Commerce.com, Inc. 10-K

Item 7. 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 conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors.” See “Special Note Regarding Forward-Looking Statements.” Overview BigCommerce is leading a new era of ecommerce. Our SaaS platform simplifies the creation of beautiful, engaging online stores by delivering a unique combination of ease-of-use, enterprise functionality, and flexibility. We allow merchants to build their ecommerce solution their way with the freedom of choice that makes the most sense for their unique business and product offerings. We power both our customers’ branded ecommerce stores and their cross-channel connections to popular online marketplaces, social networks, and offline POS systems. As of December 31, 2020, we served approximately 60,000 online stores across industries in approximately 155 countries. We provide a comprehensive platform for launching and scaling an ecommerce operation, including store design, catalog management, hosting, checkout, order management, reporting, and pre-integration into third-party services like payments, shipping, and accounting. All our stores run on a single code base and share a global, multi-tenant architecture purpose built for security, high performance, and innovation. Our platform serves stores in a wide variety of sizes, product categories, and purchase types, including B2C and B2B. Our customers include Avery Dennison, Ben & Jerry’s, Burrow, SC Johnson, SkullCandy, and Sony. We offer access to our platform on a subscription basis. We serve customers with subscription plans tailored to their size and feature needs. For our larger customers, our Enterprise plan offers our full feature set at a monthly subscription price tailored to each business. For SMBs, BigCommerce Essentials offers three retail plans: Standard, Plus, and Pro, priced at $29.95, $79.95, and $299.95 per month, respectively. Our Essentials plans include GMV thresholds with programmatic upgrades built in as merchants exceed each plan’s threshold. Partners are essential to our open strategy. We believe we possess one of the deepest and broadest ecosystems of integrated technology solutions in the ecommerce industry. We strategically partner with, rather than compete against, the leading providers in adjacent categories, including payments, shipping, POS, CMS, CRM, and ERP. We focus our research and development investments in our core product to create a best-of-breed ecommerce platform and co-market and co-sell with our strategic technology partners to enhance the breadth of the product offering to our customers. As a result, we earn high-margin revenue share from a subset of our strategic technology partners, which complements the high gross margin of our core ecommerce platform. Our business has achieved significant growth since our inception. We had total revenues of $152.4 million, $112.1 million and $91.9 million in 2020, 2019 and 2018, respectively. We plan to continue to invest in our “Open SaaS” strategy, building new partnerships and continuing to develop a platform that offers best-of-breed functionality with the cost-effectiveness of multi-tenant SaaS. As we work to develop and deliver this platform for our customers, we will also invest and grow our business by acquiring additional customers to our platform, growing our revenue with existing customers, and expanding our presence in new segments and geographies. As a result of the global travel restrictions and stay-at-home or similar orders in effect due to the COVID-19 pandemic, our sales and marketing, research and development, and general and administrative expenses declined as a percentage of revenue in the year ended December 31, 2020. On August 4, 2020, we completed our IPO, in which we issued and sold 7,877,500 shares of our Series 1 common stock, including 1,027,500 shares of Series 1 common stock that were sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares of Series 1 common stock at $24.00 per share. The IPO resulted in net proceeds of $171.1 million after deducting underwriting discounts and commissions and other offering costs. Our 2017 and 2020 Term Loans converted to Series 1 Common Stock in connection with the IPO, resulting in a $53.9 million reduction of our outstanding long-term debt. On November 12, 2020, we completed our Secondary Offering, in which we issued and sold 1,000,000 shares of our Series 1 common stock at $68.00 per share. The Secondary Offering resulted in net proceeds of $65.1 million after deducting underwriting discounts, commissions and other offering costs. Existing stockholders sold an additional 4,750,000 shares of Series 1 common stock, including 750,000 shares of Series 1 common stock that were sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares of Series 1 common stock at $68.00 per share. We did not receive any proceeds from the sale of shares by the selling stockholders in the Secondary Offering. Additionally, upon completion of the Secondary Offering, we fully repaid approximately $22 million of our outstanding indebtedness under our Credit Facility. Key factors affecting our performance We believe our future performance will depend on many factors, including the following: 33 Table of Contents Continued growth of ecommerce domestically and globally Ecommerce is rapidly transforming global B2C and B2B commerce. B2C ecommerce was nonexistent in the early-1990s and grew to approximately 10% of all global retail spending in 2017, according to eMarketer. eMarketer estimates that it will take just six years for this percentage to more than double to 21% of global retail spending in 2023. The rapid growth in ecommerce is prompting companies to adopt ecommerce platforms like BigCommerce to create compelling branded ecommerce stores and power cross-channel connections to online marketplaces, social networks, and offline POS systems. We believe we have a substantial opportunity to serve a larger number of customers as ecommerce continues to grow around the world by extending into new and emerging segments within ecommerce. The following segments are significant areas of potential growth and strategic focus for us: • Headless commerce . This refers to businesses whose technology strategy is to decouple their front-end customer experience technology from their back-end commerce platform. In terms of online strategy, these companies are typically brand-, marketing-, or experience-led. We serve headless use cases better than most of our competitors due to years of investment in our platform APIs and integration capabilities. Pre-built integrations connect our platform with leading CMSs such as Acquia, Adobe, Bloomreach, Drupal, Sitecore, and WordPress. • B2B . As of December 31, 2020, approximately 10% of our customers use BigCommerce primarily for B2B sales. In many cases, these customers’ needs are met using our native functionality, including B2B features like customer groups and price lists. In other cases, these customers complement BigCommerce with purpose-built B2B extensions and applications in the BigCommerce Apps Marketplace. Over time, we intend to add more B2B functionality to both the BigCommerce Apps Marketplace and our native feature set. • Large enterprise . Increasingly, we are successfully competing for large enterprise sites selling more than $50 million annually online, with our Enterprise plan product feature set, along with our sales, marketing, solutioning, and service capabilities. Efficient acquisition of new customers The growth of our customer base is important to our continued revenue growth. We believe we are positioned to grow significantly through a combination of our own marketing and sales initiatives, customer referrals from our agency and technology partners, and word-of-mouth referrals from existing customers. We measure the efficiency of new customer acquisition by comparing the lifetime value (“LTV”) of newly-acquired customers to the customer acquisition costs (“CAC”) of the associated time period to get an “LTV:CAC ratio.” We calculate LTV as gross profit from new sales during the four quarters of any given year divided by the estimated future subscription churn rate. We calculate CAC as total sales and marketing expense incurred during the associated preceding four quarters. New SMB, Mid-Market and Enterprise customers were added at an estimated LTV to CAC ratio of 4.9:1, up from 4.4:1 in 2019. Retention and growth of our existing customers We believe our long-term revenue growth is correlated with the growth of our existing customers’ ecommerce businesses. We strive to maintain industry-leading service levels and platform capabilities to maximize customer success and retention. Our revenue grows with that of our customers. As they generate more online sales, we generate more subscription revenue through automated sales-based upgrades on our Essentials plans and order adjustments on our Enterprise plans. Typical enterprise contracts have terms ranging from 12 to 36 months and do not include the ability to terminate for convenience. As our customers’ online sales increase, our partner and services revenue generated by revenue-sharing agreements with our strategic technology partners increases as well. Our ability to retain and grow our customers’ ecommerce businesses often depends on the continued expansion of our platform and the capabilities of our strategic technology partners to provide revenue generating services to our customers. We continually evaluate prospective and existing partners’ abilities to enhance the capabilities of our customers’ ecommerce businesses. We add new partners and expand existing partner relationships to enhance the utility of our platform, while creating new opportunities to expand our revenue share in partner and services revenue. As we continue to grow as a platform, we believe our ability to realize more favorable and expansive revenue share agreements will grow as well. We also grow by selling additional stores to existing customers. Our larger customers will often first use our platform to build a single online store that serves a single brand within their portfolio. These customers can then expand their usage of our platform by launching additional stores to serve additional brands, geographies, or use cases (e.g., B2B in addition to B2C). Successful rollout of new geographies We believe our platform can compete successfully around the world. We enhance usability in new geographies by translating our control panel into local languages and enabling the integration of local payment processors. We support the growth of mid-market and large enterprise customers around the world by expanding our regional sales and marketing capabilities. We opened our first European office in London, UK in 2018 and expanded it throughout 2019 and 2020, resulting in a 68% and 20% revenue growth rate in EMEA for the years ended December 31, 2020 and 2019, respectively. Similarly, we expanded our existing sales and marketing team in Sydney, Australia, resulting in a 38% and 28% revenue growth rate in APAC for the years ended December 31, 2020 and 2019, respectively. 2020 brought marked advancements in our international expansion strategy through the launch of new country-specific websites in France, Italy, the Netherlands, and more recently in Mexico, Germany and Spain. We 34 Table of Contents continue to invest in our global presence and in offering native language web experiences that further strengthen our ability to connect more directly with prospects and customers in each region. Evolution of our technology partner ecosystem A key part of our strategy is to build a thriving technology partner ecosystem. We focus on collaborating with, not competing against, partners in our ecosystems. This strategy contrasts with our largest competitors, who operate software stacks with multiple vertically integrated adjacent services that potentially compete with offerings from technology partners in their ecosystems. Our customers benefit from the expertise and best-of-breed offerings of our partners, the flexibility to choose without penalty the best offerings for their needs, and the tailored programs developed with our strategic partners. Through significant investment, we have developed a marketplace of integrated application and technology solutions that is one of the largest of any ecommerce platform. Our partners currently offer more than 875 pre-built applications and integrations spanning major categories relevant to ecommerce, including shipping, tax, accounting and ERP, marketing, fulfillment, cross-channel commerce, and POS systems, with additional applications and integrations for merchandising, locations, and payments. We intend to grow partner-sourced revenue by expanding the value and scope of existing partnerships, selling and marketing partner solutions to our customer base, and acquiring and cultivating new, high-value relationships. Partner referrals of customers are increasingly becoming an efficient customer acquisition strategy for us as we expand our programs for cross-marketing and cross-selling with our partners. Realizing operating leverage from our investments We have made significant investments in our SaaS platform and our global infrastructure, which we believe will yield future operating leverage and profit margin expansion. Research and development has historically been one of our largest operating expense categories. By opening and expanding a lower-cost engineering center in Kyiv, Ukraine, we are increasing development capacity while also driving leverage in engineering cost as a percentage of total revenue. In addition, we believe we will achieve operating leverage in marketing by continuing to emphasize lower-cost inbound techniques and growth in customer referrals from our technology and agency partners, especially as our revenue mix continues to shift to our enterprise plans. We believe we will be able to run our business more efficiently as we continue to grow our revenue and gain further operating scale. Duration and durability of COVID-19’s impact on partner and services revenue Ecommerce sales in our major markets have increased significantly due to the widespread closure of physical stores and behavioral changes associated with social distancing. This increase in sales has bolstered our partner and services revenue, driven predominantly by increases in our partner revenue share streams. We anticipate that our performance will be affected by the duration of COVID-19’s impact on physical stores and consumer preferences and the resulting increase in ecommerce sales. Additionally, we expect the widespread availability of treatment options to impact the trend toward ecommerce, which, in turn, may have a significant impact on our performance. We believe we are well-positioned to continue to benefit from the macro-economic shift to ecommerce that COVID-19 has accelerated, but revenue may be more variable in the near-term as a result. Key business metrics We review the following key business metrics to measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. Increases or decreases in our key business metrics may not correspond with increases or decreases in our revenue. Annual revenue run-rate We calculate annual revenue run-rate (“ARR”) at the end of each month as the sum of: (1) the product of the current month’s monthly recurring revenue (“MRR”) multiplied by twelve (to prospectively annualize subscription revenue), and (2) the trailing twelve-month partner and services revenue, including non-recurring services revenue, such as one-time partner integration fees and store-launch services. MRR includes BigCommerce platform subscription fees and invoiced growth adjustments as customers’ businesses grow past contracted order thresholds after a threshold has been met. It also includes recurring professional services revenue, such as recurring technical account management services and product training services. Accounts with greater than $2,000 ACV We track the total number of accounts with annual contract value (“ACV”) greater than $2,000 (the “ACV threshold”) as of the end of a monthly billing period. To define this $2,000 ACV cohort, we include only subscription plan revenue and exclude partner and services revenue and recurring services revenue. We consider all stores added and subtracted as of the end of the monthly billing period. This metric includes accounts that may have either one single store above the ACV threshold or multiple stores that together exceed the ACV threshold. Accordingly, this cohort would include: (1) customers on Enterprise plans, (2) customers on Pro plans, and (3) customers with multiple plans that together exceed the ACV threshold. Average revenue per account We calculate average revenue per account (“ARPA”) at the end of a period by including customer-billed revenue and an allocation of partner and services revenue. We bill customers for subscription solutions and professional services, and we include both in ARPA for the reported period. 35 Table of Contents For example, ARPA as of March 31, 2019 includes all subscription solutions and professional services billed between January 1, 2019 and March 31, 2019. We allocate partner revenue primarily based on each customer’s share of GMV processed through that partner’s solution. For partner revenue that is not directly linked to customer usage of a partner’s solution, we allocate such revenue based on each customer’s share of total platform GMV. Each account’s partner revenue allocation is calculated by taking the account’s trailing twelve-month partner revenue, then dividing by twelve to create a monthly average to apply to the applicable period in order to normalize ARPA for season ality . Enterprise Account metrics To measure the effectiveness of our ability to execute against our growth strategy, particularly within the mid-market and enterprise business segments, we calculate ARR attributable to Enterprise Accounts. We define Enterprise Accounts as accounts with at least one unique Enterprise plan subscription (“Enterprise Accounts”). These accounts may have more than one Enterprise plan or a combination of Enterprise plans and Essentials plans. The chart below illustrates certain of our key business metrics as of the years ended December 31, 2020, 2019 and 2018. 2020 2019 2018 Total ARR (in thousands) $ 181,166 $ 128,522 $ 102,162 Accounts with ACV greater than $2,000 10,184 9,090 8,375 % of Total ARR attributable to accounts with ACV greater than $2,000 82 % 78 % 74 % ARR attributable to accounts with ACV greater than $2,000 (in thousands) $ 148,556 $ 100,247 $ 75,600 ARPA attributable to accounts with ACV greater than $2,000 $ 14,615 $ 11,098 $ 9,056 ARR attributable to Enterprise Accounts (in thousands) $ 100,771 $ 66,734 $ 46,481 % of Total ARR attributable to Enterprise Accounts 56 % 52 % 45 % Net revenue retention We use net revenue retention (“NRR”) to evaluate our ability to maintain and expand our revenue with our account base of customers exceeding the ACV threshold over time. The total billings and allocated partner revenue for the measured period are divided by the total billings and allocated partner revenue for such accounts, corresponding period one year prior. An NRR greater than 100% implies positive net revenue retention. This methodology includes stores added to or subtracted from an account’s subscription during the previous twelve months. It also includes changes to subscription and partner and services revenue billings, and revenue reductions from stores or accounts that leave the platform during the previous one-year period. Net new accounts added after the previous one-year period are excluded in our NRR calculations. NRR for accounts with ACV greater than $2,000 was 113%, 106% and 108% for the years ended December 31, 2020, 2019 and 2018, respectively. We update our reported NRR at the end of each fiscal year and do not report quarterly changes in NRR. Components of results of operations Revenue We generate revenue from two sources: (1) subscription solutions revenue and (2) partner and services revenue. Subscription solutions revenue consists primarily of platform subscription fees from all plans. It also includes recurring professional services and sales of SSL certificates. Subscription solutions are charged monthly, quarterly, or annually for our customers to sell their products and process transactions on our platform. Subscription solutions are generally charged per online store and are based on the store’s subscription plan. Our Enterprise plan contracts are generally for a fixed term of one to three years and are non-cancelable. Our retail plans are generally month-to-month contracts. Monthly subscription fees for Pro and Enterprise plans are adjusted if a customer’s GMV or orders processed are outside of specified plan thresholds on a trailing twelve-month basis. Fixed monthly fees and any transaction charges related to subscription solutions are recognized as revenue in the month they are earned. We generate partner revenue from our technology application ecosystem. Customers tailor their stores to meet their feature needs by integrating applications developed by our strategic technology partners. We enter into contracts with our strategic technology partners that are generally for one year or longer. We generate revenue from these contracts in three ways: (1) revenue-sharing arrangements, (2) technology integrations, and (3) partner marketing and promotion. We recognize revenue on a net basis from revenue-sharing arrangements when the underlying transaction occurs. We also generate revenue from non-recurring professional services that we provide to complement the capabilities of our customers and their agency partners. Our services help improve customers’ time-to-market and the success of their businesses using BigCommerce. Our non-recurring services include education packages, launch services, solutions architecting, implementation consulting, and catalog transfer services. 36 Table of Contents Cost of revenue Cost of revenue consists primarily of: (1) personnel-related costs (including stock-based compensation expense) for our customer success teams, (2) costs that are directly related to hosting and maintaining our platform, (3) fees for processing customer payments, and (4) the allocation of overhead costs. We expect that cost of revenue will increase in absolute dollars, but may fluctuate as a percentage of total revenue from period to period. Sales and marketing Sales and marketing expenses consist primarily of: (1) personnel-related expenses (including stock-based compensation expense), (2) sales commissions, (3) marketing programs, (4) travel-related expenses, and (5) allocated overhead costs. We focus our sales and marketing efforts on creating sales leads and establishing and promoting our brand. We plan to increase our investment in sales and marketing by hiring additional sales and marketing personnel, executing our go-to-market strategy globally, and building our brand awareness. Incremental sales commissions for new customer contracts are deferred and amortized ratably over the estimated period of our relationship with such customers. No incremental sales commissions are incurred on renewals of customer contracts. We expect our sales and marketing expenses will increase in absolute dollars, but will decrease as a percentage of total revenue over time. Research and development Research and development expenses consist primarily of personnel-related expenses (including stock-based compensation expense) incurred in maintaining and developing enhancements to our ecommerce platform and allocated overhead costs. To date, software development costs eligible for capitalization have not been significant. We believe delivering new functionality is critical to attracting new customers and enhancing the success of existing customers. We expect to continue to make substantial investments in research and development. We expect our research and development expenses to increase in absolute dollars, but decrease as a percentage of total revenue over time, as we continue to leverage and expand our lower-cost engineering center in Kyiv, Ukraine. We expense research and development expenses as incurred. General and administrative General and administrative expenses consist primarily of: (1) personnel-related expenses (including stock-based compensation expense) for finance, legal and compliance, human resources, and IT, (2) external professional services, and (3) allocated overhead costs. We expect to incur additional general and administrative expenses as a result of operating as a public company. We also expect to increase the size of our general and administrative functions to support the growth of our business. As a result, we expect that our general and administrative expenses will increase in absolute dollars but may fluctuate as a percentage of total revenue from period to period. Other expenses, net Other expenses, net consists primarily of interest expense on our bank borrowings partially offset by interest income on corporate funds invested in money market instruments and highly liquid short-term investments. Provision for income taxes Provision for income taxes consists primarily of income taxes related to certain foreign and state jurisdictions in which we conduct business. For U.S. federal income tax purposes and in certain foreign and state jurisdictions, we have NOL carryforwards. The foreign jurisdictions in which we operate have different statutory tax rates than those of the United States. Additionally, certain of our foreign earnings may also be currently taxable in the United States. Accordingly, our effective tax rate will vary depending on the relative proportion of foreign to domestic income, use of foreign tax credits, changes in the valuation of our deferred tax assets and liabilities, applicability of any valuation allowances, and changes in tax laws in jurisdictions in which we operate. 37 Table of Contents Results of operations The following table summarizes our historical consolidated statement of operations data. The period-to-period comparison of operating results is not necessarily indicative of results for future periods. Year ended December 31, 2020 2019 2018 (in thousands) Revenue $ 152,368 $ 112,103 $ 91,867 Cost of revenue (1) 34,126 27,023 21,937 Gross profit 118,242 85,080 69,930 Operating expenses: Sales and marketing (1) 72,470 60,740 45,928 Research and development (1) 48,332 43,123 42,485 General and administrative (1) 36,137 22,204 19,497 Total operating expenses 156,939 126,067 107,910 Loss from operations (38,697 ) (40,987 ) (37,980 ) Interest income 31 245 653 Interest expense (3,103 ) (1,612 ) (1,489 ) Change in fair value of financial instrument 4,413 - - Other expense (179 ) (208 ) (52 ) Loss before provision for income taxes (37,535 ) (42,562 ) (38,868 ) Provision for income taxes 25 28 10 Net loss $ (37,560 ) $ (42,590 ) $ (38,878 ) (1) Includes stock-based compensation expense as follows: Year ended December 31, 2020 2019 2018 (in thousands) Cost of revenue 769 191 82 Sales and marketing 3,310 838 388 Research and development 2,500 666 432 General and administrative 4,479 1,461 1,169 Total stock-based compensation expense $ 11,058 $ 3,156 $ 2,071 (1) Includes depreciation and amortization as follows: Year ended December 31, 2020 2019 2018 (in thousands) Cost of revenue $ 958 $ 716 $ 466 Sales and marketing 902 730 478 Research and development 609 614 561 General and administrative 615 509 339 Total depreciation and amortization expense $ 3,084 $ 2,569 $ 1,844 38 Table of Contents Revenue by geographic region The composition of our revenue by geographic region during the years ended December 31, 2020 and 2019, and years ended December 31, 2019 and 2018 were as follows: Year ended December 31, Change Year ended December 31, Change 2020 2019 Amount % 2019 2018 Amount % (dollars in thousands) (dollars in thousands) Revenue Americas—U.S. $ 120,934 $ 91,057 $ 29,877 32.8 $ 91,057 $ 75,025 $ 16,032 21.4 Americas—other 5,371 3,761 1,610 42.8 3,761 3,000 761 25.4 EMEA 12,396 7,370 5,026 68.2 7,370 6,123 1,247 20.4 APAC 13,667 9,915 3,752 37.8 9,915 7,719 2,196 28.4 Total Revenue $ 152,368 $ 112,103 $ 40,265 35.9 $ 112,103 $ 91,867 $ 20,236 22.0 Comparison of years ended December 31, 2020 and 2019, and the years ended December 31, 2019 and 2018 Revenue The following table presents the components of our revenue for each of the periods indicated: Year ended December 31, Change Year ended December 31, Change 2020 2019 Amount % 2019 2018 Amount % (dollars in thousands) (dollars in thousands) Revenue Subscription solutions $ 103,706 $ 82,689 $ 21,017 25.4 $ 82,689 $ 70,484 $ 12,205 17.3 Partner and services 48,662 29,414 19,248 65.4 29,414 21,383 8,031 37.6 Total revenue $ 152,368 $ 112,103 $ 40,265 35.9 $ 112,103 $ 91,867 $ 20,236 22.0 Revenue increased $40.3 million, or 35.9%, to $152.4 million for the year ended December 31, 2020 from $112.1 million for the year ended December 31, 2019, as a result of increases in both subscription solutions and partner and services revenue. Subscription solutions revenue increased $21.0 million, or 25.4%, to $103.7 million for the year ended December 31, 2020 from $82.7 million for the year ended December 31, 2019, primarily due to combined growth in domestic and international retail, mid-market and enterprise subscription sales as well as improved retention of our underlying customer base. Partner and services revenue increased $19.2 million, or 65.4%, to $48.7 million for the year ended December 31, 2020 from $29.4 million for the year ended December 31, 2019, primarily as a result of increases in revenue-sharing activity with our technology partners and improved monetization of partner revenue share. Revenue increased $20.2 million, or 22%, to $112.1 million in 2019 from $91.9 million in 2018, as a result of increases in both subscription solutions and partner and services revenue. Subscription solutions revenue increased $12.2 million, or 17.3%, to $82.7 million in 2019 from $70.5 million in 2018, primarily due to the increase in mid-market and large enterprise customers and our international expansion efforts. Partner and services revenue increased $8.0 million, or 37.6%, to $29.4 million in 2019 from $21.4 million in 2018, primarily as a result of increases in revenue-sharing activity with our technology partners. Cost of revenue, gross profit, and gross margin The following table presents our cost of revenue, gross profit, and gross margin for each of the periods indicated: Year ended December 31, Change Year ended December 31, Change 2020 2019 Amount % 2019 2018 Amount % (dollars in thousands) (dollars in thousands) Cost of revenue $ 34,126 $ 27,023 $ 7,103 26.3 $ 27,023 $ 21,937 $ 5,086 23.2 Gross profit $ 118,242 $ 85,080 $ 33,162 39.0 $ 85,080 $ 69,930 $ 15,150 21.7 Gross margin 77.6 % 75.9 % 1.7 % 75.9 % 76.1 % (0.2 )% Cost of revenue increased $7.1 million, or 26.3%, to $34.1 million for the year ended December 31, 2020 from $27.0 million for the year ended December 31, 2019, primarily as a result of higher hosting costs of $2.4 million as a result of increased transactions processed and higher personnel costs of $4.5 million, including stock-based compensation expense. Gross margin increased to 77.6% during the year ended December 31, 2020 from 75.9% during the year ended December 31, 2019. Cost of revenue increased $5.1 million, or 23.2%, to $27.0 million in 2019 from $21.9 million in 2018, primarily as a result of higher hosting costs of $1.3 million as a result of increased transactions processed and increases in personnel-related costs of $3.6 million, including stock-based compensation expense, for personnel involved in providing customer support and professional services. Headcount for such personnel as of December 31, 2019 was 180 compared to 145 as of December 31, 2018. Gross margin decreased to 75.9% during 2019 from 76.1% during 2018. 39 Table of Contents Operating expenses The following tables present our operating expenses for each of the periods indicated: Sales and marketing Year ended December 31, Change Year ended December 31, Change 2020 2019 Amount % 2019 2018 Amount % (dollars in thousands) (dollars in thousands) Sales and marketing $ 72,470 $ 60,740 $ 11,730 19.3 % $ 60,740 $ 45,928 $ 14,812 32.3 % Percentage of revenue 47.6 % 54.2 % (6.6 )% 54.2 % 50.0 % 4.2 % Sales and marketing expenses increased $11.7 million, or 19.3%, to $72.5 million for the year ended December 31, 2020 from $60.7 million for the year ended December 31, 2019, primarily due to higher staffing costs of $13.7 million, including stock-based compensation expense and bonuses, offset by a reduction in travel and marketing related expenditures of $2.4 million due to shifts in event timing due to the COVID-19 pandemic. As a percentage of total revenue, sales and marketing expenses decreased to 47.6% during the year ended December 31, 2020 from 54.2% during the year ended December 31, 2019, primarily due to increased operating leverage from revenue growth. Sales and marketing expenses increased $14.8 million, or 32.3%, to $60.7 million in 2019 from $45.9 million in 2018, primarily due to an increase of $11.1 million in personnel-related costs, including stock-based compensation expense, for personnel engaged in acquiring new customers and marketing our products and services. Total sales and marketing headcount as of December 31, 2019 was 181 compared to 155 as of December 31, 2018. The increase was also attributed to a $3.3 million increase in marketing program spend to continue the promotion of our products and services globally. As a percentage of total revenue, sales and marketing expenses increased to 54.2% during 2019 from 50.0% during 2018, primarily due to investments in sales and marketing teams in London, UK and Sydney, Australia. Research and development Year ended December 31, Change Year ended December 31, Change 2020 2019 Amount % 2019 2018 Amount % (dollars in thousands) (dollars in thousands) Research and development $ 48,332 $ 43,123 $ 5,209 12.1 % $ 43,123 $ 42,485 $ 638 1.5 % Percentage of revenue 31.7 % 38.5 % (6.8 )% 38.5 % 46.2 % (7.7 )% Research and development expenses increased $5.2 million, or 12.1%, to $48.3 million for the year ended December 31, 2020 from $43.1 million for the year ended December 31, 2019, primarily due to higher staffing costs of $5.4 million including stock-based compensation and bonuses, however declined as a percentage of revenue. This decline reflects our leverage of previous enhancements to our platform capabilities and prior development of new product offerings. Research and development expenses were relatively unchanged in absolute dollars for the year ended December 31, 2019 compared to December 31, 2018, however declined as a percentage of revenue, which is reflective of our efforts to leverage the previous enhancements to our platform capabilities and prior development of new product offerings. By opening and expanding an engineering center in Kyiv, Ukraine in 2019, we increased our lower-cost development capacity, further driving leverage in research and development spend as a percentage of revenue. Total research and development headcount as of December 31, 2019 was 190 compared to 191 as of December 31, 2018. General and administrative Year ended December 31, Change Year ended December 31, Change 2020 2019 Amount % 2019 2018 Amount % (dollars in thousands) (dollars in thousands) General and administrative $ 36,137 $ 22,204 $ 13,933 62.7 % $ 22,204 $ 19,497 $ 2,707 13.9 % Percentage of revenue 23.7 % 19.8 % 3.9 % 19.8 % 21.2 % (1.4 )% General and administrative expenses increased $13.9 million, or 62.7%, to $36.1 million for the year ended December 31, 2020 from $22.2 million for the year ended December 31, 2019. The increase was primarily due to increased staffing costs of $11.0 million, including stock-based compensation expense and bonuses, and additional public company compliance costs including, but not limited to director and officer insurance amounting to $2.3 million. General and administrative expenses increased $2.7 million, or 13.9%, to $22.2 million in 2019 from $19.5 million in 2018. The increase was primarily due to an increase of $2.4 million in personnel-related expense, including stock-based compensation expense, resulting from the hiring of 40 Table of Contents additional general and administrative personnel. Total general and administrative headcount as of December 31, 2019 was 139 compared to 111 as of December 31, 2018. Interest income Interest income was insignificant for the years ended December 31, 2020 and 2019. Interest income decreased $0.4 million, or 62.5%, to $0.2 million in 2019 from $0.7 million in 2018, primarily as a result of lower balances in marketable securities. Interest expense Interest expense increased $1.5 million, or 92.5%, to $3.1 million for the year ended December 31, 2020 from $1.6 million for year ended December 31, 2019, primarily as a result of increased bank borrowings used to fund operations. Interest expense increased $0.1 million, or 8.3%, to $1.6 million in 2019 from $1.5 million in 2018, primarily as a result of increased bank borrowings used to fund operations. Change in fair value of financial instrument The increase of $4.4 million in the fair value of financial instrument for the year ended December 31, 2020 was the result of a change in fair value of the embedded lenders’ put option on our 2020 Convertible Term Loan. Other expense Other expense was insignificant in the years ended December 31, 2020 and 2019. Other expense was insignificant in the years ended December 31, 2019 and 2018. Provision for income taxes Our provision for income taxes was insignificant in the years ended December 31, 2020, 2019 and 2018. Liquidity and capital resources We have incurred losses since our inception. Prior to our IPO, our operations were financed primarily through net proceeds from the sale of convertible preferred stock and borrowings under our debt instruments. As of December 31, 2020, we had an accumulated deficit of $313.4 million, working capital of $208.2 million and $220.6 million in cash and cash equivalents and restricted cash. Additionally, in December 2020 we fully repaid all outstanding borrowings under our debt facilities and terminated our A&R Credit Facility. Our short-term liquidity needs primarily include working capital for sales and marketing, research and development, and continued innovation. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and condensed consolidated statements of cash flows. We expect to continue to incur operating losses and negative cash flows from operations in the future and may require additional capital resources to execute strategic initiatives to grow our business. Our future capital requirements will depend on many factors, including our growth rate, levels of revenue, the expansion of sales and marketing activities, market acceptance of our platform, the results of business initiatives, the timing of new product introductions, and the impact of the COVID-19 pandemic on the global economy and our business, financial condition, and results of operations. As the impact of the COVID-19 pandemic on the global economy and our operations evolves, we will continue to assess our liquidity needs. On August 4, 2020, we completed our IPO, in which we issued and sold 7,877,500 shares of our Series 1 common stock, including 1,027,500 shares of Series 1 common stock that were sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares of Series 1 common stock, at $24.00 per share. The IPO resulted in net proceeds of $171.1 million after deducting underwriting discounts, commissions and other offering costs. An additional result of the IPO was the conversion of our 2017 and 2020 Term Loans to Series 1 Common Stock resulting in a $53.9 million reduction in the principal of our outstanding long-term debt. On November 12, 2020, we completed our Secondary Offering, in which we issued and sold 1,000,000 shares of our Series 1 common stock at $68.00 per share. The Secondary Offering resulted in net proceeds of $65.1 million after deducting underwriting discounts, commissions and other offering costs. Existing stockholders sold an additional 4,750,000 shares of Series 1 common stock, including 750,000 shares of Series 1 common stock that were sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares of Series 1 common stock at $68.00 per share. 41 Table of Contents We believe that our exi sting cash and cash equivalents and our cash flows from operating activi ties will be sufficient to meet our working capital and capital expenditure ne eds for at least the next twelve months. In the future, we may attempt to raise additional capital through the sale of additional equity or debt financing. The sale of additional equity would be dilutive to our stockholders. Additional debt financing could result in increased debt service obligations and more restrictive financial and operational covenants. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition could be adversely affected. Cash flows The following table sets forth a summary of our cash flows for the periods indicated. Year ended December 31, 2020 2019 2018 (in thousands) Net cash used in operating activities $ (26,529 ) $ (39,969 ) $ (30,591 ) Net cash (used in) provided by investing activities $ (1,964 ) $ 17,871 $ (26,517 ) Net cash provided by financing activities $ 239,950 $ 17,351 $ 64,236 As of December 31, 2020, we had $220.6 million in cash, cash equivalents, and restricted cash, an increase of $211.4 million compared to $9.2 million in 2019. Cash and cash equivalents consist of highly-liquid investments with original maturities of less than three months. Restricted cash consists of security deposits for future chargebacks and amounts on deposit with certain financial institutions. We maintain cash account balances in excess of FDIC-insured limits. Operating activities Net cash used in operating activities for the years ended December 31, 2020, 2019 and 2018 was $26.5 million, $40.0 million and $30.6 million, respectively. This consisted primarily of our net losses adjusted for certain non-cash items including depreciation and amortization, stock-based compensation, debt discount amortization, bad debt expense, and the effect of changes in working capital. Investing activities Net cash used in investing activities during the year ended December 31, 2020 was $2.0 million. It consisted primarily of purchases of property and equipment of $2.0 million. Net cash provided by investing activities during the year ended December 31, 2019 was $17.9 million. It consisted primarily of proceeds from the sale and maturity of marketable securities of $23.5 million, partially offset by purchases of property and equipment of $5.6 million. Net cash used in investing activities during the year ended December 31, 2018 was $26.5 million. It consisted primarily of purchases of marketable securities of $33.6 million and purchases of property and equipment of $3.3 million, partially offset by proceeds from the maturities and sale of marketable securities of $10.4 million. Financing activities Net cash provided by financing activities during the year ended December 31, 2020 was $240.0 million. In the year ended December 31, 2020, our IPO and Secondary Offering proceeds, net of underwriting discounts, commissions and other offering costs, provided $236.2 million, bank borrowings provided $41.9 million and issuance of shares of Series 1 common stock pursuant to the exercise of stock options provided $3.3 million, which was partially offset by the payment of dividends and repayment of debt for $12.8 million and $28.6 million respectively. Net cash provided by financing activities during the year ended December 31, 2019 was $17.4 million. In the year ended December 31, 2019, bank borrowings provided $18.5 million, and issuance of shares of Series 1 common stock pursuant to the exercise of stock options provided $0.9 million, slightly offset by debt repayments of $2.0 million. Net cash provided by financing activities during the year ended December 31, 2018 was $64.2 million, respectively. In the year ended December 31, 2018, $63.6 million was provided by the issuance of convertible preferred stock and the issuance of shares of Series 1 common stock pursuant to the exercise of stock options of $0.6 million. Indebtedness Credit facility On October 27, 2017, we entered into our Credit Facility with SVB, which we subsequently amended in August 2018 and June 2019. The Credit Facility provided a $25.0 million revolving line of credit with a maturity date of October 27, 2021 (the “Revolving Line”), a $5.0 million term loan with a maturity date of September 1, 2021 (the “2018 Term Loan”), and an undrawn $5.0 million term loan. 42 Table of Contents In February 2020, we entered into the A&R Credit Facility, which amended and restated the Credit Facility. Among other amendments, the A&R Credit Facility reduced the amount available under the Revolving Line by $5.0 million to $20.0 million, effective concurrent with the funding of the 2020 Convertible Term Loan. We entered into a first amendment to the A&R Credit Facility on September 29, 2020, which delayed the planned decrease in the Revolving Line to $10.0 million until December 31, 2020. We repaid all borrowings outstanding under this agreement in December 202 0 and terminated this faci lity effective as of December 29 , 2020 . Mezzanine facility On February 28, 2020, we entered into a mezzanine loan and security agreement (the “Mezzanine Facility”) with WestRiver Innovation Lending Fund VIII, L.P. providing for a term loan of $10.0 million with a draw period that expired on September 30, 2020. The Mezzanine Facility remained undrawn as of the expiration of the draw period and was terminated as a result of such expiration. We formally terminated the Mezzanine Facility effective as of November 6, 2020. Contractual obligations Our principal commitments consist of (1) obligations under our A&R Credit Facility, (2) operating leases for office space, and (3) purchase obligations with certain technology providers used to host our platform. The following table summarizes our commitments to settle contractual obligations as of December 31, 2020. Payments due by period Total Less than 1 year 1 – 3 Years 3 – 5 Years More than 5 years (in thousands) Long term debt obligations $ — $ — $ — $ — $ — Lease obligations 18,651 3,927 5,547 4,254 4,923 Purchase obligations 10,455 6,122 4,333 — — Total contractual obligations $ 29,106 $ 10,049 $ 9,880 $ 4,254 $ 4,923 Off-balance sheet arrangements We did not have any off-balance sheet arrangements as of December 31, 2020 or as of December 31, 2019. Critical accounting policies and estimates Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. We also make estimates and assumptions on the reported revenue generated and reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. While our significant accounting policies are described in the notes to our included consolidated financial statements, we believe the following critical accounting policies are most important to understanding and evaluating our reported financial results. Revenue recognition We recognize revenue from two sources: (1) subscription solutions revenue and (2) partner and services revenue. Subscription solutions revenue consists of: (1) platform subscription fees, (2) recurring professional services, and (3) sales of SSL certificates. We generally recognize platform subscription fees and recurring professional services revenue in the month they are earned. We begin revenue recognition on the date that our service is made available to our customers. We recognize SSL certificates revenue ratably over the term of the certificates. Fixed monthly fees and any overage charges related to subscription solutions are recognized as revenue in the month they are earned. Partner and services revenue is derived from: (1) revenue-sharing arrangements, (2) technology integrations, (3) partner marketing and promotion, and (4) non-recurring professional services. We recognize revenue on a net basis from revenue-sharing arrangements when the underlying transaction occurs. We recognize revenue from technology integration fees ratably over the contract term because technology integration and platform access are deemed to be a single performance obligation. Revenue from partner marketing and promotion and non-recurring professional services is recognized as the service is performed. We adopted Financial Accounting Standards Board (“FASB”), Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“Topic 606”), effective January 1, 2018, using the full retrospective method of adoption. As such, the consolidated financial statements present revenue in accordance with Topic 606 for the period presented. Topic 606 requires us to identify distinct performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. When distinct performance obligations exist, 43 Table of Contents we allocate the contract transaction price to each distinct performance obligation. The standalone selling price, or our best estimate of standalone selling price, is used to allocate the transaction price to the separate performance obligations. We recognize revenue when, or as, the performance obligation is satisfied. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Also, significant judgment may be required to determine the allocation of transaction price to each distinct performance obligation. Deferred costs Deferred costs include deferred sales commissions that are incremental costs of obtaining customer contracts. Sales commissions are not paid on subscription renewal. We amortize deferred sales commissions ratably over the estimated period of our relationship with customers of approximately four years. Based on historical experience, we determine the average life of our customer relationship by taking into consideration our customer contracts and the estimated technological life of our platform and related significant features. Equity-based compensation We have granted stock options to certain employees, consultants, and members of our board of directors. Stock-based compensation related to stock options is measured based on the fair value of the awards on the grant date. It is recognized in our consolidated statements of operations over the period the recipient is required to perform services in exchange for the award. This period is generally the vesting period. We estimate the fair value of stock options granted using the Black-Scholes option-pricing model. Our option-pricing model requires the input of highly subjective assumptions, including: (1) the fair value of the underlying shares, (2) the expected term of the awards, (3) the expected volatility of the price of our shares, (4) risk-free interest rates, and (5) the expected dividend yield of our shares. These estimates involve inherent uncertainties and the application of judgment. The assumptions are based on the following: • Expected volatility . Since we have no significant trading history by which to determine the volatility of our stock price, we estimate volatility for option grants by evaluating the average historical volatility of peer group companies for the period immediately preceding the option grant. • Risk-free interest rate . The risk-free interest rate was based on the United States Treasury zero-coupon issues with remaining terms similar to the expected term of the options. • Dividend yield . We used an expected dividend yield of zero. We have never declared or paid any cash dividends on our common stock and do not plan to pay cash dividends on our common stock in the foreseeable future. • Average expected life . We elected to use the simplified method to compute the expected term. We have limited history of exercise activity and our stock options meet the criteria of “plain-vanilla” options as defined by the SEC. The simplified method calculates the expected term by taking the average of the vesting term and the original contractual term of the awards. • Fair value of common stock . Given the absence of an active market for our shares of common stock prior to our IPO, we estimated the fair value of our shares of common stock. Subsequent to the IPO, the BOD determines the fair value of each share based on the closing price on the date of grant on the Nasdaq. • Forfeiture . We estimate the expected forfeiture rate and only recognize expense for those shares of common stock expected to vest. We estimate the forfeiture rate based on historical experience. To the extent our actual forfeiture rate is different from our estimate, stock-based compensation expense is adjusted accordingly. If any assumptions used in the Black-Scholes option-pricing model change significantly, stock option compensation expense for future awards may differ materially compared with the expense for awards granted previously. Commencing in 2020, we also have granted restricted stock units (“RSUs”). Stock-based compensation related to RSUs is measured based on the fair value of the common stock on the grant date. It is recognized in our consolidated statement of operations over the period the recipient is required to perform services in exchange for the award, which is generally the vesting period. The expense of these awards is determined by applying a forfeiture rate to the fair value of common stock on the date of grant. Recent accounting pronouncements A discussion of recent accounting pronouncements is included in Note 2 to our included audited consolidated financial statements. 44 Table of Contents Item 7A. Quantitative and Qualitati ve Disclosures About Market Risk. Interest rate risk Our cash, cash equivalents and restricted cash, consist primarily of interest-bearing accounts. Such interest-earning instruments carry a degree of interest rate risk. To minimize interest rate risk in the future, we intend to maintain our portfolio of cash equivalents in a variety of investment-grade securities, which may include commercial paper, money market funds, and government and non-government debt securities. Because of the short-term maturities of our cash, cash equivalents, restricted cash, and marketable securities, we do not believe that an increase in market rates would have any significant negative impact on the realized value of our investments. Foreign currency exchange risk All of our revenue and a majority of our expense and capital purchasing activities for the year ended December 31, 2020 were transacted in U.S. dollars. As we expand our sales and operations internationally, we will be more exposed to changes in foreign exchange rates. Our international revenue is currently collected in U.S. dollars. In the future, as we expand into additional international jurisdictions, we expect that our international sales will be primarily denominated in U.S. dollars. If we decide in the future to denominate international sales in currencies other than the U.S. dollar, unfavorable movement in the exchange rates between the U.S. dollar and the currencies in which we conduct foreign sales could have an adverse impact on our revenue. A portion of our operating expenses are incurred outside the United States and are denominated in foreign currencies, which are subject to fluctuations due to changes in foreign currency exchange rates. In particular, in our Australia and UK-based operations, we pay payroll and other expenses in Australian dollars and British pounds sterling, respectively. Our operating results and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. However, we believe that the exposure to foreign currency fluctuation from operating expenses is relatively small at this time as the related costs do not constitute a significant portion of our total expenses. 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, and/or other common derivative financial instruments to reduce foreign currency risk. It is difficult to predict the effect future hedging activities would have on our operating results. Credit risk Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents, restricted cash, and accounts receivable. Our investment policy limits investments to high credit quality securities issued by the U.S. government, U.S. government-sponsored agencies, and highly rated corporate securities, subject to certain concentration limits and restrictions on maturities. Our cash and cash equivalents and restricted cash are held by financial institutions that management believes are of high credit quality. Amounts on deposit may at times exceed FDIC insured limits. We have not experienced any losses on our deposits of cash and cash equivalents, and accounts are monitored by management to mitigate risk. We are exposed to credit risk in the event of default by the financial institutions holding our cash and cash equivalents or an event of default by the issuers of the corporate debt securities we hold. Emerging growth company status We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until those standards apply to private companies. We have not elected to use this extended transition period for complying with new or revised accounting standards. We will remain an emerging growth company until the earliest of: (1) December 31, 2025, (2) the first fiscal year after our annual gross revenue exceed $1.07 billion, (3) the date on which we have, during the immediately preceding three-year period, issued more than $1.0 billion in non-convertible debt securities, and (4) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year. Item 8. Financial Statements and Supplementary Data. The information required by this item is incorporated by reference to the consolidated financial statements and accompanying notes set forth on pages F-1 through F-23 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.