousands) | ARRR (in thousands) | $ | 777,940 | | | $ | 605,917 | | | $ | 777,940 | | | $ | 605,917 | | ARRR (in thousands) | $ | 1,013,481 | | | $ | 861,399 | | | $ | 1,013,481 | | | $ | 861,399 | |
| ARPUS | ARPUS | $ | 193 | | | $ | 182 | | | $ | 193 | | | $ | 182 | | ARPUS | $ | 226.05 | | | $ | 206.38 | | | $ | 226.05 | | | $ | 206.38 | |
| Adjusted EBITDA (in thousands) | Adjusted EBITDA (in thousands) | $ | 42,640 | | | $ | 39,505 | | | $ | 53,737 | | | $ | 40,695 | | Adjusted EBITDA (in thousands) | $ | 66,461 | | | $ | 43,720 | | | $ | 170,707 | | | $ | 84,391 | |
| Unlevered free cash flow (in thousands) | Unlevered free cash flow (in thousands) | $ | 10,254 | | | $ | 47,270 | | | $ | 62,036 | | | $ | 100,634 | | Unlevered free cash flow (in thousands) | $ | 54,131 | | | $ | 42,122 | | | $ | 175,992 | | | $ | 124,034 | |
| GMV (in thousands) | GMV (in thousands) | $ | 1,440,442 | | | $ | 1,028,947 | | | $ | 2,666,430 | | | $ | 1,641,537 | | GMV (in thousands) | $ | 1,498,163 | | | $ | 1,411,002 | | | $ | 4,557,697 | | | $ | 4,502,828 | |
Unique subscriptions. Unique subscriptions represent the number of unique sites, standalone scheduling subscriptions, Unfold (social) subscriptions and hospitality subscriptions, as of the end of a period. A unique site represents a single
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’sentity’s online presence. Unique subscriptions do not account for one-time purchases in Unfold or hospitality services or for hospitality services.our Acquired Domain Assets. 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 0.50.2 million, or 15.0%5.4%, as of JuneSeptember 30, 20212023 compared to the same period in 2020. These increases were2022. This increase was primarily a result of continued growth in new subscriptions and the retention of existing subscriptions and the continued acquisition of new 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$41.6 million, or 23.4%18.4%, for the three months ended JuneSeptember 30, 20212023 compared to the same period in 2020 and2022 primarily as a result of the increase in our unique subscriptions as well as the impact of our Acquired Domain Assets. Total bookings increased $82.3$115.1 million, or 25.5%17.1%, for the sixnine months ended JuneSeptember 30, 20212023 compared to the same period in 2020. These increases were2022 primarily as a result of anthe increase in our unique subscriptions and an increase in GMV processed throughprice increases across several of our platform.subscription plans.
Annual run rate revenue (“ARRR”(“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$152.1 million, or 28.4%17.7%, as of JuneSeptember 30, 20212023 compared to the same period in 2020.2022. This increase was primarily a result of an increase in uniquethe retention of existing subscriptions as well as the continued acquisition of new subscriptions and an increase in commerce revenue.price increases across several of our subscription plans.
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. ARPUS does not account for Acquired Domain Assets or the revenue from Acquired Domain Assets. We believe ARPUS is a useful metric in evaluating our ability to sell higher-value plans and add-on subscriptions.
ARPUS increased $11,$19.67, or 6.0%9.5%, as of JuneSeptember 30, 20212023 compared to June 30, 2020. These increases werethe same period in 2022. The increase was primarily a result ofdue to a shift in revenue mix toward commerce and hospitality services.higher value subscription plans as well as price increases across several of our subscription plans.
Adjusted EBITDA. Adjusted EBITDA is a supplemental performance measure that our management uses to assess our operating performance. We calculate adjusted EBITDA as net income/(loss)/income excluding interest expense, other income/(loss)loss/(income), net, provision for/(benefit from) income taxes, depreciation and amortization, stock-based compensation expense and other items that we do not consider indicative of our ongoing operating performance. The following is a reconciliation of adjusted EBITDA to the most comparable GAAP measure, net income/(loss):/income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| ($ in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Net (loss)/income | $ | (16,499) | | | $ | 10,105 | | | $ | (12,337) | | | $ | (18,259) | |
| Interest expense | 9,321 | | | 5,209 | | | 26,050 | | | 10,977 | |
| Provision for income taxes | 41,151 | | | 3,277 | | | 59,622 | | | 7,446 | |
| Depreciation and amortization | 10,498 | | | 7,904 | | | 24,975 | | | 23,773 | |
| Stock-based compensation expense | 28,317 | | | 24,094 | | | 79,922 | | | 75,051 | |
| Other income, net | (6,327) | | | (6,869) | | | (7,525) | | | (14,597) | |
| Adjusted EBITDA | 66,461 | | | 43,720 | | | 170,707 | | | 84,391 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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$22.7 million, or 7.9%52.0%, for the three months ended JuneSeptember 30, 20212023 compared to the same period in 2020. The2022. This increase was primarily a result of increaseddue to the increase in revenue partially offset by additional investmentsincreases in marketing expensesdomain name registration fees, cash-based payroll and payroll related investments.associated benefits, and advertising expenses. Adjusted EBITDA increased $13.0$86.3 million, or 32.0%102.3%, for the sixnine months ended JuneSeptember 30, 20212023, compared to the same period in 2020. The2022. This increase was primarily due to the increase in revenue and a result of increased revenuereduction in advertising expenses, partially offset primarily by investmentsincreases in marketing spend.domain name registration fees and cash-based payroll and associated benefits.
Unlevered free cash flow. Unlevered free cash flow is a supplemental liquidity measure that our management uses to evaluate our core operating business and our ability to meet our current and future financing and investing needs. We define unlevered free cash flow as cash flow from operating activities less cash paid for capital expenditures increased by
cash paid for interest expense net of the associated tax benefit. The following is a reconciliation of unlevered free cash flow to the most comparable GAAP measure, cash flows from operating activities:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| ($ in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Cash flows from operating activities | $ | 53,325 | | | $ | 41,434 | | | $ | 170,027 | | | $ | 125,117 | |
| Cash paid of capital expenditures | (5,974) | | | (3,117) | | | (13,141) | | | (8,852) | |
| Free cash flow | 47,351 | | | 38,317 | | | 156,886 | | | 116,265 | |
| Cash paid for interest, net of the associated tax benefit | 6,780 | | | 3,805 | | | 19,106 | | | 7,769 | |
| Unlevered free cash flow | $ | 54,131 | | | $ | 42,122 | | | $ | 175,992 | | | $ | 124,034 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
| ($ in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| Cash flows from operating activities | $ | 8,692 | | | $ | 46,445 | | | $ | 58,823 | | | $ | 98,914 | |
| Cash paid of capital expenditures | (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 | | | $ | 62,036 | | | $ | 100,634 | |
Unlevered free cash flow decreased $37.0increased $12.0 million, or 78.3%28.5%, for the three months ended JuneSeptember 30, 20212023 compared to the same period in 2020. The decrease2022. This increase was primarily driven primarily by a declinethe increase in net working capitalbookings, which was impactedpartially offset by increases in cash-based payroll and associated benefits and prepaid domain name registration fees, as well as the expensestiming of other payments, including cash paid for the transaction service agreement related to the Direct Listing and an increase in prepayments.Google Domains Asset Acquisition. Unlevered free cash flow decreased $38.6increased $52.0 million, or 38.4%41.9%, for the sixnine months ended JuneSeptember 30, 20212023 compared to the same period in 2020. The decrease2022. This increase was primarily driven by the expenses related to the Direct Listingincrease in bookings partially offset by increases in cash-based payroll and associated benefits and prepaid domain name registration fees, as well as 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 ended June 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 ended June 30, 2020.other payments.
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$87.2 million, or 40.0%6.2%, for the three months ended JuneSeptember 30, 20212023 compared to the same period in 2020 and2022 primarily due to our scheduling product as well as increased $1,024.9transaction volume on our customers' Business plan sites. GMV processed on our platform increased $54.9 million, or 62.4%1.2%, for the sixnine months ended JuneSeptember 30, 20212023 compared to the same period in 2020.2022 primarily due to certain hospitality services as well as increased transaction volume on our customers' Business plan sites.
Contractual Obligations
During the six months ended June 30, 2021, there were no material changes in our contractual obligations. Our principal commitments consist of our obligations under our Credit Agreement and various long-term operating leases for our offices. The following table summarizes our contractual obligations as of December 31, 2020.
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| Payments Due by Period |
| ($ 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 | $ | 27,476 | | | $ | 27,778 | | | $ | 54,812 | | | $ | 55,315 | | | $ | 448,714 | | | $ | 72,648 | | | $ | 686,743 | |
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of June 30, 2021.
Critical Accounting Policies and Estimates
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 controlThe preparation of the promised services is transferredcondensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect 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.
We determine revenue recognition through the following steps:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligationsamounts reported 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 from Commerce 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,condensed consolidated financial statements. Management's 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 factshistorical experience and circumstanceson various other market-specific and relevant assumptions 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
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 expectedmanagement believes to be generated overreasonable under 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 thatcircumstances. Actual results could differ from those estimates.
Our critical accounting policies 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 compensationdisclosed 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 valueour Annual Report 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 the American 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.
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 effectForm 10-K for the year ended December 31, 2022. Our critical accounting policies have not significantly changed during the nine months ended September 30, 2023. See "Part I. Financial Information, Item 1. Financial Statements (Unaudited), Note 2. Summary of Significant Accounting Policies" elsewhere 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 needthis Quarterly Report on Form 10-Q 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.information.
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 an Emerging Growth Company
As a company with less than $1.07$1.235 billion in revenue during our last fiscal year, we qualify as an “emerging“emerging growth company”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“Management’s Discussion and Analysis of Financial Condition and Results of Operations”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”“say-on-pay,” “say-on-frequency” and “say-on-golden parachutes”“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’sofficer’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 Listingeffectiveness of the registration statement on Form S-1 filed with the SEC on May 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“Part II. Item 1A.Risk Factors, — Risks Related to Being a Public Company — our Business and Industry." We are an “emerging“emerging growth company”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 Riskcurrency exchange risk
While we generate the majority of our revenue in U.S. dollars, a portion of our revenue is denominated in Euros. For the three and sixnine months ended JuneSeptember 30, 2021, 72.2%2023, 71.7% and 71.5%71.6% of our revenue was denominated in U.S. dollars, respectively, and 70.2%72.3% and 70.0%71.5% for the same periods in 2020,2022, respectively. For the three and sixnine months ended JuneSeptember 30, 2021, 27.8%2023, 28.3% and 28.5%28.4% of our revenue was denominated in Euros, respectively, and 30.0%27.7% and 29.8%28.5% for the same periods in 2020,2022, respectively. As we expand globally, we will be further exposed to fluctuations in currency exchange rates.
In addition, the assets and liabilities of our wholly-owned Irish subsidiaryinternational subsidiaries are denominated in Euros.the local currencies of the subsidiaries. Accordingly, assets and liabilities of thisthe subsidiary are translated into U.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 Euroforeign currencies relative to the U.S. dollar. Transaction gains/(losses) for the three and sixnine months ended JuneSeptember 30, 20212023 were $(1.3)$4.1 million and $2.2$2.8 million, respectively, and for the three and sixnine months ended JuneSeptember 30, 20202022 were $(1.6)$6.3 million and $(0.9)$13.8 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 Sensitivityrate sensitivity
We had cash equivalents and marketable securities totaling $224.0$154.1 million as of JuneSeptember 30, 2021.2023. 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 arewere subject to an interest rate equal to, at our option, LIBOR or ABR, in either case, plus an applicable margin. Effective June 30, 2023, LIBOR as the benchmark rate was replaced with SOFR. Based on the outstanding balance of the Credit Agreement as of JuneSeptember 30, 2021,2023, for every 100 basis point increase in LIBORSOFR or ABR, we would incur approximately $5.4$5.8 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 Riskrisk
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 twothree 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“disclosure controls and procedures”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, withinin the time periods specified in the SEC’sSEC’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 of JuneSeptember 30, 2021,2023, 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,operating effectively and 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 with U.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 the SEC, pursuant to Rule 424(b)(4) on May 19, 2021, a material weakness over financial reporting was identified as of December 31, 2020 for Tock, Inc. (now Tock
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 dated December 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)13a-15(e) and Rule 15d-15(d) of15d-15(e) under 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, withinin our Company have been detected.
Part II - Other Information
Item 1. Legal Proceedings
From time to time, we may be involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any litigation the outcome of which we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, financial condition and results of operations.
Item 1A. Risk Factors
RISK FACTORS
A description of the risks and uncertainties associated with our business is set forth below. You should consider carefully the risks and uncertainties described below, together with the financial and other information contained in this Quarterly Report on Form 10-Q, including the section titled “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” and our unaudited condensed consolidated financial statements and related notes. If any of the following risks or uncertainties actually occur, our business, financial condition and results of operations could be materially and adversely affected. In that case, the market price of our Class A common stock could decline and you may lose all or a part of your investment. The risks discussed below are not the only risks we face. Additional risks or uncertainties not currently known to us, or that we currently deem immaterial, may also have a material adverse effect on our business, financial condition and results of operations.
Risk Factor Summary
We are providing the following summary of the risk factors contained in this Quarterly Report on Form 10-Q to enhance the readability and accessibility of our risk factor disclosures. We encourage you to carefully review the full risk factors contained in this Quarterly Report on Form 10-Q in their entirety for additional information regarding the material factors that make an investment in our securities speculative or risky. These risks and uncertainties include, but are not limited to, the following:
••Our business, financial condition and results of operations will be harmed if we are unable to attract and retain customers and expand their use of our platform.
••If we fail to improve and enhance the functionality, performance, reliability, design, security and scalability of our solutions in a manner that responds to our customers’customers’ evolving needs, our business, financial condition and results of operations may be adversely affected.
••Our industry is highly competitive and we may not be able to compete successfully against current and future competitors.
••The COVID-19 pandemic the measures attempting to containhas affected how we, our providers, and mitigate the effects of the COVID-19 pandemic (including stay-at-home, business closure and other restrictive orders),consumers operate and the resulting changes in consumer behaviors have disruptedextent to which this will affect our business, future results of operations, and may continue to disrupt our normal operations. financial condition remains uncertain.
••The Squarespace brand is integral to our success. If we fail to protect or promote our brand, our business, financial condition and results of operations may be harmed.
••Our business, financial condition and results of operations would be adversely affected if our marketing and selling activities fail to generate new customers at the levels that we anticipate or fail to generate new customers on a cost-effective basis.
••We depend on highly skilled personnel, and if we are unable to hire, integrate and retain our personnel, we may not be able to address competitive challenges.
••We rely heavily on the reliability, security and performance of our software. If our software contains serious errors or defects, or we have difficulty maintaining the software, we may lose revenue and market acceptance and may incur costs to defend or settle claims with our customers.
••Our business, financial condition and results of operations would be harmed if changes to technologies used in our platform or new versions or upgrades of operating systems and internet browsers adversely impact the process by which customers interface with our platform and users interface with our customers’customers’ sites.
••We are subject to privacy and data protection laws and regulations as well as contractual privacy and data protection obligations. Our failure to comply with these or any future laws, regulations or obligations could subject us to sanctions and damages and could harm our reputation, business, financial condition and results of operations.
••Our business is susceptible to risks associated with international sales and the use of our platform in various countries as well as our ability to localize our platform in such countries.
•The trading price of our Class A common stock may be volatile and could decline significantly and rapidly regardless of our operating performance.
••The multi-class structure of our common stock has the effect of concentrating voting control with those stockholders who hold our Class B common stock, including our Founder and Chief Executive Officer limiting your ability to influence corporate matters.
Risks Related to our Business and Industry
Our business, financial condition and results of operations will be harmed if we are unable to attract and retain customers and expand their use of our platform.
We have experienced growth in recent years, due in large part to sustained subscription growth and retention, including customers who expand their use of our platform over time. We offer two payment options for eachmost of our subscription plans: monthly and annual. Customers’Customers’ subscriptions currently renew automatically at the end of each monthly or annual period, as applicable, but the customer is free to disable automatic renewal or cancel the subscription at any time. As a result, even though the number of unique subscriptions to our platform has grown in recent years, there can be no assurance that we will be able to retain unique subscriptions beyond the existing monthly or annual subscription periods. In addition, any limitation or restriction imposed on our ability to bill our customers on a recurring basis, whether due to new regulations or otherwise, may significantly lower our unique subscription retention rate.
A number of factors could impact our ability to attract and retain customers and expand our customers’customers’ use of our platform, including:
••the quality and design of our solutions compared to other similar solutions;
••our ability to develop new technologies or offer new or enhanced solutions;
••the pricing of our solutions compared to our competitors;
••the reliability and availability of our customer support;
••our ability to provide value-added third-party applications, solutions and services that integrate into our platform;
••any perceived or actual security, reliability, quality or compatibility problems with our solutions, including those related to system outages, unscheduled downtime and the impact of cyber-attacks on customers’customers’ data;
••our ability to expand into new geographic regions; and
••the cost and effectiveness of our marketing campaigns.
We have historically experienced customer turnover as a result of general economic conditions and other risks affecting our customers’customers’ businesses or needs. Many of these customers are in the entrepreneurial stage of their development and there is no guarantee that their businesses will succeed. Other customers may be looking for a shorter-term solution for a specific event. Our costs associated with renewals are substantially lower than costs associated with generating new unique subscriptions. Therefore, a reduction in retention of our unique subscriptions, even if offset by an increase in new unique subscriptions, could adversely impact our business, financial condition and results of operations. Moreover, any volatile or uncertain economic conditions due to the COVID-19 pandemic or otherwise and any resulting decrease in business formation or failures of SMBs could affect our ability to generate new unique subscriptions or retain existing unique subscriptions.
Additionally, our growth rate may decline over time even though the number of unique subscriptions on our platform increases. As our growth rate declines, investors’investors’ perception of our business, financial condition and results of operations may be adversely affected. To the extent our growth rate slows, our business performance will become increasingly dependent on our ability to retain revenue from existing unique subscriptions and increase sales to existing customers.
If we fail to improve and enhance the functionality, performance, reliability, design, security and scalability of our solutions in a manner that responds to our customers’customers’ evolving needs, our business, financial condition and results of operations may be adversely affected.
The markets in which we compete are characterized by constant change and innovation, and we expect them to continue to evolve rapidly. The success of our business will depend, in part, on our ability to adapt and respond effectively to changing market dynamics on a timely basis while continuing to improve and enhance the functionality, performance, reliability, design, security and scalability of our solutions. For example, as commerce transacted over mobile devices continues to grow more rapidly than desktop transactions, continued effective mobile functionality becomes increasingly integral to our long-term development and growth strategy. If we are unable to develop new and upgraded solutions that
satisfy our customers and that keep pace with rapid technological and industry change, our business, financial condition and results of operations could be adversely affected.
The process of developing new technology is complex and uncertain. If we fail to accurately predict customers’customers’ changing needs or emerging technological trends, or we otherwise fail to achieve the benefits expected from our investments in technology, our business, financial condition and results of operations could be harmed. The development of new and upgraded solutions involves a significant amount of time and effort from our research and development team, as it
can take months to update, code and test new and upgraded solutions and integrate them into our existing solutions. Further, our design team spends a significant amount of time and resources in order to incorporate various design elements and other features into any new and upgraded solutions. The introduction of these new and upgraded design and functional features often involves a significant amount of marketing spend. We must also manage our existing solutions as we continue to introduce new solutions. Given this complexity, we occasionally have experienced, and could experience in the future, delays in completing the development and introduction of new and upgraded solutions.
Our industry is highly competitive, and we may not be able to compete successfully against current and future competitors.
The market for providing SaaS-based website design and management software is evolving and highly fragmented and we face competition in various aspects of our business, which we expect to intensify in the future as existing and new competitors introduce new solutions or enhance existing solutions. We also compete with specific providers offering services or products that overlap with parts of our solutions, including online presence solutions, e-commerce solutions, domain registration and website hosting services, email marketing solutions, scheduling solutions and schedulingreservation and restaurant management solutions. Some of our competitors have longer operating histories, larger customer bases, greater brand recognition, more extensive commercial relationships and greater financial and other resources than we do.
New or existing competitors may be able to develop solutions better received by customers or may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, regulations or requirements of our customers and their users. In addition, some larger competitors may be able to leverage a larger installed customer base and distribution network to adopt more aggressive pricing policies and offer more attractive sales terms, which could cause us to lose potential sales or reduce prices to remain competitive.
Competition may also intensify as our competitors enter into business combinations or alliances or raise additional capital, or as established companies in other market segments or geographic regions expand into our market segments or geographic regions. For instance, certain competitors could use strong or dominant positions in one or more markets to gain a competitive advantage by integrating competing platforms or features into solutions they control such as search engines, web browsers, mobile device operating systems or social networks or by making access to our platform more difficult. We also expect new entrants to offer competitive solutions. If we cannot compete successfully against current and future competitors, our business, financial condition and results of operations could be negatively impacted.
The COVID-19 pandemic the measures attempting to containhas affected how we, our providers, and mitigate the effects of the COVID-19 pandemic (including stay-at-home, business closure and other restrictive orders),consumers operate and the resulting changes in consumer behaviors have disruptedextent to which this will affect our business, future results of operations, and may continue to disrupt our normal operations. financial condition remains uncertain.
In response to the COVID-19 pandemic, we have takentook a number of actions that have impacted and may continue to impact our business, financial condition and results of operations, including transitioning employees across all our offices (including our corporate headquarters) to remote or hybrid work-from-home arrangements and recommending travel and related restrictions.arrangements. While we believe these actions were reasonable and necessary as a result of the COVID-19 pandemic, they were disruptive to our business. Given the continued spread of COVID-19,At present we support remote, hybrid and fully office based arrangements for our employee base. We may have to take additional actions in the future that could further disrupt our business. IfWhile we have a distributed workforce and our employees are requiredaccustomed to maintain work-from-home arrangements for a significant period of time as a result of the ongoing COVID-19 pandemicworking remotely or other future adverse public health developments, itworking with remote employees, our workforce has not historically been fully remote. Doing less business in-person may impact our ability to preserve our corporate culture. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives. In addition, the COVID-19 pandemic could disrupt or delay the ability of our employees to work because they become sick or are required to care for those who become sick or for dependents for whom external care is not available. The COVID-19 pandemic could also cause delays or disruptions in services provided by key service providers, increase our and service providers’ vulnerability to security breaches, distributed denial of service (“DDoS”) attacks or other hacking or phishing attacks or cause other unpredictable effects. Our management team has spent, and will likelymay continue to spend, significant time, attention and resources monitoring the COVID-19 pandemic and associated global economic uncertaintyworkplace-related changes and seeking to manage itsthe effects on our business and workforce.
If economic conditions deteriorate, uncertainty fromIt is not possible for us to predict the pandemic may cause prospective or existing customers to cancel their subscriptions for our solutionsduration and users may not have the financial means to make purchases from our customers or may delay or reduce discretionary purchases, negatively impacting our e-commerce customers and our associated results of operations. Our entrepreneurial and small business customers may be more susceptible to general economic conditions than larger businesses with greater liquidity and access to capital.
The degreeextent to which COVID-19 and any associated volatile or uncertain economic conditionsthis will affect our business, financial condition andfuture results of operations, will depend on future developments that are highly uncertain and cannot currently be predicted. The risks described herein and throughoutfinancial condition at this “Risk Factors” section could be further exacerbated by a prolonged existence of the COVID-19 pandemic or other future adverse public health developments.time.
Our business, financial condition and results of operations could be harmed if we fail to manage our growth effectively.
The growth that we have experienced places significant demands on our operational infrastructure. The scalability and flexibility of our platform depends on the functionality of our technology and network infrastructure and our ability to handle increased traffic and demand for bandwidth. The growth in the number of unique subscriptions on our platform and the number of orders processed through our platform has increased the amount of data and requests processed. Any problems with the transmission of increased data and requests could result in harm to our brand or reputation. Moreover, as our business grows, we will need to devote additional resources to improving our operational infrastructure and continuing to enhance our scalability in order to maintain the performance of our platform.
Our growth has also placed, and will likely continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We intend to further expand the business, including into new geographic regions, with no assurance that our revenue will continue to grow. We are likely to recognize the costs associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower or may develop more slowly than we expect. Unless our growth results in an increase in our revenues that is proportionate to, or greater than, the increase in our costs associated with this growth, our profitability may be adversely affected. As we grow, we will be required to continue to improve our operational and financial controls, management information systems and reporting procedures and we may not be able to do so effectively.
The Squarespace brand is integral to our success. If we fail to protect or promote our brand, our business, financial condition and results of operations may be harmed.
We believe that protecting, maintaining and enhancing the Squarespace brand is integral to our success, particularly as we seek to attract new customers. Protecting, maintaining and enhancing our brand will depend largely on our ability to continue to provide design-focused and differentiated solutions, which we may not do successfully. The value of our brand may decline if we are unable to maintain the image of the Squarespace brand as design-focused. Successfully maintaining our brand will depend largely on the effectiveness of our marketing efforts, our ability to provide a reliable and useful platform to meet the needs of our customers, our ability to maintain our customers’customers’ trust and our ability to continue to develop and successfully differentiate our solutions. Errors, defects, disruptions or other performance problems with our solutions, including with third-party services accessed through our platform, may harm our reputation and brand. Unfavorable media coverage, negative publicity or negative public perception about us or our marketing efforts, our industry, the quality and reliability of our platform or our privacy and security practices may also harm our reputation and our brand. If events occur that damage our reputation and brand, our ability to expand our subscription base may be impaired, and our business, financial condition and results of operations may be harmed.
We also believe that the importance of brand recognition will increase as competition in our market increases and the promotion of our brand may require substantial expenditures. We have invested, and expect tomay continue to invest, substantial resources to increase our brand awareness, both generally and in specific geographies and to specific customer groups. There can be no assurance that our brand development strategies and investment of resources will enhance recognition of the Squarespace brand or lead to an increased customer base. Furthermore, our international branding efforts may prove unsuccessful due to language barriers and cultural differences. If our efforts to protect and promote our brand are not successful, our business, financial condition and results of operations may be adversely affected. In addition, even if brand recognition and loyalty increases, revenue may not increase at a level commensurate with our marketing spend.
Our business, financial condition and results of operations would be adversely affected if our marketing and selling activities fail to generate new customers at the levels that we anticipate or fail to generate new customers on a cost-effective basis.
We use a variety of marketing channels to promote our brand, including online keyword search, sponsorships and celebrity endorsements, television, podcasts, print and online advertising, email and social media marketing. If we lose access to one or more of these channels because the costs of advertising become prohibitively expensive or for other reasons, we may not be able to promote our brand effectively, which could limit our ability to grow our business. In addition, in order to maintain our current revenues and grow our business, we need to continuously optimize our marketing campaigns aimed at acquiring new customers. However, we may fail to accurately predict customer interest and, as a result, fail to generate the expected return on marketing spend. An unexpected increase in the marginal acquisition cost of new customers may have an adverse effect on our ability to grow our subscription base. We have and may in the future invest a significant portion of our marketing expenses in more traditional advertising and promotion of our brand, including through printout-of-home campaigns and television commercials, the effectiveness of which is more difficult to track than online marketing. If these marketing activities fail to generate traffic to our website, attract potential customers and lead to new and renewed subscriptions at the levels we anticipate, our business, financial condition and results of operations would be adversely affected.
If demand for our solutions does not meet expectations, our ability to generate revenue could be adversely affected.
Although we expect continued demand from individuals and businesses for our solutions, it is possible the rate of growth may not meet our expectations, or the market may not grow, including as a result of a negative economic impact from the COVID-19 pandemic or future adverse public health developments.grow. Our expectations for future revenue growth are based in part on assumptions reflecting our industry knowledge and experience serving individuals and businesses, as well as our assumptions regarding demographic shifts, growth in the availability and capacity of internet infrastructure internationally and the general economic climate. If any of these assumptions proves to be inaccurate, including as a result of the extent of current global economic uncertainty, our growth could be significantly lower than expected.
Our ability to compete successfully depends on our ability to offer an integrated and comprehensive platform enabling a diverse base of customers to start, grow and run their businesses or promote their brand. The success of our solutions is predicated on the assumption that an online presence is, and will continue to be, an important factor in our customers’customers’ abilities to establish, expand and manage their online presencebrand and business quickly, easily and affordably. If we are incorrect in this assumption, for example due to the introduction of a new technology or industry standard superseding the importance of an online presence or rendering our existing or future solutions obsolete, then our ability to retain existing customers and attract new customers could be adversely affected, which could harm our business, financial condition and results of operations.
If we fail to maintain a consistently high level of customer support, our brand, business, financial condition and results of operations may be harmed.
We believe our focus on customer support is critical to acquiring new customers, retaining existing customers and growing our business. As a result, we have invested heavily in the quality and training of our Customer Operations team along with the tools they use to provide this service. If we are unable to maintain a consistently high level of customer
support, we may lose existing customers. In addition, our ability to attract new customers and increase unique subscriptions depends, in part, on the support we provide to customers as well as positive recommendations from our existing customers. Any failure to maintain a consistently high level of customer support, or a market perception that we do not maintain high-quality customer support, could adversely affect our brand, business, financial condition and results of operations.
Our pricing decisions may adversely affect our ability to attract and retain customers.
We have from time to time changed our overall pricing model or the various price points of our subscription plans and add-on services and expect to do so in the future. However, no assurance can be given that any new pricing model or price points will be optimal and not result in loss of customers or profits. In addition, as competitors introduce new solutions, we may be unable to attract new customers at the price or based on the pricing models we currently use and we may be required to reduce prices. Individuals and small businesses, which comprise the majority of customers on our platform, could be sensitive to price increases or swayed by more attractive prices offered by competitors. We also must determine the appropriate price to enable us to compete effectively internationally. Any of these developments could negatively impact our business, financial condition and results of operations.
We may acquire or invest in companies, which may divert our management’smanagement’s attention and result in additional dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions.
From time to time, we evaluate potential strategic acquisition or investment opportunities and we have completed various strategic acquisitions in recent periods, including the acquisition of Tock.periods. Any future transactions that we enter into could be material to our business, financial condition and results of operations. The process of acquiring and integrating another company or technology could create unforeseen operating difficulties and expenditures. Acquisitions and investments involve a number of risks, such as:
••diversion of management time and focus from operating our business;
••use of resources that are needed in other areas of our business;
••retention and integration of employees from an acquired company, including potential risks or challenges to our corporate culture;
••implementation or remediation of controls, procedures and policies of an acquired company;
••difficulty integrating the accounting systems and operations of an acquired company;
••coordination of product, engineering and selling and marketing functions, including difficulties and additional expenses associated with incorporating the acquired company’scompany’s solutions and infrastructure with our existing solutions and infrastructure and difficulties converting the customers of the acquired company onto our platform;
••unforeseen costs or liabilities;
••adverse effects to our existing business relationships as a result of the acquisition or investment;
••the possibility of adverse tax consequences;
••litigation or other claims arising in connection with the acquired company or investment; and
••in the case of foreign acquisitions, the need to integrate operations and workforces across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries.
In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. If our acquisitions including the acquisition of Tock, do not yield expected returns, we may be required to take charges toon our operating results based on this impairment assessment process, which could adversely affect our business, financial condition and results of operations.
Future acquisitions and investments may also result in dilutive issuances of equity securities, which could adversely affect the trading price of our Class A common stock, result in issuances of securities with superior rights and preferences to our Class A common stock or result in the incurrence of debt with restrictive covenants that limit our operating flexibility.
We may not be able to identify future acquisition or investment opportunities that meet our strategic objectives, or to the extent such opportunities are identified, we may not be able to negotiate terms with respect to the acquisition or investment that are acceptable to us. IfAcquisitions we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our strategic objectives, and any acquisitions we complete could be viewed negatively by investors. To pay for any such acquisition, we may have to use cash or incur debt, both of which may affect our financial condition or the trading price of our Class A common stock. At this time we have made no commitments or agreements with respect to any such material transactions.
We depend on highly skilled personnel, and if we are unable to hire, integrate and retain our personnel, we may not be able to address competitive challenges.
Our future success will depend upon our continued ability to attract, hire, integrate and retain highly skilled personnel, including senior management, engineers, designers, product managers, finance, and legal personnel and customer support. Competition for highly skilled personnel is intense. We compete with many other companies for engineers, designers and product managers with meaningful experience in designing, developing and managing software, as well as for skilled marketing, operations and customer support professionals, and we may not be successful in attracting and retaining the professionals we need. We may need to invest significant amounts of cash and equity to attract and retain new and highly skilled employees, and may never realize returns on these investments. Extended stay-at-home, business closure and other restrictive orders may impact our ability to identify, hire and train new personnel. In addition, we are limited in our ability to recruit global talent for our U.S. offices by U.S. immigration laws, including those related to H1-B visas. If we are not able to effectively hire, train and retain employees, our ability to achieve our strategic objectives will be adversely impacted and our business, financial condition and results of operations will be harmed.
In addition to hiring and integrating new employees, we must continue to focus on retaining our key employees who foster and promote our innovative corporate culture. Our future performance depends on the continued services and contributions of our Founder and Chief Executive Officer, Mr. Casalena, who is critical to the development of our business and growth strategy, in addition to other key employees to execute on our business plan and to identify and pursue new opportunities and solutions. The failure to properly develop or manage succession plans or develop leadership talent or the loss of services of key employees could significantly delay or prevent the achievement of our strategic objectives. From time to time, there may be changes in our senior management team resulting from the hiring or departure of executives, which could disrupt our business. We do not have employmentfixed term agreements with our executive officers or other key personnel that require them to continue to work for us for any specifiedbeyond a standard notice period; therefore, they could terminate their employment with us at any time. The loss of one or more of our key employees (including any limitation on the performance of their duties or short term or long term absences as a result of illness, such as COVID-19)illness) could adversely affect our business, financial condition and results of operations.
We primarily rely on a single supplier to process payments from our customers and we integrate with a limited number of suppliers to process transactions from users.
The success of our platform depends, in part, on our ability to integrate and offer third-party services to our customers. In particular, we use Stripe, Inc. (“Stripe”(“Stripe”) to process our transactions with our customers and we offer payment processing integrations for our customers to charge their users through Stripe, PayPal Holdings, Inc. (“PayPal”(“PayPal”) and Square,Block, Inc. (“Square”(“Block”). While we offer our customers access to three payment processing integrations and our native payment solutions through which to charge their users, disruptions or problems with the relevant services provided by any of these companies could have an adverse effect on our reputation, business, financial condition and results of operations. If Stripe, PayPal or SquareBlock were to terminate, or materially alter, its relationship with us or become unable to continue processing payments on our behalf, we could experience an impact to our financial results or incur substantial delays and expense in finding and integrating an alternative payment service provider to process payments from our customers and their users, and the quality and reliability of any such alternative payment service provider may not be comparable.
If we cannot maintain the compatibility of our platform and solutions with third-party applications or content or if the third-party applications that we offer fail to keep pace with competitors’competitors’ offerings, demand for our platform and solutions could decline.
In addition to offering our customers access to Stripe and other payment solutions, we offer our customers access to third-party applications for order fulfillment, accounting and other business services as well as third-party content. Third-party application providers may change the features of their applications and third-party content providers and application providers may change how others can access the application or content or alter the terms governing use of their applications or content in an adverse manner. Such changes could limit, restrict or terminate our access to their applications and content, which could negatively impact our solutions and harm our business, financial condition and results of operations. In addition, competitors may offer better functionality than the third-party applications integrated into our platform. If we fail to integrate new third-party applications and content that our customers need for their online presence or to develop them directly, we may not be able to offer the functionality that our customers expect, which would negatively impact our solutions and, as a result, harm our business, financial condition and results of operations.
We rely heavily on the reliability, security and performance of our software. If our software contains serious errors or defects, or we have difficulty maintaining the software, we may lose revenue and market acceptance and may incur costs to defend or settle claims with our customers.
The reliability and continuous availability of our platform is critical to our success. However, software such as ours often contains errors, defects, security vulnerabilities or software bugs that are difficult to detect and correct, particularly when first introduced or when new versions or enhancements are released. Any third-party software we incorporate into our platform may have similar deficiencies. Despite internal testing, our platform may contain serious errors or defects, security vulnerabilities or software bugs that we may be unable to successfully correct in a timely manner or at all, and any ensuing disruptions could result in lost revenue, significant expenditures of capital, a delay or loss in market acceptance and damage
to our reputation and brand, any of which could have an adverse effect on our business, financial condition and results of operations. Furthermore, our platform is cloud-based, which allows us to deploy new versions and enhancements to all of our customers simultaneously. To the extent we deploy new versions or enhancements that contain errors, defects, security vulnerabilities or software bugs to all of our customers simultaneously, the consequences would be more severe than if such versions or enhancements were only deployed to a smaller number of customers. In addition, to the extent that we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business, financial condition and results of operations, as well as our reputation, may be adversely affected.
Since customers may use our solutions for processes that are critical to their businesses, errors, defects, security vulnerabilities, service interruptions or software bugs in our platform could result in losses to our customers. Customers may seek significant compensation from us for any losses they suffer or they may cease conducting business with us altogether. Further, a customer could share information about bad experiences on social media, which could result in damage to our reputation. There can be no assurance that provisions typically included in agreements with our customers that attempt to limit exposure to claims would be enforceable or adequate or would otherwise protect us from liabilities or damages with respect to any particular claim. Even if not successful, a claim brought against us by any of our customers would likely be time-consuming, divert management’smanagement’s attention and be costly to defend and could seriously damage our reputation and brand, making it harder to sell our solutions.
We rely on search engines, social networking sites and online streaming services to attract a meaningful portion of our customers, and if those search engines, social networking sites and online streaming services change their listings or policies regarding advertising, or increase their pricing or suffer problems, it may limit our ability to attract new customers.
Many customers locate our platform through internet search engines, such as Google, and advertisements on social networking sites and online streaming services, such as Facebook and YouTube.YouTube as an alternative to typing our website address directly into a web browser navigation bar. If we are listed less prominently or fail to appear in search results for any reason, visits to our website could decline significantly, and we may not be able to replace this traffic. Search engines revise their algorithms from time to time in an attempt to optimize their search results. If the search engines on which we rely for algorithmic listings modify their algorithms, we may appear less prominently or not at all in search results, which could result in reduced traffic to our website that we may not be able to replace. Additionally, if the costs of search engine marketing services, such as Google AdWords, increase, we may incur additional marketing expenses, we may be required to allocate a larger portion of our marketing spend to this channel or we may be forced to attempt to replace it with another channel (which may not be available at reasonable prices, if at all), and our business, financial condition and results of operations could be adversely affected.
Furthermore, competitors may in the future bid on our brand names and other search terms that we use to drive traffic to our website. Such actions could increase our marketing costs and result in decreased traffic to our website. In addition, search engines, social networking sites and video streaming services may change their advertising policies from time to time. If any change to these policies delays or prevents us from advertising through these channels, it could result in reduced traffic to our website and sales of our solutions. Additionally, new search engines, social networking sites, video streaming services and other popular digital engagement platforms may develop in specific jurisdictions or more broadly
that reduce traffic on existing search engines, social networking sites and video streaming services. Moreover, changes in customer behavior and practices, like the use of voice recognition technology such as Alexa, Google Assistant, Cortana or Siri may drive traffic away froman alternative to using traditional search engines, may potentially resultingresult in reduced traffic to our website. If we are not able to achieve awareness through advertising or otherwise, we may not achieve significant traffic to our website.
Our business, financial condition and results of operations would be harmed if changes to technologies used in our platform or new versions or upgrades of operating systems and internet browsers adversely impact the process by which customers interface with our platform and users interface with our customers’customers’ sites.
We believe that our integrated web and mobile platform has helped us to grow our customer base. In addition to offering customers mobile-optimized websites created on our platform, we offer mobile apps that enable customers to monitor analytics, fulfill orders and create, edit and manage content from their mobile devices, among other things. In the future, mobile and desktop operating system providers, such as Microsoft, Google, Apple or any other provider of internet browsers, could introduce new features that would make it difficult for customers to use our platform, change existing browser specifications such that they would be incompatible with our platform, prevent users from accessing customers’customers’ sites or limit or preclude our marketing efforts. In addition, we are subject to the standard policies and terms of service of these providers, which may change in the future. We may incur additional costs in order to adapt our platform to other operating systems and may face technical challenges adapting our solutions to different versions of already-supported operating systems, such as Android variants offered by different mobile phone manufacturers, and we may face technical challenges adapting to new hardware and software on the Android and iOS platforms. Any changes to technologies used in our platform, to existing features that we rely on or to operating systems or internet browsers that make it difficult for customers to access our platform or visitors to access our customers’customers’ sites, may make it more difficult for us to maintain or increase our revenue and could adversely impact our business, financial condition and results of operations. Moreover, as
customers increasingly expect to be able to purchase and use our solutions on their mobile device or via our mobile apps, our future prospects could be harmed or we could face increased costs to build out and maintain this functionality. The use of our apps is also subject to applicable terms of use of third-party app stores. If we are unable to maintain availability on these third-party app stores or update our applications on these stores, our business, financial condition and results of operations may be harmed.
We use a limited number of cloud service providers, infrastructure providers and data centers to deliver our solutions. Any disruption of service by these providers or at these facilities could harm our business, financial condition and results of operations.
We currently rely on a limited number of cloud service providers and third-party data center facilities. While we engineer and architect the systems upon which our platform runs, and own the hardware installed at the data centers on which we rely, we do not control the operation of these facilities. We also obtain cloud storage and computing from Amazon and Google. We have experienced, and may in the future experience, failures at the third-party data centers where our hardware is deployed. Data centers are vulnerable to damage or interruption from human error, cyber-crimes, computer viruses and other intentional bad acts, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. Changes in law or regulations applicable to data centers in various jurisdictions could also cause a disruption in service. Similarly, if we are unable to utilize cloud services from Amazon andor Google, we could experience delays or disruptions. The occurrence of any of these events or other unanticipated problems with these providers or at these facilities could result in loss of data (including personal information), lengthy interruptions in the availability of our solutions and harm to our reputation and brand.
While our third-party data center and cloud provider agreements may include automatic renewal provisions, these service providers have no obligation to renew the agreements on commercially reasonable terms or at all. In addition, a timely notice of intent not to renew under one or more of these agreements may not provide us with adequate time to transfer operations and may cause disruptions to our platform. Similarly, service providers of other aspects of our critical infrastructure, such as private network connectivity, content delivery, DDoS mitigation, domain registration and domain name servers, among others, are under no obligation to continue to provide these services after the expiration of the respective service agreements, nor are they obligated to renew the terms of those agreements. If we were required to move our equipment to a new facility, move cloud platforms or migrate to a new critical infrastructure vendor without adequate time to plan and prepare for such a migration, we would face significant challenges due to the technical complexity, risk and high costs of the relocation or migration. If we are unable to renew these agreements on commercially reasonable terms, or if the service providers close such facilities or cease providing such services, we may be required to transfer to new service providers and may incur costs and possible service interruption in connection with doing so.
Our business depends on our customers’customers’ continued and unimpeded access to the internet and the development and maintenance of the internet infrastructure. Internet service providers may be able to block, degrade or charge for access to certain of our solutions, which could lead to additional expenses and the loss of customers.
Our success depends upon the general public’spublic’s ability to access the internet and continued willingness to use the internet as a means to pay for purchases, communicate, access social media and research and conduct commercial transactions, including through mobile devices. If consumers or sellers become unable, unwilling or less willing to use the internet for commerce for any reason, including lack of access to high-speed communications equipment, internet outages
or delays, disruptions or other damage to sellers’sellers’ and consumers’consumers’ computers, increases in the cost of accessing the internet and security and privacy risks or the perception of such risks, our business, financial condition and results of operations could be adversely affected.
Currently, internet access is provided by companies that have significant market power in the broadband and internet access marketplace, including incumbent telephone companies, cable companies, mobile communications companies and government-owned service providers. Laws or regulations that adversely affect the growth, popularity or use of the internet, including changes to laws or regulations impacting internet neutrality, could decrease the demand for our solutions, increase our operating costs, require us to alter the manner in which we conduct our business or otherwise adversely affect our business, financial condition and results of operations. We could experience discriminatory or anti-competitive practices that could impede our growth, cause us to incur additional expense or otherwise negatively affect our business, financial condition and results of operations. For example, paid prioritization could enable internet service providers to impose higher fees. Public opinion towards internet infrastructure, mobile connected devices and other similar technological advancements is rapidly evolving and such industries have faced criticism in the past. We cannot be certain that the public will continue to support existing or new technologies on which we, our service providers, our customers and their users rely or may come to rely. If our industry loses public interest and support, it could have a material adverse effect on our business, financial condition and results of operations.
We may be unable to obtain, maintain and protect our intellectual property rights and proprietary information or prevent third partiesthird-parties from making unauthorized use of our technology.
Intellectual property rights are important to our business. We rely on a combination of trade secret, copyright, patent and trademark laws as well as contractual provisions, such as confidentiality clauses, to protect our proprietary technology,
know-how, brand and other intellectual property, all of which offer only limited protection. While it is our policy to protect and defend our intellectual property, the steps we take may be inadequate to prevent infringement, misappropriation, dilution or other potential violations of our intellectual property rights or to provide us with any competitive advantage. Further, the laws of foreign countries may not provide as much protection to intellectual property as exists in the United States. For example, some license provisions protecting against unauthorized use, copying, transfer and disclosure of our solutions may be unenforceable or otherwise limited under the laws of certain jurisdictions and foreign countries. Moreover, policing unauthorized use of our intellectual property is difficult, expensive and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. To the extent we expand our international activities, our exposure to unauthorized copying and use of our intellectual property and proprietary information may increase. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite the precautions taken by us, it may be possible for unauthorized third partiesthird-parties to copy or reverse engineer our solutions and use information that we regard as proprietary to create solutions that compete with those offered by us.
We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to, or ownership of, our proprietary information and technology or providing adequate remedies for unauthorized use or disclosure of such information or technology. Further, these agreements do not prevent competitors from independently developing technologies that are substantially equivalent or superior to our solutions. Additionally, from time to time we may be subject to opposition or similar proceedings with respect to applications for registrations of our intellectual property, including but not limited to trademark applications. While we aim to acquire adequate protection of our brand through trademark registrations in key markets, occasionally third partiesthird-parties may have already registered or otherwise acquired rights to identical or similar marks for solutions that also address the software market. Any of the pending or future trademark applications and any future patent applications, whether or not challenged, may not be issued with the scope of the claims we seek, if at all. There can be no guarantee that additional trademarks will issue from pending or future applications, that patents will issue from future applications, if any, or that any issued patents or trademarks will not be challenged, invalidated, circumvented or declared invalid or unenforceable, or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage. We rely on our brand and trademarks to identify our solutions to our customers and to differentiate our solutions from those of our competitors. If we are unable to adequately protect our trademarks, third partiesthird-parties may use brand names or trademarks similar to ours in a manner that may cause confusion or dilute our brand names or trademarks, which could decrease the value of our brand.
From time to time, we may discover that third partiesthird-parties are infringing, misappropriating or otherwise violating our intellectual property rights. However, policing unauthorized use of our intellectual property and misappropriation of our technology is difficult and we may therefore not always be aware of such unauthorized use or misappropriation. In addition, litigation brought to protect and enforce our intellectual property rights can be costly, time-consuming andor distracting to management and could result in the impairment or loss of portions ofrights or privileges associated with our intellectual property. As a result, we may be aware of infringement by competitors but may choose not to bring litigation to enforce our intellectual property rights due to the cost, time andor distraction of bringing such litigation. Furthermore, even if we decide to bring litigation, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits challenging or opposing
our right to use and otherwise exploit particular intellectual property, services and technology or the enforceability of our intellectual property rights. As a result, despite efforts by us to protect our intellectual property rights, unauthorized third partiesthird-parties may attempt to use, copy or otherwise obtain and market or distribute our intellectual property or technology or otherwise develop solutions with the same or similar functionality as our solutions. If competitors infringe, misappropriate or otherwise violate our intellectual property rights and we are not adequately protected or elect not to litigate, or if competitors are able to develop solutions with the same or similar functionality without infringing our intellectual property, our competitive position, business, financial condition and results of operations could be harmed.
Claims by third partiesthird-parties of intellectual property infringement, regardless of merit, could result in litigation and materially adversely affect our business, financial condition and results of operations.
The software industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents and other intellectual property rights. Third partiesThird-parties have asserted, and may in the future assert, that our platform, solutions, technology, methods or practices infringe, misappropriate or otherwise violate their intellectual property or other proprietary rights. Such claims may be made by competitors seeking to obtain a competitive advantage or by other parties. Our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we have.
Additionally, in recent years, non-practicing entities have begun purchasing intellectual property assets for the purpose of makingmay make claims of infringement and attemptingattempt to extract settlements from companies like us, and such entities may notare unlikely to be deterred by a patent portfolio of any size because their sole or primary business is the assertion of patent claims. The risk of claims may increase as the number of solutions we offer and the number of competitors increases and overlaps occur. In addition, to the extent we gain greater visibility and market exposure, we face a higher risk of being the subject of intellectual property infringement claims. If it appears necessary or
desirable, we may seek to license intellectual property that our solutions are alleged to infringe. If required licenses cannot be obtained, litigation could result.
Regardless of merit, litigation is inherently uncertain and defending intellectual property claims is costly, can impose a significant burden on management and employees, can disrupt the conduct of our business and can have an adverse effect on our brand, business, financial condition and results of operations. The terms of any settlement or any adverse judgment may require us to pay substantial damages, develop non-infringing technology, enter into royalty-bearing licensing agreements, stop selling or marketing some or all of our solutions, indemnify our customers or partners, refund fees or re-brand our solutions, any of which could be costly and could materially and adversely affect our business, financial condition and results of operations.
Our platform contains open-source software, which could negatively affect our ability to sell our solutions, pose particular risks to our proprietary software and subject us to possible litigation.
We use open-source software that is subject to one or more open-source licenses in connection with our software development and we may incorporate additional open-source software into our software, or otherwise link our software to open-source software. Open-source software is typically freely accessible, usable and modifiable, subject to compliance with the applicable licenses. Certain open-source software licenses require an entity who distributes or otherwise makes available the open-source software in connection with the entity’sentity’s software to publicly disclose publicly part or all of the source code to the entity’sentity’s software or to make any derivative works of the open-source code or even the entity’sentity’s software available to others on potentially unfavorable terms or at no cost.
However, the terms of many open-source licenses have not been interpreted by United States or foreign courts and there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses. As a result, the potential impact of these terms on our business is uncertain and may result in unanticipated obligations or restrictions relating to the use of our platform. In that event, we could be required to seek licenses from third partiesthird-parties in order to continue offering our solutions, to re-develop our solutions, to discontinue sales of our solutions or to release our proprietary source code under the terms of an open-source license, any of which could harm our business, financial condition and results of operations. From time to time, companies that use open-source software have faced claims challenging the use of open-source software and/or compliance with open-source license terms, and we may be subject to such claims in the future.
While we monitor our use of open-source software and try to ensure that none is used in a manner that would require disclosure of proprietary source code that would preclude us from charging fees for the use of our software or that would otherwise breach the terms of an open-source agreement, we cannot guarantee that our monitoring efforts will be fully successful. While it is our view that the majority of our solutions are not considered distributed software since no installation of the applicable software is necessary, this position could be challenged. In addition, parts of our platform, such as our mobile applications, for example, may be considered to be distributed. Finally, certain open-source licenses require disclosure of proprietary code under certain circumstances, even in the absence of distribution. In those instances, if a specific open-source license requires it, we might be obligated to disclose part of our proprietary code or otherwise be subject to undesirable open-source license terms. Any termination of an open-source license, requirement to disclose proprietary source code or distribute proprietary software on open-source license terms or pay damages for breach of
contract could be harmful to our business, financial condition and results of operations, and could help our competitors develop solutions that are similar to or better than ours.
In addition to risks related to license requirements, usage of open-source software can lead to greater risks than the use of third-party commercial software, as open-source licensors generally do not provide warranties, controls on the origin or development of the software or remedies against the licensors. Further, given the nature of open-source software, it may be more likely that third partiesthird-parties might assert copyright and other intellectual property infringement claims against us based on our use of open-source software. Finally, use of open-source software may introduce vulnerabilities into our solutions. Disclosing the source code of our proprietary software could also make it easier for cyber attackers and other third-parties to discover or exploit vulnerabilities in or to defeat the protections of our solutions, which could result in our solutions failing to provide our customers with the security they expect. Likewise, some open source projects have known security or other vulnerabilities or architecture instabilities, or are otherwise subject to security attacks due to their wide availability, or are provided on an “as-is” basis. Many of the risks associated with usage of open-source software cannot be eliminated and could adversely affect our business, financial condition and results of operations.
We are exposed to risks, including security and regulatory risks, associated with credit card and debit card payment processing.
We accept payments through credit and debit cards and are therefore subject to a number of risks related to credit and debit card payments, including:
••payment of fees, which may increase over time and may require us to either increase the prices we charge for our solutions or experience an increase in operating expenses;
•if our billing systems fail to work properly and, as a result, we do not automatically charge customers’customers’ credit cards on a timely basis or at all, we could lose revenue;
••if we are unable to maintain our chargeback rate at acceptable levels, our credit card fees for chargeback transactions, or for other credit and debit card transactions, may increase or issuers may terminate their relationship with us;
••if we are unable to maintain PCI-DSS compliance or other payment card industry data security standards (“PCI-DSS”) compliance,network operating rules, we may breach our contractual obligations, be subject to fines, penalties, damages, higher transaction fees and civil liability, be prevented from processing or accepting payment cards or lose payment processing partners;
••we securely store and rely on third-party payment service providers to securely store customer payment card information and maintain PCI-DSS compliance; and
••we rely on third-party payment service providers to process payments from our customers and their users and the providers may face downtime and thus affect our cash flow and our customers’customers’ cash flow.
There can also be no assurance that the billing system data security standards of our third-party payment service providerproviders will adequately comply with the billing standards of any future jurisdiction in which we seek to market our solutions.
In addition, certain of our subsidiaries perform services that relate to the processing of payments or similar activities. The U.S. Department of Treasury’sTreasury’s Financial Crimes Enforcement Network and various state banking departments regulate entities engaged in money transmission and require registration, at the federal level, and licensure, at the state level, of entities engaged in regulated activity. We have relied on various exemptions from such registration and licensing requirements to date and believe, based on our business model, that such exemptions are valid. Any determination that we are not exempt may require expenditures of time and money to remediate and could adversely affect our business, financial condition and results of operations.
Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults or non-performance by financial institutions could adversely affect our liquidity, financial condition and results of operations.
We deposit substantial funds in financial institutions and may maintain cash balances at such financial institutions in excess of the Federal Deposit Insurance Corporation limit. Events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. These events could have an adverse effect on our liquidity, financial condition and results of operations.
For example, on March 10, 2023, Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. Although the Federal Reserve Board, the Department of the Treasury and the FDIC have taken steps to ensure that depositors at Silicon Valley Bank can access all of their funds, including funds held in uninsured deposit accounts, there is no guarantee that, in the event of the closure of other financial institutions in the future, depositors would be able to access uninsured funds or that they would be able to do so in a timely fashion.
To date, we have not experienced any adverse impact to our liquidity, financial condition or results of operations as a result of the events described above. However, uncertainty remains over liquidity concerns in the broader financial services industry and we could be adversely impacted by these developments in ways that we cannot predict at this time. Further, we cannot guarantee that we will be able to avoid negative consequences directly or indirectly from any failure of one or more financial institutions.
If the security of personal information, payment card information or other confidential information of customers and their users stored in our systems is breached or otherwise subjected to unauthorized access, our reputation may be harmed and we may be exposed to liability.
Our business involves the storage andand/or transmission of personal information, payment card information and other confidential information. In addition, the amount of potentially sensitive or confidential data we store for customers on our servers has been increasing. If third partiesthird-parties succeed in penetrating our security measures or those of our service providers, or in otherwise accessing or obtaining without authorization the sensitive or confidential information we or our service providers maintain, we could be subject to liability, loss of business, litigation, government investigations or other losses. Hackers or individuals who attempt to breach the security measures put in place by us or our service providers could, if successful, cause the unauthorized disclosure, misuse or loss of personal information, payment card information or other confidential information, suspend web-hosting operations or cause malfunctions or interruptions in our platform.
If we or our customers experience any material breaches of security measures or sabotage or otherwise suffer unauthorized use or disclosure of, or access to, personal information, payment card information or other confidential information, we might be required to expend significant capital and resources to address these problems. We may not be able to remedy any problems caused by hackers or other similar actors in a timely manner, or at all. Because techniques used to obtain unauthorized
access or to sabotage systems change frequently and generally are not recognized until after they are launched against a target, we and our service providers may be unable to anticipate these techniques or to implement adequate preventative measures. Advances in computer capabilities, discoveries of new weaknesses and other developments with
software generally used by the internet community also increase the risk we, or customers using our servers, will suffer a material security breach. We, our service providers or our customers may also suffer material security breaches or unauthorized access to personal information, payment card information and other confidential information due to employee error, rogue employee activity, unauthorized access by third partiesthird-parties acting with malicious intent or who commit an inadvertent mistake or social engineering. If a material breach of security or other data security incident occurs or is perceived to have occurred, the perception of the effectiveness of our security measures and reputation could be harmed and we could lose current and potential customers, even if the security breach were to also affect one or more of our competitors. Further, concerns about practices with regard to the collection, use, disclosure or security of personal information, payment card information or other confidential information, even if unfounded, could damage our reputation and adversely affect our business, financial condition and results of operations.
Any actual or alleged security breaches or other unauthorized access to personal information, payment card information and other confidential information or alleged violation of federal, state or foreign laws or regulations relating to privacy and data security could result in:
••mandated customer notifications, litigation, government investigations, significant fines and expenditures;
••claims against us for misuse of personal information, payment card information and other confidential information;
••diversion of management’smanagement’s attention;
••damage to our brand and reputation;
••our operations being suspended for some length of time; and
••an adverse effect on our business, financial condition and results of operations.
In addition, we could be required to devote significant resources to investigate and address a security breach. Defending against claims or litigation based on any security breach or incident, regardless of its merit, will be costly and may cause reputation harm. Further, under certain regulatory schemes, such as the California Consumer Privacy Act (the “CCPA”“CCPA”), we may be liable for statutory damages on a per breached record basis, irrespective of any actual damages or harm to the individual. The successful assertion of one or more large claims against us that exceed available insurance coverage, denial of coverage as to any specific claim or any change or cessation in our insurance policies and coverages, including premium increases or the imposition of large deductible requirements, could adversely affect our business, financial condition and results of operations. We expect to continue to expend significant resources to protect against security breaches and other data security incidents. The risk that these types of events could seriously harm our business is likely to increase as we expand our solutions and operate in more geographic regions.
We are subject to privacy and data protection laws and regulations as well as contractual privacy and data protection obligations. Our failure to comply with these or any future laws, regulations or obligations could subject us to sanctions and damages and could harm our reputation, business, financial condition and results of operations.
We are subject to a variety of laws and regulations, including regulation by various federal government agencies, including the Federal Trade Commission (“FTC,”), the Federal Communications Commission and state and local agencies, as well as data privacy and security laws in jurisdictions outside of the United States. We collect personal information and other potentially protected information from our employees, our current and prospective customers and their users. The U.S. federal and various state and foreign governments have adopted or proposed limitations on, or requirements regarding, the collection, distribution, use, security and storage of personal information, payment card information or other confidential information of individuals and the FTC and many state attorneys general are applying federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data. Self-regulatory obligations, other industry standards, policies and other legal obligations may apply to our collection, distribution, use, security or storage of personal information, payment card information, payment solution know-your-customer and risk information or other confidential information relating to individuals. These obligations may be interpreted and applied inconsistently from one jurisdiction to another and may conflict with one another, other regulatory requirements or our internal practices. Any failure or perceived failure by us to comply with United States, European Union or other foreign privacy or security laws, policies, industry standards or legal obligations or any security incident resulting in the unauthorized access to, or acquisition, release or transfer of, personal information, payment card information, payment solution know-your-customer and risk information or other confidential information relating to our customers, employees or others may result in governmental enforcement actions, litigation, fines and penalties or adverse publicity and could cause our customers to lose trust in us, which could have an adverse effect on our reputation, business, financial condition and results of operations.
We expect there will continue to be newly enacted and proposed laws and regulations as well as emerging industry standards concerning privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we cannot yet determine the impact such future laws, regulations and standards may have on our
business. Such laws, regulations, standards and other obligations could impair our ability to, or the manner in which we collect or use information to target advertising to our customers, thereby having a negative impact on our ability to maintain and grow our customer base and increase revenue. For example, the CCPA requires, among other things, that covered
companies such as ours provide new disclosures to California consumers and affords such consumers new rights, including the right to access and delete their information and to opt-out of certain sharing and sales of personal information or opt into certain financial incentive programs. The law also prohibits covered businesses from discriminating against consumers (e.g., charging more for services) for exercising any of their CCPA rights. The CCPA took effect on January 1, 2020 and enforcement of the CCPA by the California Attorney General began on July 1, 2020. The CCPA imposes a severe statutory damages framework as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action is expected to increase the likelihood of, and risks associated with, data breach litigation. It remains unclear how various provisions of the CCPA will be interpreted and enforced. The CCPA has been amended on multiple occasions and is the subject of regulations of the California Attorney General finalized on August 14, 2020. Additionally, the California Secretary of State recently certified a new privacy law, the California Privacy Rights Act (the “CPRA”“CPRA”), which California voters approved on November 4, 2020. This initiative significantly modifies the CCPA, potentially resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply. The CCPAVirginia, Colorado, Utah and CPRAConnecticut also passed comprehensive privacy laws that will take effect in 2023. Other states may lead other states to pass comparable legislation, with potentially greater penalties and more rigorous compliance requirements relevant to our business. The effects of the CCPA, and other similar state or federal laws, are potentially significant and may require us to modify our data processing practices and policies and to incur substantial costs and potential liability in an effort to comply with such legislation. Future restrictions on the collection, use, sharing or disclosure of our customers’customers’ data or additional requirements for express or implied consent of customers for the collection, use, disclosure, sharing or other processing of such information could increase our operating expenses, require us to modify our solutions, possibly in a material manner, or stop offering certain solutions, and could limit our ability to develop and implement new solutions.
In addition, several foreign countries and governmental bodies, including the European Union and Canada, have laws and regulations concerning the collection and use of their residents’residents’ personal information and payment card information, which are often more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of personal information and payment card information identifying, or which may be used to identify, an individual, such as names, email addresses and, in some jurisdictions, Internet Protocol (IP) addresses, device identifiers and other data. Although we are working to comply with those laws and regulations applicable to us, these and other obligations may be modified and interpreted in different ways by courts, and new laws and regulations may be enacted in the future. We are subject to the E.U. General Data Protection Regulation 2016/679 (the “GDPR”“GDPR”), and following the United Kingdom’sKingdom’s exit from the European Union, from January 1, 2021, we are also subject to the United Kingdom GDPR (the “U.K. GDPR”“U.K. GDPR”), which, together with the amended U.K. Data Protection Act of 2018 (the “U.K.“U.K. Data Protection Act”Act”), retains the GDPR in U.K. national law. The U.K. GDPR mirrors the fines under the GDPR. It remains unclear how the U.K. GDPR, the U.K. Data Protection Act and other U.K. data protection laws or regulations will develop in the medium to longer term and how data transfers to and from the United Kingdom will be regulated after the expiration of the grace period to seek an adequacy ruling later this year.term. In addition, some countries are considering or have enacted legislation requiring local storage and processing of data that could increase the cost and complexity of delivering our solutions. Any new laws, regulations, other legal obligations or industry standards or any changed interpretation of existing laws, regulations or other standards may require us to incur additional costs and restrict our business operations.
The regulatory environment applicable to the handling of European Economic Area (“EEA”(“EEA”), Swiss and United Kingdom individuals’individuals’ personal data (as such item is used in the GDPR), and our actions taken in response, may cause us to face a risk of enforcement actions by data protection authorities in the EEA, Switzerland and the United Kingdom, assume additional liabilities or incur additional costs and could result in our business, financial condition and results of operations being harmed. In particular, with regard to transfers to the United States of personal data (as such term is used in the GDPR) of our European employees and our European, Swiss and United Kingdom customers and their users, we historically relied upon the U.S.-E.U.European Commission, the United Kingdom Government, and the Swiss Federal Administration (working with the U.S. Department of Commerce) adopted an adequacy decision pursuant to the EU-U.S. Data Privacy Shield, as well as E.U. Model Clauses in certain circumstances. The U.S.-E.U.Framework, the Swiss-U.S. Data Privacy Shield wasFramework and the UK Extension to the EU-U.S. Data Privacy Frameworks (each individually and jointly, the “Data Privacy Frameworks”). We comply with the Data Privacy Frameworks to provide an additional legal basis for transfers of personal data to the United States from the EEA, Switzerland and the United Kingdom. It is expected that the Data Privacy Frameworks will be subject to legal challenge to be invalidated bythrough the Court of Justice of the European Union in July 2020, and the E.U. Model Clauses have been subject to legal challenge and may be modified or invalidated. The European Commission has adopted the new modular E.U. Model Clauses providing for an 18 month implementation period and the non-legally binding guidance on Supplementary Measures that has been issued by the European Data Protection Board casts doubt on the ability to transfer unencrypted data to the United States. We are monitoring thesethe developments related to the Data Privacy Frameworks and E.U. Model Clauses, but depending on the outcome, we may be unsuccessful in maintaining a legitimate means for our transfer and receipt of personal data from the EEA, Switzerland and United Kingdom in the United States and any other countries that are not considered adequate by the European Union, Switzerland or the United Kingdom. We may, in addition to other impacts, experience additional costs associated with increased compliance burdens and be required to engage in new contract negotiations with third partiesthird-parties that aid in processing data on our behalf or localize certain data. We may experience reluctance or refusal by current or prospective
European, Swiss or United Kingdom customers to use our solutions, and we may find it necessary or desirable to make further changes to our handling of personal data of EEA, Switzerland and United Kingdom residents.
We are also subject to evolving privacy laws on tracking technologies, including cookies and e-marketing. For example, in the European Union and the United Kingdom, regulators are increasingly focusing on compliance with requirements in the online behavioral advertising ecosystem, and current national laws that implement the ePrivacy Directive are highly likely to be replaced by an E.U. regulation known as the ePrivacy Regulation which will significantly increase fines for non-compliance. Recent guidanceGuidance and case law in the European Union and the United Kingdom require opt-in consent for the placement of a cookie or similar tracking technologies on a customer’scustomer’s device and for direct
electronic marketing. Evolving privacy laws on cookies and e-marketing could lead to substantial costs, require significant systems changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, increase costs and subject us to additional liabilities. Regulation of cookies and similar technologies, and any decline of cookies or similar online tracking technologies as a means to identify and potentially target users, may lead to broader restrictions and impairments on our marketing and personalization activities and may negatively impact our efforts to understand our customers.
Consumers can, with increasing ease, implement technologies that limit our ability to collect and use data to deliver or advertise our services, or otherwise limit the effectiveness of our platform. Cookies may be deleted or blocked by consumers. The most commonly used Internet browsers allow consumers to modify their browser settings to block first-party cookies (placed directly byfrom the publisher ordomain of the website owner that the consumer intends to interact with)is browsing) or third-party cookies (placed by parties that do not havefrom a direct relationship with the consumer)different domain), and some browsers block third-party cookies by default. Some prominent technology companies, including Google, the owner of the Chrome browser, have announced intentions to discontinue support of third-party cookies, and to develop alternative methods and mechanisms for tracking consumers. Many applications and other devices allow consumers to avoid receiving advertisements by paying for subscriptions or other downloads. Mobile devices using Android and iOS operating systems limit the ability of cookies, or similar technology, to track consumers while they are using applications other than their web browser on the device. For example, the release of iOS 14 on Apple devices brought with it a number of new changes, including the need for app users to opt-in before their identifier for advertisers (“IDFA”), can be accessed by an app. Apple’s IDFA is a string of numbers and letters assigned to Apple devices which marketers use to identify app users to deliver personalized and targeted marketing. As a consequence, fewer of our cookies, publishers’ cookies or IDFAs, as applicable, may be set in browsers or be accessible from mobile devices, which may adversely affect our business.
If our privacy or data security measures fail to comply with current or future laws, regulations, policies, legal obligations or industry standards, or are perceived to have failed to so comply, we may be subject to litigation, regulatory investigations and related actions, significant fines (which, for certain breaches of the GDPR or U.K. GDPR, may be up to the greater of €20€20 million or 4% of total global annual turnover), civil claims including representative actions and other class action type litigation (potentially amounting to significant compensation or damages liabilities) or other liabilities, negative publicity and a potential loss of business. Moreover, if future laws, regulations, other legal obligations or industry standards, or any changed interpretations of the foregoing, limit our customers’customers’ ability to use and share personal information, including payment card information, or our ability to store, process and share such personal information or other data, demand for our solutions could decrease, our costs could increase and our business, financial condition and results of operations could be harmed.
Activities of our customers or the content of their websites could damage our brand, subject us to liability and harm our business, financial condition and results of operations.
Our terms of service and acceptable use policy prohibit our customers from using our platform to engage in illegal or otherwise prohibited activities and our terms of service and acceptable use policy permit us to terminate a customer’scustomer’s account if we become aware of such use. Customers may nonetheless use our platform to engage in prohibited or illegal activities, such as uploading content in violation of applicable laws, which could subject us to liability. Furthermore, our brand may be negatively impacted by the actions of customers that aremay be deemed to be hostile, offensive, inappropriate or illegal.illegal, whether such actions occur on our platform or otherwise. We do not proactively monitor or review the appropriateness of our customers’ websitescustomers’ content and we do not have control over customer activities or the activities in which their users engage. The safeguards we have in place may not be sufficient for us to avoid liability or avoid harm to our brand, especially if such hostile, offensive, inappropriate or illegal use is or becomes high profile, which could adversely affect our business, financial condition and results of operations. Customers using the platform may also operate businesses in regulated industries, which are subject to additional scrutiny, increasing the potential liability we could incur.
We are subject to export controls and economic sanctions laws that could impair our ability to compete in international markets and subject us to liability if we are not in full compliance with applicable laws.
Our business activities are subject to various restrictions under U.S. export controls and trade and economic sanctions laws, including the U.S. Commerce Department’sDepartment’s Export Administration Regulations and economic and trade sanctions regulations maintained by the U.S. Treasury Department’sDepartment’s Office of Foreign Assets Control (“OFAC”).Control. If we fail to comply with these laws and regulations, we could be subject to civil or criminal penalties and reputational harm. U.S. export control laws and economic sanctions laws also prohibit certain transactions with U.S. embargoed or sanctioned countries, governments, persons and entities.
Even though we take precautions to prevent transactions with U.S. sanctions targets, there is risk that in the future we could provide our solutions to such targets despite such precautions. This could result in negative consequences to us,
including government investigations, penalties and reputational harm. Changes in the list of embargoed countries and regions or prohibited persons may require us to modify these procedures in order to comply with governmental regulations.
Changes in our solutions, changes in export and import regulations or changes in the global environment may create delays in the introduction and sale of our solutions in international markets or, in some cases, prevent the sale of our
solutions to certain countries, governments or persons altogether. Any change in export or import regulations, shift in the enforcement or scope of existing regulations or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our platform or decreased ability to sell our solutions to existing or potential customers. Any decreased use of our solutions or limitation on our ability to sell our solutions internationally could adversely affect our growth prospects.
If we are found to be in violation of the export controls laws and regulations or economic sanctions laws and regulations, penalties may be imposed against us and our employees, including loss of export privileges and monetary penalties, which could have an adverse effect on our business, financial condition and results of operations.
Due to the global nature of our business, we could be adversely affected by violations of anti-bribery and anti-corruption laws.
The global nature of our business creates various domestic and local regulatory challenges. The U.S. Foreign Corrupt Practices Act of 1977, as amended (“FCPA,”), the U.K. Bribery Act, 2010 (“U.K. Bribery Act”), the U.S. Travel Act of 1961 and similar anti-bribery and anti-corruption laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to foreign government officials and other persons for the corrupt purpose of obtaining or retaining business, directing business to any person or securing any advantage. In addition, companies are required to maintain records accurately and fairly representing their transactions and having an adequate system of internal accounting controls. We face significant risks if we fail to comply with the FCPA and other anti-corruption and anti-bribery laws prohibiting companies and their employees and third-party intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits to foreign government officials, political parties and private-sector recipients for an illegal purpose.
We sell our solutions to customers around the world, including some in areas of the world that experience corruption by government officials to some degree and, in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. In addition, changes in laws could result in increased regulatory requirements and compliance costs which could adversely affect our business, financial condition and results of operations. While we are committed to complying, and training our employees to comply, with all applicable anti-bribery and anti-corruption laws, we cannot assure our employees or other agents will not engage in prohibited conduct and render us responsible under the FCPA, the U.K. Bribery Act or other anti-bribery and anti-corruption laws.
If we are found to be in violation of the FCPA, the U.K. Bribery Act or other anti-bribery and anti-corruption laws (either due to acts or inadvertence of our employees, or due to the acts or inadvertence of others), we could suffer criminal or civil penalties or other sanctions, which could have an adverse effect on our business, financial condition and results of operations. Any violation of the FCPA or other applicable anti-corruption or anti-bribery laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, which could have an adverse effect on our reputation, business, financial condition and results of operations. In addition, responding to any enforcement action may result in a significant diversion of management’smanagement’s attention and resources and significant defense costs and other professional fees.
Our business could be affected by new and evolving governmental regulations regarding the internet.
To date, laws, regulations and enforcement actions by governments have not materially restricted use of the internet in most parts of the world. However, the legal and regulatory environment relating to the internet is uncertain, and governments may impose regulation in the future. New laws may be passed, courts may issue decisions affecting the internet, existing but previously inapplicable or unenforced laws may be deemed to apply to the internet or regulatory agencies may begin to more rigorously enforce such formerly unenforced laws, or existing legal safe harbors may be narrowed, both by U.S. federal or state governments and by governments of foreign jurisdictions. The adoption of any new laws or regulations, or the narrowing of any safe harbors, could hinder growth in the use of the internet and online services generally, and decrease acceptance of the internet and online services as a means of communications, e-commerce and advertising. In addition, such changes in laws could increase our costs of doing business or prevent us from delivering our solutions over the internet or in specific jurisdictions, which could harm our business, financial condition and results of operations. For example, we rely on a variety of statutory and common-law frameworks and defenses relevant to the content available on our platform, including the Digital Millennium Copyright Act (the “DMCA”“DMCA”), the Communications Decency Act (the “CDA”“CDA”), theand fair-use doctrine in the United States and the Electronic Commerce Directive in the European Union. The DMCA limits, but does not necessarily eliminate, our potential liability for caching, hosting, listing or linking to third-party content that may include materials that infringe copyrights or other rights. The CDA further limits our potential liability for content uploaded onto our platform by third parties.third-parties. Defenses such as the fair-use doctrine (and related doctrines in other countries) may be available to limit our potential liability for featuring third-party intellectual property content for purposes such as reporting, commentary and parody. In the European Union, the Electronic Commerce
Directive offers certain limitations on our potential liability for featuring third-party content. However, each of these statutes and doctrines isare subject to uncertain or evolving judicial interpretation and regulatory and legislative amendments, and we cannot guarantee that such frameworks and defenses will be available for our protection.available. Regulators in the United States and in other countries may introduce new regulatory regimes that increase potential liability for content available on
our platform, including liability for misleading, false or manipulative information, hate speech, privacy violations, copyrighted content and other types of online harm.harm; or alternatively increase potential liability for removing content on our platform. For example, there have been various legislative and executive efforts to restrict the scope of the protections available to online platforms under Section 230 of the CDA, and current protections from liability for third-party content in the United States could decrease or change. There are also a number of legislative proposals in the United States, at both the federal and state level, and in the European Union and the United Kingdom, that could impose new obligations in areas affecting our business, such as liability for copyright infringement and other online harm. Any new legislation may be difficult to comply with in a timely and comprehensive manner and may expose our business or customers to increased costs. If the rules, doctrines or currently available defenses change, if international jurisdictions refuse to apply protections similar to those that are currently available in the United States or the European Union or if a court were to disagree with our application of those rules to our solutions, our potential liability for information or content created by third partiesthird-parties and posted to our platform could require us to expend significant resources to try to comply with the new rules and implement additional measures to reduce our exposure to such liability or we could incur liability and our business, financial condition and results of operations could be harmed.
Governmental and regulatory policies or claims concerning the domain registration system and the internet in general, and industry reactions to those policies or claims, may cause instability in the industry and disrupt our business.
The Internet Corporation for Assigned Names and Numbers (“ICANN”(“ICANN”) is a multi-stakeholder, private sector, not-for-profit corporation formed in 1998 for the express purposes of overseeing a number of internet related tasks, including managing the Domain Name System’s (“DNS”)System’s allocation of IP addresses, accreditation of domain name registrars and registries and the definition and coordination of policy development for all of these functions. ICANN has been subject to strict scrutiny by the public and governments around the world, as well as multi-governmental organizations such as the United Nations, with many of those bodies becoming increasingly interested in internet governance. Any instability in the domain name registration system may make it difficult for us to maintain our relationships with accredited domain name registrars andor registries, continue to offer our existing solutions, andor introduce new ones. offerings.
Natural catastrophic events, andincluding global pandemics, as well as man-made problems such as power disruptions, computer viruses, global pandemics, data security breaches and terrorism may disrupt our business.
We rely heavily on our network infrastructure and IT systems for our business operations. AnUnanticipated events such as an online attack (including illegal hacking, ransomware, phishing or criminal fraud or impersonation), earthquake, fire, flood, terrorist attack, power loss, global pandemic (such as the COVID-19 pandemic) or other future adverse public health developments, telecommunications failure or other similar catastrophic events could cause interruptions in the availability of our platform, delays in accessing our solutions, reputational harm and loss of critical data. Such events could prevent us from providing our solutions to our customers and their users. A catastrophic event that results in the destruction or disruption of our data centers, network infrastructure or IT systems, including any errors, defects or failures in third-party services, could result in costly litigation or other claims and adversely affect our business, financial condition and results of operations.
Our level of indebtedness could have a material adverse effect on our ability to generate sufficient cash to fulfilfulfill our obligations under such indebtedness, to react to changes in our business and to incur additional indebtedness to fund future needs.
As of JuneSeptember 30, 2021,2023, we have outstanding $537$584 million aggregate principal amount of borrowings under the Term Loan and $7$7.3 million aggregate principal amount of borrowings under the Revolving Credit Facility (as defined above). If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures or to sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our current or future debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. We cannot assure you that our business will be able to generate sufficient levels of cash or that future borrowings or other financings will be available to us in an amount sufficient to enable us to service our indebtedness and fund our other liquidity needs. In addition, our indebtedness under the Credit Agreement (as defined above) bears interest at variable rates. Because we have variable rate debt, fluctuations in interest rates may affect our business, financial condition and results of operations.
Our Credit Agreement contains financial covenants and other restrictions on our actions that may limit our operational flexibility or otherwise adversely affect our business, financial condition and results of operations.
The terms of our Credit Agreement include a number of covenants that limit our ability to (subject to negotiated exceptions), among other things, incur additional indebtedness or issue preferred stock, incur liens on assets, enter into
agreements related to mergers and acquisitions, dispose of assets or pay dividends and make distributions. The terms of our Credit Agreement may restrict our current and future operations and could adversely affect our ability to finance our future operations or capital needs. In addition, complying with these covenants may make it more difficult for us to successfully execute our business strategy and compete against companies which are not subject to such restrictions.
A failure by us to comply with the covenants specified in the Credit Agreement could result in an event of default under the agreement, which would give the lenders the right to terminate their commitments to provide additional loans
under our Revolving Credit Facility and to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. If the debt under the Credit Agreement were to be accelerated, we may not have sufficient cash or be able to borrow sufficient funds to refinance the debt or sell sufficient assets to repay the debt, which could adversely affect our business, financial condition and results of operations.
Because we generally recognize revenue from monthly and annual subscriptions over the term of an agreement, downturns or upturns in sales are not immediately reflected in our full results of operations.
We offer annual and monthly subscriptions and generally recognize revenue over the term of our customers’customers’ contracts in accordance with GAAP. Accordingly, increases in annual subscriptions during a particular period do not translate into immediate, proportional increases in revenue during such period, and a substantial portion of the revenue we recognize during a quarter is derived from deferred revenue from annual subscriptions purchased during previous quarters. Conversely, a decline in new or renewed annual subscriptions in any one quarter may not significantly reduce revenue for that quarter but could negatively affect revenue in future quarters. Accordingly, the effect of significant downturns in new or renewed sales of our solutions may not be fully reflected in our results of operations until future periods.
Our business is susceptible to risks associated with international sales and the use of our platform in various countries as well as our ability to localize our platform in such countries.
As of JuneSeptember 30, 2021,2023, we had customers in over 200 countries and territories and expect to continue to expand our international operations in the future. However, international sales and the use of our platform in various countries subject us to risks that we do not generally face with respect to domestic sales. These risks include, but are not limited to:
••greater difficulty in enforcing contracts, including our terms of service and other agreements;
••lack of familiarity and burdens and complexity involved with complying with multiple, conflicting and changing foreign laws, standards, regulatory requirements, tariffs, export controls and other barriers;
••data privacy laws, which may require that customer and user data be stored and processed in a designated territory;
••differing technology standards and different strategic priorities for customers in various jurisdictions;
••weaker protection for intellectual property in certain jurisdictions;
••potentially adverse tax consequences, including the complexities of foreign value-added tax (or other tax) systems and restrictions on the repatriation of earnings;
••uncertain political and economic climates and increased exposure to global political, economic and social risks that may impact our operations or our customers’customers’ operations and/or decrease consumer spending, including the impact of global health emergencies;
••difficulties in ensuring compliance with government regulations of e-commerce and other services, which could lead to lower adoption rates;
••potentially restrictive actions by foreign governments or regulators, including actions that prevent or limit access to our platform, solutions, apps or website;
••uncertainties and instability in European and global markets and increased regulatory costs and challenges and other adverse effects caused by the United Kingdom’sKingdom’s withdrawal from the European Union;
••lower levels of credit card usage and increased payment risks;
••currency exchange rates;
••reduced or uncertain protection for intellectual property rights and free speech in some countries;
••new and different sources of competition; and
••restricted access to and/or lower levels of use of the internet.
These factors may cause international costs of doing business to exceed comparable domestic costs and may also require significant management attention and financial resources. Any negative impact from our international business efforts could adversely affect our business, financial condition and results of operations.
Exchange rate fluctuations may negatively affect our business, financial condition and results of operations.
Our business, financial condition and results of operations are affected by fluctuations due to changes in foreign currency exchange rates. While we generate the majority of our revenue in U.S. dollars, a portion of our revenue is denominated in Euros. For the nine months ended September 30, 2023, 71.6% of our revenue was denominated in U.S. dollars and 28.4% of our revenue was denominated in Euros. As we expand globally, we will be further exposed to fluctuations in currency exchange rates to the extent that the revenue that we generate in currencies other than the U.S. dollar increases. Furthermore, currency exchange rates have been especially volatile in the recent past, and these currency fluctuations have made and may continue to make it difficult for us to accurately predict our results of operations.
Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our business, financial condition and results of operations.
With sales in various countries, we are subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes paid in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have an adverse impact on our liquidity and results of operations.
Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
••changes in the valuation of deferred tax assets and liabilities;
••expected timing and amount of the release of any tax valuation allowances;
••tax effects of stock-based compensation;
••expiration of, or unfavorable changes to, research and development tax credit laws;
••costs related to intercompany restructurings;
••changes in tax laws, regulations or interpretations thereof; or
••future earnings being lower than anticipated in countries that have lower statutory tax rates and higher than anticipated earnings in countries that have higher statutory tax rates.
The determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amount recorded in our condensed consolidated financial statements and may materially affect our financial results in the period or periods for which such determination is made.
Our corporate structure and associated transfer pricing policies consider the functions, risks and assets of the various entities involved in the intercompany transactions. If two or more affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that transfer prices be the same as those between unrelated companies dealing at arm’sarm’s length. If tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arm’sarm’s length transactions, they could require us to adjust our transfer prices and thereby reallocate income to reflect these revised transfer prices, which could result in a higher tax liability. Our financial statements could fail to reflect adequate reserves to cover such a contingency.
In addition, the authorities in several jurisdictions could review our tax returns and impose additional tax, interest and penalties, which could have an impact on us and our business, financial condition and results of operations.
We may be subject to additional obligations to collect and remit sales tax and other taxes. We may be subject to tax liability for past sales, which could harm our business, financial condition and results of operations.
State, local and foreign jurisdictions have differing tax rules and regulations governing sales, use, value addedvalue-added, digital services, and other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of such taxes to our platform in various jurisdictions is unclear. These jurisdictions’jurisdictions’ rules regarding tax nexus are complex and vary significantly. Significant judgment is required on an ongoing basis to evaluate applicable tax obligations, and as a result, amounts recorded are estimates and are subject to adjustments. In many cases, the ultimate tax determination is uncertain because it is not clear how new and existing statutes might apply to our business.
One or more states, localities, the federal government or other countries may seek to impose additional reporting, record-keeping or indirect tax collection and remittance obligations on businesses like ours. An increasing number of jurisdictions have enacted laws or are considering enacting laws requiring e-commerce platforms to report user activity or collect and remit taxes on certain sales through a marketplace. Imposition of an information reporting, record-keeping or tax collection requirement could require us to incur substantial costs in order to comply, including costs associated with tax calculation, collection and remittance, which could adversely affect our business and results of operations. In some cases
we also may not have sufficient notice to enable us to build systems and adopt processes to properly comply with new reporting, record-keeping or collection obligations by the effective date.
As a result, we could face tax assessments and audits. Our liability for these taxes and associated penalties could exceed our historical tax accruals. Jurisdictions in which we have not historically collected or accrued sales, use, value addedvalue-added or other taxes could assert our liability for such taxes. A successful assertion that we should be collecting additional taxes in jurisdictions where we have not historically done so could result in substantial tax liabilities for past sales. Furthermore, certain jurisdictions have introduced a digital services tax, which is generally a tax on gross revenue generated from users or customers located in those jurisdictions, and other jurisdictions have enacted or are considering enacting similar laws. Further, even where we are collecting and remitting taxes to the appropriate authorities, we may fail to accurately calculate, collect, report and remit such taxes. Any of these events could result in substantial tax liabilities and related penalties for past sales. It could also discourage customers from using our platform or otherwise harm our business, financial condition and results of operations.
Exchange rate fluctuationsWe have recorded in the past a full valuation allowance on our net deferred tax assets since it is more likely than not that these benefits will not be realized. Future adjustments to the realizability of our deferred tax assets may negatively affecthave a material impact on our business, financial condition and results of operations.
Our business,Determining whether a valuation allowance for deferred tax assets is appropriate requires significant judgment and an evaluation of all positive and negative evidence. We assess the need for, or the sufficiency of, a valuation allowance against deferred tax assets at each reporting period. In making such an assessment, significant weight is given to evidence that can be objectively verified. New facts and circumstances, future financial results, and new tax legislation, among other factors, may require us to reevaluate our valuation allowance positions which could potentially affect our effective tax rate.
We continue to monitor the likelihood that we will be able to recover our deferred tax assets, including those for which a valuation allowance is recorded. There can be no assurance that our deferred tax assets will be fully realized. The determination to record or reverse a valuation allowance is subject to objective factors that cannot be readily predicted in advance and may have a material impact on our financial condition and results of operationsoperations.
If there are affected by fluctuations in our effective tax rate due to changes in foreign currency exchange rates. Whiletax laws or regulations, we generate the majority ofcould suffer adverse tax and other financial consequences.
New tax laws or regulations could be enacted at any time, and existing tax laws or regulations could be interpreted, modified or applied in a manner that adversely affects our revenue in U.S. dollars, a portion of our revenue is denominated in Euros. For the year ended December 31, 2020, 69.2% of our revenue was denominated in U.S. dollarstax rates and 30.8% of our revenue was denominated in Euros and for the six months ended June 30, 2021, 71.5% of our revenue was denominated in U.S. dollars and 28.5% of our revenue was denominated in Euros. As we expand globally, we will be further exposed to fluctuations in currency exchange rates to the extent that the revenue that we generate in currencies other than the U.S. dollar increases. Furthermore, currency exchange rates have been especially volatile in the recent past, and these currency fluctuations may make it difficult for us to predicttherefore our results of operations. operations and financial condition.
certain large corporations and a nondeductible 1% excise tax on the net value of certain share repurchases made after December 31, 2022 by covered corporations. As of January 1, 2023, the Company began recording excise taxes related to share repurchases in additional paid in capital in the condensed consolidated balance sheet.As a public company,The Organization for Economic Co-operation and Development (the "OECD") has issued recommendations that, in some cases, make substantial changes to numerous long-standing tax positions and principles. These changes, many of which have been adopted or are under active consideration by OECD members and/or other countries, could increase tax uncertainty and may adversely affect our provision for income taxes, cash tax liability, and effective tax rate in countries where we will be obligatedoperate.
If we fail to maintain an effective system of disclosure controls and internal controls, overour ability to produce timely and accurate financial reportingstatements or comply with applicable regulations could be impaired.
We are required to comply with the SEC rules that is compliant with Section 404 of the Sarbanes-Oxley Act. Our current internal control systems and procedures may not prove to be adequate to support our rapid growth. Any failure of our internal systems, controls and procedures could have an adverse effect on our business, financial condition and results of operations.
Pursuant toimplement Section 404 of the Sarbanes-Oxley Act (“Section 404”) and the related rules adopted by the SEC and the Public Company Accounting Oversight Board, our management will beare required to provide an annual management report on the effectiveness of our disclosure controls and internal control over financial reporting starting withreporting. However, pursuant to an exemption available to emerging growth companies, our second Annual Report on Form 10-K. Because we areindependent registered public accounting firm will not currentlybe required to comply with Section 404, we are not currently requiredattest to make a formal assessment of the effectiveness of our internal controls, or to deliver a report that assesses the effectiveness of our internal control over financial reporting. We have not yet determined whether our existing internal controls over financial reporting until we are compliant with Section 404. This process will require the investment of substantial time and resources, including by our Chief Financial Officer and other members of our senior management. In addition, we cannot predict the outcome of this determination and whether we will need to implement remedial actions. Management’s assessment of our internal control systems and procedures may identify weaknesses and conditions that need to be addressed or other matters that may raise concerns for investors, including confidence in the accuracy and completeness of our financial reports. The determination and any remedial actions required could result in us incurring additional costs that we did not anticipate. In addition, we could become subject to investigations by the SEC or other regulatory authorities. Additionally, any actual or perceived weakness or condition that needs to be addressed in our internal control systems may haveno longer deemed an adverse impact on our business, financial condition and results of operations. emerging growth company.
Irrespective of compliance with Section 404, asAs we mature, we will need to further develop our internal control systems and procedures to keep pace with our rapid growth and we are currently working to improve our controls. Our current controls and any new controls that we
develop may become inadequate because, among other reasons, they may not keep pace with our growth or the conditions in our business may change.
We have made, and will continue to make, changes to our financial management control systems and other areas to manage our obligations as a public company, including corporate governance, corporate controls, disclosure controls and procedures and financial reporting and accounting systems. During the year ended December 31, 2020, Tock identified material weaknesses in its internal control over financial reporting. 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 expect to complete the remediation process by the end of the fiscal year dated December 31, 2021. However, these and other measures that we may take to remediate the material weakness in Tock’s internal control over financial reporting may take longer than anticipated.
If we fail to maintain effective systems, controls and procedures, including disclosure controls and internal controls over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations and prevent fraud could be adversely impacted. Moreover, we may have to disclose in periodic reports we file with the SEC material weaknesses in our system of internal controls. The existence of a material weakness would preclude management from concluding that our internal controls over financial reporting are effective, and would preclude our independent auditors from issuing an unqualified opinion that our internal controls over financial reporting are effective. We may also experience higher than anticipated operating expenses during and after the implementation of these changes.
If we are unable to implement any of the changes to our internal control over financial reporting effectively or efficiently or are required to do so earlier than anticipated, it could adversely affect our business, financial condition and results of operations. Additionally, we do not expect that our internal control systems, even if timely and well established, will prevent all errors and all fraud. Internal control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’ssystem’s objectives will be met.
We are an “emerging“emerging growth company”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.
We are an “emerging“emerging growth company”company” as defined in the JOBS Act. 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 have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates.
For as long as we continue to be an emerging growth company, we may also take advantage of other exemptions from certain reporting requirements that are applicable to other public companies, including not being required to comply with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a non-binding advisory vote on executive compensation and any golden parachute arrangements, such as “say-on-pay,” “say-on-frequency”“say-on-pay,” “say-on-frequency” and “say-on-
golden-parachutes,”“say-on-golden-parachutes,” and reduced financial reporting requirements. Although we cannot predict with any certainty, investors may find our Class A common stock less attractive because we will rely on these exemptions, which could result in a less active trading market for our Class A common stock, increased price fluctuation and a decrease in the trading price of our Class A common stock. Moreover, the information that we provide to our stockholderstockholders may be different than the information you might receive from other public reporting companies in which you hold equity interests.
We will remain an emerging growth company until the earliest of: (i) the last day of the first fiscal year in which our annual gross revenue is $1.07$1.235 billion or more; (ii) the last day of the fiscal year during which the fifth anniversary of thisour listing occurs;as a public company; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
Our management team has limited experience managing a public company.
Most members of our management team have limited experience managing a publicly traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company that is subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could harm our business, financial condition and results of operations.
The requirements of being a public company may strain our resources, divert management’smanagement’s attention and affect our ability to attract and retain qualified board members.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the NYSENew York Stock Exchange (“NYSE”) on which our Class A common stock is traded and other applicable securities rules and regulations. The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our compliance. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in which we operate our
business. We expect that compliance with these rules and regulations will continue to cause us to incur additional accounting, legal and other expenses that we did not incur as a private company. Any failure by us to file our periodic reports with the SEC in a timely manner could harm our reputation and reduce the trading price of our Class A common stock. We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under securities laws, as well as rules and regulations implemented by the SEC and the NYSE, particularly after we are no longer an “emerging“emerging growth company.”” We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, while also diverting some of management’smanagement’s time and attention from revenue-generating activities. Furthermore, these rules and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. In addition, if we fail to comply with these rules and regulations, we could be subject to a number of penalties, including the delisting of our Class A common stock, fines, sanctions or other regulatory action or civil litigation.
Risks Related to Ownership of our Class A Common Stock
The trading price of our Class A common stock may be volatile and could decline significantly and rapidly regardless of our operating performance.
The trading price of our Class A common stock may be volatile and could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:
••the number of shares of our Class A common stock made available for trading;
••sales or expectations with respect to sales of shares of our Class A common stock by holders of our Class A common stock;
••actual or anticipated fluctuations in our business, financial condition and results of operations;
••variance in our financial performance from expectations of securities analysts;
••changes in our revenue;
••announcements by us or our competitors of significant business developments, acquisitions or new offerings;
••our involvement in any litigation;
••our sale of our Class A common stock or other securities in the future;
••changes in senior management or key personnel;
••the trading volume of our Class A common stock;
••changes in the anticipated future size and growth rate of our market; and
••general economic, regulatory and market conditions.
Recently, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions (including the impact of the ongoing COVID-19 pandemic and other future adverse public health developments), may negatively impact the market price of our Class A common stock. These fluctuations may be even more pronounced in the trading market for our Class A common stock as a result of the supply and demand forces described above and could cause you to lose all or part of your investment in our Class A common stock since you might be unable to sell your shares at or above the price you paid. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantial costs and divert our management’smanagement’s attention.
None of our stockholders are party to any contractual lock-up agreement or other contractual restrictions on transfer. Sales of substantial amounts of our Class A common stock in the public markets, or the perception that sales might occur, could cause the trading price of our Class A common stock to decline.
In addition to the supply and demand and volatility factors discussed above, sales of a substantial number of shares of our Class A common stock into the public market, particularly sales by our Founder, directors, executive officers and principal stockholders, or the perception that these sales might occur in large quantities, could cause the trading price of our Class A common stock to decline.
None of our securityholderssecurity holders are subject to any contractual lock-up or other contractual restriction on the transfer or sale of their shares.
In addition, certain of our stockholders have rights, subject to some conditions, to require us to file registration statements for the public resale of their Class A common stock or to include such shares in registration statements that we may file for us or other stockholders. Any registration statement we file to register additional shares, whether as a result of registration rights or otherwise, could cause the trading price of our Class A common stock to decline or be volatile.
The multi-class structure of our common stock has the effect of concentrating voting control with those stockholders who hold our Class B common stock, including our Founder and Chief Executive Officer. This will limit or preclude your ability to influence corporate matters, including the election of directors, amendments to our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transactions requiring stockholder approval.
Our Class A common stock has one vote per share and our Class B common stock has ten votes per share. The multi-class structure of our common stock has the effect of concentrating voting control with our Class B common stockholders. As of JuneSeptember 30, 2021,2023, Mr. Casalena holds a majority of the voting power of our outstanding capital stock. As a result, Mr. Casalena will have control over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. He may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. Corporate actionactions might be taken even if other stockholders oppose them. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control or other liquidity event of our company, could deprive our stockholders of an opportunity to receive a premium for their shares of Class A common stock as part of a sale or other liquidity event and might ultimately affect the trading price of our Class A common stock. Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, which will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term.
Pursuant to our amended and restated certificate of incorporation, we are authorized to issue 1,000,000,000 shares of Class C common stock and as of JuneSeptember 30, 2021,2023, there is no Class C common stock outstanding. Although we have no current plans to issue any shares of Class C common stock in the future, we may issue shares of Class C common stock for a variety of corporate purposes, including financings, acquisitions, investments, dividends and equity incentives to our employees, consultants and directors. Under our amended and restated certificate of incorporation, our board of directors has the authority, without stockholder approval except as required by the listing standards of the NYSE, to issue additional shares of our capital stock. Because the Class C common stock carries no voting rights, is not convertible into any other capital stock and is not listed for trading on an exchange or registered for sale with the SEC, shares of Class C common stock may be less liquid and less attractive to any future recipients of these shares than shares of Class A common stock,
although we may seek to list the Class C common stock for trading and register shares of Class C common stock for sale in the future. In addition, because our Class C common stock carries no voting rights and is not counted when determining whether the seven percent ownership threshold related to automatic conversion of the Class B common stock is met, if we issue shares of Class C common stock in the future, the holders of our Class B common stock, including our Founder and Chief Executive Officer, may be able to elect all of our directors and to determine the outcome of most matters submitted to a vote of our stockholders for a longer period of time than would be the case if we issued Class A common stock rather than Class C common stock in such transactions. In addition, if we issue shares of Class C common stock in the future, such issuances would have a dilutive effect on the economic interests of our Class A common stock and Class B common stock.
We cannot predict the impact our capital structure may have on our stock price.
We cannot predict whether our multi-class structure will result in a lower or more volatile market price of our Class A common stock, in adverse publicity or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple-class share structures in certain of their indexes. S&P,&P, Dow Jones and FTSE Russell have each announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P&P 500. These changes exclude companies with multiple classes of shares of common stock from being added to these indices. In addition, several stockholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the multi-class structure of our capital stock may prevent the inclusion of our Class A common stock in these indices and may cause stockholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our Class A common stock. Any actions or publications by stockholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the trading price of our Class A common stock.
The multi-class structure of our common stock additionally has the effect of concentrating voting control with our Class B common stockholders, including our Founder and Chief Executive Officer. This concentrated control could delay, defer, or prevent a change of control, merger, consolidation, takeover, or other business combination involving us that you, as a stockholder, may otherwise support, and could allow us to take actions that some of our stockholders do not view as beneficial, which could reduce the trading price of our Class A common stock. Furthermore, this concentrated control could also discourage a potential investor from acquiring our Class A common stock due to the limited voting power of such stock relative to the Class B common stock and might harm the trading price of our Class A common stock. Any issuance of Class C common stock could also cause the trading price of our Class A common stock to decline.
Our business, financial condition and results of operations may differ from any projections that we disclose or any information that may be attributed to us by third parties.
From time to time, we may provide guidance via public disclosures regarding our projected business, financial condition or results of operations. However, any such projections involve risks, assumptions and uncertainties, and our actual results could differ materially from such projections. Factors that could cause or contribute to such differences include, but are not limited to, those identified in these Risk Factors, some or all of which are not predictable or within our control. Other unknown or unpredictable factors also could adversely impact our performance, and we undertake no obligation to update or revise any projections, whether as a result of new information, future events or otherwise. In addition, various news sources, bloggers and other publishers often make statements regarding our historical or projected business or financial performance, and you should not rely on any such information even if it is attributed directly or indirectly to us.
We do not intend to pay dividends on our capital stock for the foreseeable future.
We do not currently anticipate paying dividends on our capital stock. Any declaration and payment of future dividends to holders of our capital stock will be at the discretion of our board of directors and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual
restrictions applying to the payment of dividends, the provisions of Delaware law affecting the payment of dividends and distributions to stockholders and other considerations that our board of directors deems relevant. In addition, the terms of the Credit Agreement currently limit our ability to pay dividends and future agreements governing our indebtedness may similarly limit our ability to pay dividends. Consequently, your only opportunity to achieve a return on your investment in our company will be if the trading price of our Class A common stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our Class A common stock that will prevail in the market will ever exceed the price that you paid. paid for your shares.
Anti-takeover provisions contained in our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the trading price of our Class A common stock.
Our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:
•our multi-class common stock structure, which provides holders of our Class B common stock with the ability to significantly influence the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding common stock;
•our stockholders are only able to take action at a meeting of stockholders and not by written consent;
•special meetings of our stockholders may be called only by a majority of our board of directors, the chairperson of our board of directors or our chief executive officer;
•advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders;
•certain amendments to our amended and restated certificate of incorporation or our amended and restated bylaws require the approval of at least 661∕3% of the then-outstanding voting power of our capital stock;
•our amended and restated bylaws provide that certain litigation against us can only be brought in Delaware; and
•authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock.
These and other provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and under Delaware law could discourage potential takeover attempts, reduce the price investors might be willing to pay in the future for shares of our Class A common stock and result in the trading price of our Class A common stock being lower than it would be without these provisions.
Our amended and restated certificate of incorporation contains exclusive forum provisions for certain claims, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of a duty (including any fiduciary duty) owed by any of our current or former directors, officers, stockholders, employees or agents to us or our stockholders; (iii) any action asserting a claim against us or any of our current or former directors, officers, stockholders, employees or agents arising out of or relating to any provision of the General Corporation Law of the State of Delaware or our amended and restated certificate of incorporation or our amended and restated bylaws; or (iv) any action asserting a claim against us or any of our current or former directors, officers, stockholders, employees or agents governed by the internal affairs doctrine of the State of Delaware.
This provision, however, does not apply to suits brought to enforce any duty or liability created by the Securities Act of 1933, as amended (the "Securities Act") or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or rules and regulations thereunder. The federal district courts of the United States of America will, to the fullest extent permitted by law, be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act or the Exchange Act. Accordingly, while there can be no assurance that federal or state courts will determine that our exclusive forum provision should be enforced in a particular case, suits brought by our stockholders to enforce any duty or liability created by the Securities Act must be brought in federal court and cannot be brought in state court.
Our investors are deemed to have notice of and consented to these forum provisions, provided, however, that stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. These provisions may limit our stockholders’ ability to bring a claim in a judicial forum they find favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees and agents. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may
incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.
General Risk Factors
Our business, financial condition and results of operations may differ from any projections that we disclose or any information that may be attributed to us by third-parties.
From time to time, we may provide guidance via public disclosures regarding our projected business, financial condition or results of operations. However, any such projections involve risks, assumptions and uncertainties, and our actual results could differ materially from such projections. Factors that could cause or contribute to such differences include, but are not limited to, those identified in these Risk Factors, some or all of which are not predictable or in our control. Other unknown or unpredictable factors also could adversely impact our performance, and we undertake no obligation to update or revise any projections, whether as a result of new information, future events or otherwise. In addition, various news sources, bloggers and other publishers often make statements regarding our historical or projected business or financial performance, and you should not rely on any such information even if it is attributed directly or indirectly to us.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our Class A common stock adversely, the trading price of our Class A common stock and trading volume could decline.
The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not control these analysts. If any of the analysts who cover us downgrade our Class A common stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, the price of our Class A common stock may decline. If analysts cease coverage of
us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the price or trading volume of our Class A common stock to decline and our Class A common stock to be less liquid.
Additional issuances of our stock could result in significant dilution to our stockholders.
Additional issuances of our stock, exercise of options or vesting of RSUs will result in dilution to existing holders of our capital stock. The amount of dilution could be substantial depending upon the size of the issuance, exercise or vesting. As part of our business strategy, we may acquire or make investments in companies, products or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the trading price of our Class A common stock to decline.
Anti-takeover provisions contained in our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the trading price of our Class A common stock.
Our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:
•our multi-class common stock structure, which provides holders of our Class B common stock with the ability to significantly influence the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding common stock;
•our stockholders are only able to take action at a meeting of stockholders and not by written consent;
•special meetings of our stockholders may be called only by a majority of our board of directors, the chairperson of our board of directors or our chief executive officer;
•advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.
•certain amendments to our amended and restated certificate of incorporation or our amended and restated bylaws require the approval of at least 661∕3% of the then-outstanding voting power of our capital stock;
•our amended and restated bylaws provide that certain litigation against us can only be brought in Delaware; and
•authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock.
These and other provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and under Delaware law could discourage potential takeover attempts, reduce the price investors might be willing to pay in the future for shares of our Class A common stock and result in the trading price of our Class A common stock being lower than it would be without these provisions.
Our amended and restated certificate of incorporation contains exclusive forum provisions for certain claims, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation, to the fullest extent permitted by law, provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of us; (ii) any action asserting a claim of breach of a duty (including any fiduciary duty) owed by any of our current or former directors, officers, stockholders, employees or agents to us or our stockholders; (iii) any action asserting a claim against us or any of our current or former directors, officers, stockholders, employees or agents arising out of or relating to any provision of the General Corporation Law of the State of Delaware (the “DGCL”) or our amended and restated certificate of incorporation or our amended and restated bylaws; or (iv) any action asserting a claim against us or any of our current or former directors, officers, stockholders, employees or agents governed by the internal affairs doctrine of the State of Delaware. As described below, this provision does not apply to suits brought to enforce any duty or liability created by the Securities Act of 1933, as amended (the "Securities Act") or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or rules and regulations thereunder.
Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all claims brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder and our amended and restated certificate of incorporation provides that the federal district courts of the United States of America will, to the fullest extent permitted by law, be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. Our decision to adopt such a federal forum provision followed a decision by the Supreme Court of the State of Delaware holding that such provisions are facially valid under Delaware law. While there can be no assurance that federal or state courts will follow the holding of the Delaware Supreme Court or determine that our federal forum provision should be enforced in a particular case, application of our federal forum provision means that suits brought
by our stockholders to enforce any duty or liability created by the Securities Act must be brought in federal court and cannot be brought in state court.
Section 27 of the Exchange Act creates exclusive federal jurisdiction over all claims brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder and our amended and restated certificate of incorporation will provide that the exclusive forum provision does not apply to suits brought to enforce any duty or liability created by the Exchange Act. Accordingly, actions by our stockholders to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder must be brought in federal court. Our stockholders will not be deemed to have waived our compliance with the federal securities laws and the regulations promulgated thereunder.
Any person or entity purchasing or otherwise acquiring or holding any interest in any of our securities shall be deemed to have notice of and consented to our exclusive forum provisions, including the federal forum provision, provided, however, that stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. Additionally, our stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. These provisions may limit our stockholders’ ability to bring a claim in a judicial forum they find favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees and agents. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Between April 1, 2021 and May 10, 2021 (the date of the filing of our registration statement on Form S-8), we issued and sold to employees and former employees an aggregate of 871,807 shares of Class A common stock upon conversion from Class B common stock in connection with the exercise of options granted under our equity compensation plans at a weighted average exercise price of $0.63 per share.
Between April 1, 2021 and May 10, 2021 (the date of the filing of our registration statement on Form S-8) we granted 2,750,000 performance restricted stock units to Anthony Casalena pursuant to the Performance Restricted Stock Unit Agreement.
We believe that each of the above transactions were exempt from the registration requirements of the Securities Act (or Regulation D or Regulation S promulgated thereunder) by virtue of Section 4(a)(2) of the Securities Act because the issuance of securities to the recipients did not involve a public offering, or in reliance on Rule 701 because the transactions were pursuant to compensatory benefit plans or contracts relating to compensation as provided under such rule. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. The sales of these securities were made without any general solicitation or advertising.Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.On August 11, 2023, Anthony Casalena, Chief Executive Officer, adopted a 10b5-1 trading plan intended to satisfy the affirmative defense of Rule 10b5-1(c) under the Exchange Act. The 10b5-1 trading plan provides for the sale of an aggregate of up to 3,930,000 shares of the Company's common stock between December 2023 and June 2024, subject to early termination for certain specified events set forth in the plan.
Item 6. Exhibits
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference |
| Exhibit No. | | Exhibit Title | | Form | | File Number | | Exhibit | | Filing Date |
| 3.1 | | | | S-8 | | 333-255977 | | 4.2 | | May 10, 2021 |
| 3.2 | | | | S-8 | | 333-255977 | | 4.3 | | May 10, 2021 |
| 10.1 | | | | S-1 | | 333-255284 | | 10.1 | | April 16, 2021 |
| 10.2 | | | | S-1 | | 333-255284 | | 10.2 | | April 16, 2021 |
| 10.3 | | | | S-8 | | 333-255977 | | 99.1 | | May 10, 2021 |
| 10.4 | | | | S-8 | | 333-255977 | | 99.2 | | May 10, 2021 |
| 10.5 | | | | S-1 | | 333-255284 | | 10.14 | | April 16, 2021 |
| 10.6 | | | | S-1 | | 333-255284 | | 10.15 | | April 16, 2021 |
| 31.1* | | | | | | | | | | |
| 31.2* | | | | | | | | | | |
| 32.1# | | | | | | | | | | |
| 101.1 NS* | | XBRL Instance Document | | | | | | | | |
| 101.SCH* | | XBRL Taxonomy Extension Schema Document. | | | | | | | | |
| 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | |
| 101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | |
| 101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. | | | | | | | | |
| 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference |
| Exhibit No. | | Exhibit Title | | Form | | File Number | | Exhibit | | Filing Date |
| 31.1* | | | | | | | | | | |
| 31.2* | | | | | | | | | | |
| 32.1# | | | | | | | | | | |
| 101.1 NS* | | XBRL Instance Document | | | | | | | | |
| 101.SCH* | | XBRL Taxonomy Extension Schema Document. | | | | | | | | |
| 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | |
| 101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | |
| 101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. | | | | | | | | |
| 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | | | | | | | | |
__________________
* Filed herewith.
# The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed”“filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates it by reference. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates it by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| Squarespace, Inc. |
| | |
| Date: November 7, 2023 | By: | /s/ Anthony Casalena |
| | Anthony Casalena Chief Executive Officer (Principal Executive Officer) |
| | |
Date: August 9, 2021November 7, 2023 | By: | /s/ Anthony Casalena Nathan Gooden |
| | Anthony CasalenaNathan Gooden
Chief Executive Officer
(Principal Executive Officer)
|
| | |
Date: August 9, 2021 | By:
| /s/ Marcela Martin
|
| | Marcela Martin
Chief Financial Officer (Principal Financial Officer) |