LEGALZOOM.COM, INC. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes included in our prospectus, dated June 29, 2021, filed with the Securities and Exchange Commission, or SEC, in accordance with Rule 424(b) of the Securities Act on June 30, 2021, or the Prospectus, in connection with our initial public offering, or IPO. Overview LegalZoom, or referred to herein as “we,” “us,” or “our”, is a leading online platform for legal and compliance solutions in the United States, or U.S. Our core offerings include business formations, intellectual property and estate planning services, and we have recently expanded our platform to include professional expertise and other products, both legal and non-legal, to better meet the needs of small businesses. Our unique position at business inception allows us to become a trusted business advisor, supporting the evolving needs of a new business throughout its lifecycle. Along with formations, our services include ongoing compliance and tax advice and filings, trademark filings, and estate plans. Additionally, we have unique insights into our customers and leverage our product as a channel to introduce small businesses to leading brands in our partner ecosystem, solving even more of their business needs. We operate across all 50 states and over 3,000 counties in the U.S. and have more than 20 years of experience navigating complex regulation and simplifying the legal and compliance process for our customers. In 2020, 10% of new limited liability companies, or LLCs, and 5% of new corporations in the U.S. were formed through our platform. Initial Public Offering On July 2, 2021, we completed our IPO for the sale of 19,121,000 shares of our common stock, $0.001 par value per share, at an offering price of $28.00 per share, pursuant to our Prospectus. In addition, we sold 3,214,285 shares of our common stock in a private placement with an existing shareholder, and sold 2,868,150 shares of our common stock pursuant to the full exercise of the underwriter’s option to purchase additional shares in connection with the IPO. We raised proceeds of $666.9 million after deducting underwriting discounts and commissions. Deferred offering costs of approximately $5.5 million incurred in connection with our IPO will be deducted against stockholders’ equity in the third quarter of 2021. Upon the close of our IPO, 23,081,080 outstanding shares of redeemable convertible preferred stock with a carrying value of $70.9 million converted into an aggregate of 46,162,160 shares of common stock. Our Business Model and Growth Strategy Our business model is to acquire customers at the time of business formation, and then continue to serve their legal and compliance needs over the life of their businesses with our mix of transaction, subscription, and partner offerings. Transaction products include legal documents, business filings, and related services for small business owners and their families, such as business formations, annual compliance filings, intellectual property, estate planning documents, forms, and agreements. Subscription products include compliance solutions and credentialed professional subscription services, including legal and tax advisory services. We also introduce our customers to a variety of third-party partners, giving them access to critical services they need to start and run their businesses, such as business license services, bookkeeping services, banking services, productivity tools, and business insurance, among others. Going forward, our strategy is to scale our existing business and gain market share by investing in core products and sales and marketing; expand our addressable market while increasing conversion and average order value, or AOV, by integrating our independent attorney network and tax professionals into our core product set; and grow average revenue per subscription unit, or ARPU, and partnership revenue through building in-house adjacencies and expanding our partner ecosystem to provide new recurring revenue streams. 26 Table of Contents Key Business Metrics In addition to the measures presented in our condensed consolidated financial statements, we regularly monitor the following financial and operating metrics to evaluate the growth of our business, measure the effectiveness of our marketing efforts, identify trends, formulate financial forecasts and make strategic decisions. Number of business formations We define the number of business formations in a given period as the number of global LLC, incorporation, not-for-profit and other formation orders placed on our platform in such period. We consider the number of business formations to be an important metric considering that it is typically the first product or service small business customers purchase on our platform, creating the foundation for additional products and subsequent subscription and partner revenue as they adopt additional products and services throughout their business lifecycles. The below table sets forth the number of business formations for the three and six months ended June 30, 2021 and 2020: Three Months Ended June 30 Six Months Ended June 30 2021 2020 2021 2020 (in thousands) Number of business formations 123 92 245 173 We achieved 34% growth in formations from the three months ended June 30, 2020 to the three months ended June 30, 2021, and 42% from the six months ended June 30, 2020 to the six months ended June 30, 2021. The growth in the number of business formations on our platform during the three and six months ended June 30, 2021 was primarily due to improved growth in overall U.S. business formations. Number of transactions We define the number of transactions in a given period as gross transaction order volume, prior to refunds, on our platform during such period, excluding transactions from our subsidiary, Beaumont ABS Limited, which was divested in April 2020. Transactions may include one or more services purchased at the same time. For example, a customer of our business formation services may choose to form an LLC and purchase an operating agreement and business licenses at the same time. This constitutes a single transaction. Refunds, or partial refunds, may be issued under certain circumstances pursuant to the terms of our customer satisfaction guarantee. We consider the number of transactions to be an important metric considering that our customers generally begin their LegalZoom journey with a transaction, creating the foundation for generating subsequent subscription and partner revenue. The below table sets forth the number of transactions for the three and six months ended June 30, 2021 and 2020: Three Months Ended June 30 Six Months Ended June 30 2021 2020 2021 2020 (in thousands) Number of transactions 260 232 536 442 27 Table of Contents We achieved 12% growth in transactions from the three months ended June 30, 2020 to the three months ended June 30, 2021, and 21% from the six months ended June 30, 2020 to the six months ended June 30, 2021. Our growth in number of transactions in the three and six month periods was driven by improved growth in U.S. business formations such as LLCs and incorporations, while estate planning and other consumer transactions declined year-over year. We expect the proportion of consumer transactions to decrease over time as we focus more of our investment in small business formations, which have a significantly higher order value. Estate planning transactions benefitted from tailwinds driven by the COVID-19 pandemic in the prior year, as individuals turned to our online services given the relative inaccessibility of offline alternatives. We expect to continue to grow transactions, however the growth may fluctuate period over period based on the variability of overall business formations and estate planning transactions. Average order value We define average order value for a given period as total transaction revenue divided by total number of transactions in such period, excluding revenue and related transactions from our subsidiary, Beaumont ABS Limited, or Beaumont, which was divested in April 2020. We consider average order value to be an important metric given it indicates how much customers are spending on our platform. Estate planning transactions are generally at a lower price point, making our overall average order value lower than our typical price point for small business formations. The below table sets forth the average order value for the three and six months ended June 30, 2021 and 2020: Three Months Ended June 30 Six Months Ended June 30 2021 2020 2021 2020 Average order value 282 217 252 213 Average order value increased by 30% from the three months ended June 30, 2020 to the three months ended June 30, 2021 and 18% from the six months ended June 30, 2020 to the six months ended June 30, 2021. Growth in average order value for the three and six months ended June 30, 2021 was primarily driven by an increase in the proportion of small business formations, which have a significantly higher order value compared to other transactions relative to total transactions, the timing of transaction revenue recognition and increased customer adoption of our attorney-led trade mark product. We typically recognize a high amount of revenue in the second quarter from transaction orders placed in the first quarter but fulfilled in the second quarter. Growth may fluctuate period-over-period based on estate planning transactions, the timing of transaction revenue recognition, and our ability to introduce and sell higher-value products. While we expect continued strength in average order value as business formations continue to account for a larger share of overall transaction units, we expect year-over-year average order value growth to taper in the second half of 2021. Our goal is to grow average order value as we increase the average number of transactional products purchased in a single order and the mix of higher-value credentialed professional-assisted products. Number of subscription units We define the number of subscription units in a given period as the paid subscriptions that remain active at the end of such period, including those that are not yet 60 days past their subscription order dates, excluding subscriptions from our employer group legal plan and small business concierge subscription service, for which we ceased acquiring new subscribers in October 2020. Refunds, or partial refunds, may be issued under certain circumstances pursuant to the terms of our customer satisfaction guarantee. We consider the number of subscription units to be an important metric since subscriptions enable us to increase lifetime value through deeper, longer-term relationships with customers. Subscriptions typically range from 30 days to one year in duration and the vast majority of our new subscriptions originate from business formation orders and have an annual term. Our customers can have multiple subscriptions at the end of a period. For example, a popular combination for a new small business owner is attorney advice and registered agent subscriptions. Our registered agent offering comprised approximately 60% of our subscription units for the three and six months ended June 30, 2021 and 2020. 28 Table of Contents The below table sets forth the number of subscription units as of June 30, 2021 and 2020: June 30, 2021 2020 (in thousands) Number of subscription units 1,215 974 We achieved 25% growth in our number of subscription units from June 30, 2020 to June 30, 2021, reflecting strong growth from our registered agent, compliance, and attorney advice subscriptions primarily due to increased business formations. The number of subscriptions units as of June 30, 2021 increased 12% from 1,085,000 units as of December 31, 2020. We aim to continue to grow subscription units by increasing the proportion of our small business customers that purchase a subscription service at the time of their initial formation purchase and improving retention rates. Average revenue per subscription unit We define ARPU as of a given date as subscription revenue for the 12-month period ended on such date, or LTM, divided by the average number of subscription units at the beginning and end of the LTM period, excluding revenue and subscriptions from our employer group legal plan and small business concierge subscription service, for which we ceased acquiring new subscribers in October 2020. We consider ARPU to be an important metric because it helps to illustrate our ability to deepen our relationship with our existing customers as they purchase incremental and higher-value services. We have generated ARPU expansion in recent periods, and for the three months ended June 30, 2021, ARPU increased 3% from the same periods in 2020. The below table sets forth ARPU as at June 30, 2021 and 2020: June 30, 2021 2020 Average revenue per subscription unit 230 224 We expect ARPU to remain relatively stable over time, as we plan to focus more of our efforts on increasing the number of subscription units rather than routinely increasing pricing on existing subscription plans. Key Factors Affecting Our Performance We believe that our future performance will depend on many factors, including the following: • Business formations . The majority of our transaction revenue is generated by providing formation services to guide our customers through the transition from being aspiring business owners to actually launching their entities. We offer entity formation services for LLCs, corporations and non-profits. In each of three and six months ended June 30, 2021 and 2020, business formations represented the largest share of our total transaction orders. In addition, business formations act as an entry point for many customers to the LegalZoom ecosystem, where they then often purchase additional products and services. We grew our share of total U.S. business formations from 8.7% in 2019 to 10.0% in 2020, representing an increase of 15%, and expect we will continue to increase our share over time as small businesses become more comfortable with digital solutions and are better educated on the risks of not officially forming a business entity. Our business depends on the continuation of new business formation in the U.S., which may be seasonal in nature and dependent on macroeconomic factors, and even more so, on our ability to increase our share of these formations. • Product leadership . We have invested significantly in our user experience, which we believe is critical to converting customers and improving retention. These investments consist mainly of educational content creation, improving our website and application user interface, and creating and offering additional products and services, including the growing use of credentialed professionals in the customer journey. The performance of our product is important to attracting new customers to our platform, maintaining a healthy subscriber base and retaining our customers. 29 Table of Contents • Ability to enhance customer lifetime value . Many of our subscribers have increased their cumulative spend with us over time as they have expanded their use of our platform to include additional products and subscription services. Our relationship with our small business customers typically starts with the formation of their business, and we can generate additional revenue as their businesses grow and their needs become more complex. We intend to further increase customer lifetime value by developing new products and subscription services such as tax advice and preparation to deepen customer relationships, and which in turn we expect will result in higher customer engagement and retention. Additionally, we offer third-party services via our partner ecosystem, and we expect to be able to generate incremental revenue and further increase our customer lifetime value via these offerings. • Investment in marketing. We have invested, and expect that we will continue to invest, in our brand and the promotion of our services through our various customer acquisition channels, including search engine marketing, search engine optimization, television, digital video, social, radio, and our inside sales team to acquire new customers and grow our business. We frequently evaluate how we price, market, and sell transaction products in order to optimize our subscription business. Given our customer acquisition efficiency, we intend to increase our marketing spend over the medium term. • Investment in tax offerings . Tax represents a natural adjacency in our mission to make legal and compliance services accessible to small businesses. Based on customer surveys, we estimate that approximately 70% of small business owners that sought a tax accountant did not have one at the time of their entity formation, but face tax implications as a result of the entity they choose. We have invested in launching our Tax Advisory offering. We incurred costs related to this investment in 2020 and to date in 2021, and anticipate continued investment throughout the remainder of 2021, as we believe that our tax offerings represent an attractive opportunity for incremental revenue growth. • Talent acquisition and retention. We are focused on providing a quality employee experience as we believe the future success of our business is heavily dependent on our ability to attract and retain talented and highly productive employees, including software engineers, product designers, brand and performance marketers, and customer-facing positions. We compete for talent within the technology industry and believe that our strong brand recognition and greater company purpose are important, positive considerations in our ability to recruit talent. We also are scaling an in-house team of certified public accountants, or CPAs, and enrolled agents that are critical to our tax offerings. • COVID-19 impact . In 2020, we saw tailwinds driven by the COVID-19 pandemic, as individuals and small businesses turned to online services given the relative inaccessibility of offline alternatives. We believe these shifts represent an acceleration of existing trends toward greater adoption of online services. Thus far in 2021, our business has benefitted from strengthening macroeconomic conditions, in part due to continuation of government stimulus programs aimed at accelerating the recovery. However, our growth rate may moderate if these trends or governmental and business reactions to the pandemic moderate or reverse over time. Key Components of our Results of Operations Revenue We generate revenue from the sources identified below. Transaction revenue . Transaction revenue is primarily generated from our customized legal document services upon fulfillment of these services. Transaction revenue includes filing fees and is net of cancellations, promotional discounts, sales allowances and credit reserves. Until April 2020, when we ceased providing such services, we also generated transaction revenue from our residential and commercial conveyancing business in the United Kingdom, and revenue for these services was recognized when delivered to the customer. In the fourth quarter of 2020, we commenced providing tax preparation services in the U.S. which are recognized at the point in time when the customer’s tax return is filed and accepted by the applicable government authority. 30 Table of Contents Subscription revenue . Subscription revenue is generated primarily from subscriptions to our registered agent services, compliance packages, attorney advice, and legal forms services, in addition to software-as-a-service, or SaaS, subscriptions in the United Kingdom. In the fourth quarter of 2020, we commenced providing tax, bookkeeping and payroll subscription services. We recognize revenue from our subscriptions ratably over the subscription term. Subscription terms generally range from thirty days to one year. Subscription revenue includes the value allocated to bundled free trials for our subscription services and is net of promotional discounts, cancellations, sales allowances and credit reserves and payments to third-party service providers such as legal plan law firms and tax service providers. For transaction and subscription revenue, we generally collect payments and fees at the time orders are placed and prior to services being rendered. We record amounts collected for services that have not been performed as deferred revenue on our consolidated balance sheet. The transaction price that we record is generally based on the contractual amounts in our contracts and is reduced for estimated sales allowances for price concessions, charge-backs, sales credits and refunds, which are accounted for as variable consideration when estimating the amount of revenue to recognize. Partner revenue . Partner revenue consists primarily of one-time or recurring fees earned from third-party providers from leads generated to such providers through our online legal platform. Revenue is recognized when the related performance-based criteria have been met. We assess whether performance criteria have been met on a cost-per-click or cost-per-action basis. In the near term, we expect lower performance in partner revenue as we transition away from legacy partners that do not align with our new strategic direction, and we focus more on long-term opportunities to have strategic partnerships that build on recurring revenue models. Cost of revenue Cost of revenue includes all costs of providing and fulfilling our services. Cost of revenue primarily includes government filing fees; costs of fulfillment, customer care and credentialed professionals, and related benefits, including stock-based compensation, and costs of independent contractors for document preparation; telecommunications and data center costs, amortization of acquired developed technology, depreciation and amortization of network computers, equipment and internal-use software; printing, shipping and handling charges; credit and debit card fees; allocated overhead; legal document kit expenses; and sales and use taxes. We defer direct and incremental costs primarily related to government filing fees incurred prior to the associated service meeting the criteria for revenue recognition. These contract assets are recognized as cost of revenue in the same period the related revenue is recognized. We expect our cost of revenue to increase in absolute dollars as we continue to invest in enhancing our customer experience and in new product development, including expert-assisted offerings for our Tax and Attorney-Assisted services. Gross profit and gross margin Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, have been and will continue to be affected by various factors, primarily the mix between transaction, subscription and partner revenue. Our gross margin on subscription and partner revenue is higher than our gross margin on transaction revenue. Our gross margin expansion is also driven by automation improvements and digitization efforts. Further, our acquisitions of other companies have negatively impacted our gross margin in the short term, and any such future acquisitions could have a similar effect. 31 Table of Contents We expect our gross profit to increase in absolute dollars and our gross margin to increase modestly over the long term as we continue to focus on growing higher-margin subscription revenue and invest in fulfillment automation technologies. However, our gross margin could fluctuate from period to period due to fulfillment rates and seasonality. Operating expenses Our operating expenses consist primarily of sales and marketing, technology and development, general and administrative expenses, and to a lesser extent, impairments of goodwill, long-lived assets and other assets, in addition to a loss on sale of a business in the second quarter of 2020. Sales and marketing Sales and marketing expenses consist of customer acquisition media costs; compensation and related benefits, including stock-based compensation for marketing and sales personnel; media production; public relations and other promotional activities; general business development activities; an allocation of depreciation and amortization and allocated overhead. Customer acquisition media costs consist primarily of search engine marketing, television and radio costs. Marketing and advertising costs to promote our services are expensed in the period incurred. Media production costs are expensed the first time the advertisement is aired. We intend to continue to make significant investments in sales and marketing to drive additional revenue, further penetrate our expanding addressable market, and build on our digital brand leadership and awareness. As a result, we expect our sales and marketing expenses to continue to increase in absolute dollars and to be our largest operating expense category for the foreseeable future. Technology and development Technology and development expenses consist primarily of personnel costs and related benefits, including stock-based compensation, expenses for outside consultants, an allocation of depreciation and amortization and allocated overhead. These expenses include costs incurred in the development and implementation of our websites, mobile applications, online legal platform, research and development and related infrastructure. Technology and development expenses are expensed as incurred, except to the extent that such costs are associated with internal-use software costs that qualify for capitalization. We expect our technology and development expenses to continue to increase in absolute dollars for the foreseeable future as we invest in new products and services, enhancing our customer experience, and in production automation technologies. We expect our technology and development expenses to remain relatively consistent or increase as a percentage of our revenue over the long term, although our technology and development expenses may fluctuate as a percentage of our revenue from period to period due to seasonality and the timing and extent of these expenses. General and administrative Our general and administrative expenses relate primarily to compensation and related benefits, including stock-based compensation, for executive and corporate personnel, professional and consulting fees, an allocation of depreciation and amortization, allocated overhead and legal costs. We expense legal costs for defending legal proceedings as incurred. We expect our general and administrative expenses to increase in absolute dollars for the foreseeable future due to additional costs associated with accounting, compliance, insurance and investor relations as we have recently become a public company. Over the next three years, we will incur significant stock-based compensation expense as a result of certain modifications to equity awards that occurred in connection with our IPO, however, we expect our general and administrative expenses to decrease as a percentage of our revenue over the longer term, although our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to seasonality and the timing and extent of these expenses. 32 Table of Contents Interest expense, net Interest expense, net, consists primarily of interest expense on our 2018 Credit Facility and 2018 Revolving Facility, hedging instruments, capital lease obligations and amortization of debt issuance costs. Interest expense, net, decreased in 2020 primarily due to a decrease in London Interbank Offered Rate, or LIBOR on our 2018 Term Loan. We expect interest expense, net, to decrease significantly in the near term following the full repayment of our outstanding indebtedness under our 2018 Term Loan in July 2021 after the completion of our IPO. Income taxes Our provision for income taxes consists of current and deferred federal, state and foreign income taxes. At December 31, 2020, we had federal net operating loss, or NOL, carryforwards of $11.7 million which will begin to expire in 2031. In 2020, we had state NOL carryforwards of $49.8 million, which will begin to expire in 2022 and we had foreign NOL carryforwards of $32.4 million which can be carried forward indefinitely and are not subject to expiration. In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change, by value, in its equity ownership by certain stockholders over a three-year period, the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes, such as research tax credits, to offset its post-change income or taxes may be limited. We had an ownership change in prior years, and as a result certain federal and state NOLs were limited pursuant to Section 382 of the Code. This limitation has been accounted for in calculating our available NOL carryforwards. We may experience an ownership change in the future or subsequent changes in our stock ownership, some of which changes are outside our control. If we undergo another ownership change, our ability to further utilize federal NOLs could be limited by Section 382 of the Code. Furthermore, for federal NOLs arising in tax years beginning after December 31, 2020, the 2017 Tax Cuts and Jobs Act, or Tax Act, limits a taxpayer’s ability to utilize federal NOL carryforwards to 80% of taxable income. In addition, NOLs arising in tax years beginning after December 31, 2017 can be carried forward indefinitely. However, carryback of such NOLs is generally prohibited, except that, under the CARES Act, federal NOLs generated in 2018, 2019 and 2020 may be carried back to each of the five taxable years preceding the taxable year in which the loss arises. For these reasons, we may not be able to utilize a material portion of any NOLs that are generated in tax years ending after December 31, 2020. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or increase our state taxes owed. Results of Operations The following table sets forth our consolidated statement of operations data for each of the periods indicated. The period-to-period comparison of financial results should not be considered as a prediction or indicative of our future results. Three Months Ended June 30 Six Months Ended June 30 2021 2020 2021 2020 (in thousands) Revenue $ 150,432 $ 111,007 $ 285,064 $ 216,802 Cost of revenue (1)(2) 49,859 35,759 93,819 70,871 Gross profit 100,573 75,248 191,245 145,931 Operating expenses: Sales and marketing (1)(2) 65,431 40,173 136,792 83,654 Technology and development (1)(2) 28,426 10,165 38,925 20,708 General and administrative (1)(2) 33,845 12,612 47,010 25,273 Impairment of long-lived and other assets 379 — 379 555 Loss on sale of business — 1,764 — 1,764 Total operating expenses 128,081 64,714 223,106 131,954 (Loss) income from operations (27,508 ) 10,534 (31,861 ) 13,977 Interest expense, net (9,312 ) (8,857 ) (17,966 ) (18,127 ) Other income (expense), net 420 (355 ) 668 (1,461 ) Impairment of available-for-sale debt securities — (4,818 ) — (4,818 ) Loss before income taxes (36,400 ) (3,496 ) (49,159 ) (10,429 ) Provision for (benefit from) income taxes 1,995 563 (941 ) (1,492 ) Net loss $ (38,395 ) $ (4,059 ) $ (48,218 ) $ (8,937 ) (1) Includes stock-based compensation expense as follows: 33 Table of Contents Three Months Ended June 30 Six Months Ended June 30 2021 2020 2021 2020 (in thousands) Cost of revenue $ 762 $ 46 $ 821 $ 83 Sales and marketing 5,143 144 5,350 787 Technology and development 17,619 603 18,145 1,553 General and administrative 21,430 2,568 24,580 5,265 Total stock-based compensation expense $ 44,954 $ 3,361 $ 48,896 $ 7,688 Stock-based compensation expense increased significantly for the three and six months ended June 30, 2021 due to the modification of certain equity awards in connection with our IPO. Refer to Note 9 of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. (2) Includes depreciation and amortization expense for our property and equipment, including capitalized internal-use software and intangible assets as follows: Three Months Ended June 30 Six Months Ended June 30 2021 2020 2021 2020 (in thousands) Cost of revenue $ 1,398 $ 1,934 $ 3,076 $ 3,892 Sales and marketing 1,323 1,762 2,798 3,611 Technology and development 584 667 1,171 1,317 General and administrative 358 464 784 927 Total depreciation and amortization expense $ 3,663 $ 4,827 $ 7,829 $ 9,747 Comparison of the Three Months Ended June 30, 2021 and 2020 Revenue Three Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Revenue by type Transaction $ 73,360 $ 50,429 $ 22,931 45 % Subscription 69,384 53,832 15,552 29 % Partner 7,688 6,746 942 14 % Total revenue $ 150,432 $ 111,007 $ 39,425 36 % Total revenue for the three months ended June 30, 2021 increased $39.4 million, or 36%, compared to the three months ended June 30, 2020. The increase was primarily driven by increases in transaction revenue and subscription revenue. Transaction revenue was 49% and 45% of total revenue for the three months ended June 30, 2021 and 2020, respectively, and subscription revenue was 46% and 49% of total revenue for the three months ended June 30, 2021 and 2020, respectively. Transaction revenue for the three months ended June 30, 2021 increased $22.9 million, or 45%, compared to the three months ended June 30, 2020, driven by a 12% increase in the number of transactions and a 30% improvement in average order value. The improvement in average order value was primarily driven by an increase in the proportion of small business formations, which have a significantly higher order value compared to other transactions, relative to total transactions, the timing of transaction revenue recognition and increased customer adoption of our attorney-led trademark product. 34 Table of Contents Subscription revenue for the three months ended June 30, 2021 increased $15.6 million, or 29%, compared to the three months ended June 30, 2020. The increase was primarily due to a 25% increase in the number of subscription units. The increase in subscription units was primarily driven by increased business formations. Strong performance from our registered agent subscription services drove the largest contribution of growth to the number of subscription units. Partner revenue for the three months ended June 30, 2021 increased $0.9 million, or 14%, compared to the three months ended June 30, 2020. The increase was primarily due to higher transaction volumes. Cost of revenue Three Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Cost of revenue $ 49,859 $ 35,759 $ 14,100 39 % Cost of revenue for the three months ended June 30, 2021 increased $14.1 million, or 39%, compared to the three months ended June 30, 2020. The increase was primarily due to higher filing fees and costs associated with customer care and fulfillment as a result of the increase in transaction volume. Gross profit Three Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Gross profit $ 100,573 $ 75,248 $ 25,325 34 % Gross profit for the three months ended June 30, 2021 increased $25.3 million, or 34%. The increase was primarily due to increased revenue partially offset by higher filing fees and costs associated with fulfillment as our revenue mix shifted toward transactions, which have lower gross margins than subscriptions. Sales and marketing Three Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Sales and marketing $ 65,431 $ 40,173 $ 25,258 63 % Sales and marketing expenses for the three months ended June 30, 2021 increased $25.3 million, or 63%, compared to the three months ended June 30, 2020. The increase was primarily due to an increase in customer acquisition marketing spend of $16.9 million and stock-based compensation of $5.0 million mainly in connection with our IPO. Customer acquisition marketing spend was $44.5 million and $27.6 million for the three months ended June 30, 2021 and June 30, 2020, respectively, an increase of 61% as we invested to expand our customer base and build our digital brand leadership and awareness. 35 Table of Contents Technology and development Three Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Technology and development $ 28,426 $ 10,165 $ 18,261 180 % Technology and development expenses for the three months ended June 30, 2021 increased $18.3 million, or 180%, compared to the three months ended June 30, 2020. The increase was primarily due to an increase in stock-based compensation of $17.0 million mainly in connection with our IPO. General and administrative Three Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) General and administrative $ 33,845 $ 12,612 $ 21,233 168 % General and administrative expenses for the three months ended June 30, 2021 increased $21.2 million, or 168%, compared to the three months ended June 30, 2020. The increase was primarily due to an increase in stock-based compensation of $18.9 million and professional services costs of $2.4 million mainly related to our IPO. Impairment of long-lived and other assets Three Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Impairment of long-lived and other assets $ 379 $ — $ 379 100 % In the three months ended June 30, 2021, we recorded an impairment charge of $0.4 million related to capitalized software projects for certain product initiatives that were no longer aligned with our go-forward strategy. Interest expense, net Three Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Interest expense, net $ 9,312 $ 8,857 $ 455 5 % Interest expense, net, for the three months ended June 30, 2021 increased $0.5 million, or 5%, compared to the three months ended June 30, 2020. The increase was primarily related to our interest rate swaps and amortization of debt issuance costs, partially offset by a slight decrease in LIBOR on our 2018 Term Loan. Other income (expense), net Three Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Other income (expense), net $ 420 $ (355 ) $ 775 218 % Other income (expense), net for the three months ended June 30, 2021 increased $0.8 million, or 218%, compared to the three months ended June 30, 2020. The increase was primarily due to changes in foreign currency movements related to our intercompany loans which are denominated in GBP. 36 Table of Contents Provision for income taxes Three Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Provision for income taxes $ 1,995 $ 563 $ 1,432 254 % The provision for income taxes increased by $1.4 million primarily due to the tax impact from the decrease in U.S income compared to the three months ended June 30, 2020 offset by non-deductible share-based compensation. Comparison of the Six Months Ended June 30, 2021 and 2020 Revenue Six Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Revenue by type Transaction $ 134,748 $ 96,015 $ 38,733 40 % Subscription 134,877 108,067 26,810 25 % Partner 15,439 12,720 2,719 21 % Total revenue $ 285,064 $ 216,802 $ 68,262 31 % Total revenue for the six months ended June 30, 2021 increased $68.3 million, or 31%, to $285.1 million compared to the six months ended June 30, 2020. The increase was primarily driven by increases in transaction revenue and subscription revenue. Transaction revenue was 47% and 44% of total revenue for the six months ended June 30, 2021 and 2020, respectively, and subscription revenue was 47% and 50% of total revenue for the six months ended June 30, 2021 and 2020, respectively. Transaction revenue for the six months ended June 30, 2021 increased $38.7 million, or 40%, compared to the six months ended June 30, 2020, driven by a 21% increase in the number of transactions and an 18% improvement in average order value. Subscription revenue for the six months ended June 30, 2021 increased $26.8 million, or 25%, compared to the six months ended June 30, 2020. The increase was primarily due to a 25% increase in the number of subscription units. The increase in subscription units was primarily driven by increased business formations. Strong performance from our registered agent subscription services drove the largest contribution of growth to the number of subscription units. Partner revenue for the six months ended June 30, 2021 increased $2.7 million, or 21%, compared to the six months ended June 30, 2020. The increase was primarily due to higher transaction volumes. Cost of revenue Six MonthsEnded June 30 2021 2020 $ change % change (in thousands, except percentages) Cost of revenue $ 93,819 $ 70,871 $ 22,948 32 % Cost of revenue for the six months ended June 30, 2021 increased $22.9 million, or 32%, compared to the six months ended June 30, 2020. The increase was primarily due to higher filing fees and costs associated with customer care and fulfillment as a result of the increase in transaction volume. 37 Table of Contents Gross profit Six Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Gross profit $ 191,245 $ 145,931 $ 45,314 31 % Gross profit for the six months ended June 30, 2021 increased $45.3 million, or 31%. The increase was driven by increased revenue partially offset by higher filing fees and costs associated with customer care and fulfillment as our revenue mix shifted toward transactions, which have lower gross margins than subscriptions. Sales and marketing Six Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Sales and marketing $ 136,792 $ 83,654 $ 53,138 64 % Sales and marketing expenses for the six months ended June 30, 2021 increased $53.1 million, or 64%, compared to the six months ended June 30, 2020. The increase was primarily due to an increase in customer acquisition marketing spend of $40.5 million, media production spend of $3.1 million and stock-based compensation of $4.6 million mainly in connection with our IPO. Customer acquisition marketing spend was $98.1 million and $57.7 million for the six months ended June 30, 2021 and June 30, 2020, respectively, as we invested to expand our customer base and build our digital brand leadership and awareness. Technology and development Six Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Technology and development $ 38,925 $ 20,708 $ 18,217 88 % Technology and development expenses for the six months ended June 30, 2021 increased $18.2 million, or 88%, compared to the six months ended June 30, 2020. The increase was primarily due to an increase in stock-based compensation of $16.6 million mainly in connection with our IPO. General and administrative Six Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) General and administrative $ 47,010 $ 25,273 $ 21,737 86 % General and administrative expenses for the six months ended June 30, 2021 increased $21.7 million, or 86%, compared to the six months ended June 30, 2020. The increase was primarily due to an increase in stock-based compensation of $19.3 million and professional services costs of $4.0 million. 38 Table of Contents Impairment of long-lived and other assets Six Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Impairment of long-lived and other assets $ 379 $ 555 $ (176 ) (32 )% In 2021 and 2020, we impaired internal-use software projects that were no longer aligned with our go-forward strategy. Loss on sale of business Six Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Loss on sale of business $ — $ 1,764 $ (1,764 ) (100 )% In April 2020, in connection with our sale of our subsidiary, Beaumont, we incurred a loss of $1.8 million. Interest expense, net Six Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Interest expense, net $ 17,966 $ 18,127 $ (161 ) (1 )% Interest expense, net, decreased by $0.2 million to $18.1 million in 2021. The decrease was primarily a result of a decrease in LIBOR, on our 2018 Term Loan partially offset by costs related to our interest rate swaps and amortization of debt issuance costs. Other income (expense), net Six Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Other income (expense), net $ 668 $ (1,461 ) $ 2,129 (146 )% The change in other income, net between 2021 and 2020 was primarily due to changes in foreign currency movements related to our intercompany loans which are denominated in GBP, resulting in a net increase of $3.0 million, partially offset by lower gains from the change in fair value of our financial guarantee of $0.9 million. Our financial guarantee of $0.1 million was waived in June 2021. Impairment of available-for-sale debt securities Six Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Impairment of available-for-share debt securities $ — $ 4,818 $ (4,818 ) (100 )% In 2020, we fully impaired our investment in firma.de Firmenbaukasten AG, a German limited liability company. We incurred a loss of $4.8 million as the present value of cash flows expected to be collected was less than the amortized cost basis of the investment. 39 Table of Contents Benefit from income taxes Six Months Ended June 30 2021 2020 $ change % change (in thousands, except percentages) Benefit from income taxes $ 941 $ 1,492 $ 551 (37 )% Benefit from income taxes decreased $0.6 million, or 37%, to $0.9 million in 2021. The decrease was primarily due to increased benefits from the exercise of non-qualified stock options in 2020 over 2021, and due to non-deductible share-based compensation in 2021. Liquidity and Capital Resources Overview Since inception, we have funded our operations and capital expenditures primarily from private sales of equity securities, cash flows provided by operating activities and equity and debt financing arrangements. Our primary requirements for liquidity and capital are to finance working capital, capital expenditures and general corporate purposes. At June 30, 2021, our principal sources of liquidity were cash and cash equivalents of $167.0 million, which consisted of cash on deposit with banks and money market funds, of which $1.2 million related to our foreign subsidiaries. Our cash and cash equivalents increased in June 2021 by $25.0 million upon the lapse of our restricted cash equivalent upon the release of collateral related to a personal loan by a former executive. In July 2021, we raised $666.9 million net of underwriting discounts and commissions from our IPO and repaid in full principal outstanding of $521.6 million of our 2018 Term Loan. We currently anticipate that our available cash and cash equivalents and cash provided by operating activities will be sufficient to meet our operational cash needs for at least the next twelve months. We may supplement our liquidity needs with borrowings under our 2021 Revolving Facility. We have historically considered the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested, and accordingly no taxes have been provided on such earnings. We continue to evaluate our plans for reinvestment or repatriation of unremitting foreign earnings and have not changed our previous indefinite reinvestment determination following the enactment of the Tax Act. We have not repatriated funds to the U.S. to satisfy domestic liquidity needs, nor do we anticipate the need to do so. If we determine that all or a portion of our foreign earnings are no longer indefinitely reinvested, we may be subject to foreign withholding taxes and U.S. state income taxes. Borrowings 2021 Revolving Facility On July 2, 2021, we entered into an Amended and Restated Credit and Guaranty Agreement, or 2021 Revolving Facility, with JPMorgan Chase Bank, N.A., as the administrative agent. This agreement amends and restates our first lien credit and guarantee agreement with JPMorgan Chase Bank, N.A, or 2018 Credit Facility, and permits revolving borrowings of up to $150.0 million. The 2021 Revolving Facility provides for the issuance of up to $20.0 million of letters of credit as well as borrowings on same-day notice, referred to as swingline loans, in an amount of up to $10.0 million. We have $150.0 million available for use under our 2021 Revolving Facility. 40 Table of Contents Subject to the satisfaction of certain criteria, we will be able to increase the facility by an amount equal to the sum of (i) the greater of $90.0 million and 75% of consolidated last twelve months Cash EBITDA, which is defined in the 2018 Credit Facility, or LTM Cash EBITDA, plus (ii) unused amounts under the general debt basket (i.e., an amount equal to the greater of $50.0 million and an equivalent percentage of consolidated LTM Cash EBITDA), plus (iii) an unlimited amount so long as the borrower is in pro forma compliance with the Financial Covenant (as defined below), in each case, with the consent of the lenders participating in the increase. We are required to pay a commitment fee in respect of unutilized commitments under the 2021 Revolving Facility. The commitment fee is, initially, 0.35% per annum. The commitment fee is subject to one reduction of 0.10% upon achieving a total net first lien leverage ratio of 3.50 to 1.00. We are also required to pay customary letter of credit fees and agency fees. The interest rate applicable to the 2021 Revolving Facility is, at our option, at a rate equal to the greatest of (i) the administrative agent’s prime rate; (ii) the federal funds effective rate plus 1/2 of 1.0% and (iii) one month LIBOR (subject to a 1.00% floor), plus 1.00% or LIBOR (subject to a 0.00% floor) plus 2.00%. The interest rate margins under the 2021 Revolving Facility are subject to one reduction of 0.25% and a further reduction of 0.25% upon achieving total net first lien leverage ratios of 3.50 to 1.00 and 2.50 to 1.00, respectively. We have the option to voluntarily repay outstanding loans at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans. There is no scheduled amortization under the 2021 Revolving Facility. The principal amount outstanding is due and payable in full at maturity, five years from the closing date of the 2021 Revolving Facility. Obligations under the 2021 Revolving Facility are guaranteed by our existing and future direct and indirect material wholly-owned domestic subsidiaries, subject to certain exceptions. The 2021 Revolving Facility is secured by a first-priority security interest in substantially all of the assets of the borrower and the guarantors, subject to certain exceptions. The 2021 Revolving Facility contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability and the ability of our restricted subsidiaries to: incur additional indebtedness and guarantee indebtedness; create or incur liens; pay dividends and distributions or repurchase capital stock; merge, liquidate and make asset sales; change lines of business; change our fiscal year; incur restrictions on our subsidiaries’ ability to make distributions and create liens; modify our organizational documents; make investments, loans and advances; and enter into certain transactions with affiliates. The 2021 Revolving Facility requires compliance with a total net first lien leverage ratio of 4.50 to 1.00, or the Financial Covenant. The Financial Covenant will be tested at quarter-end only if the total principal amount of all revolving loans, swingline loans and drawn letters of credit that have not been reimbursed exceeds 35% of the total commitments under the 2021 Revolving Facility on the last day of such fiscal quarter. 2018 Credit Facility In 2018, we entered into the 2018 Credit Facility with JPMorgan Chase Bank, N.A., as Administrative Agent and lender, and the other lenders party thereto, which provided $575.0 million of loans, consisting of the $535.0 million 2018 Term Loan maturing on November 21, 2024, and an available $40.0 million 2018 Revolving Facility maturing on November 23, 2023. The 2018 Revolving Facility included a subfacility that provides for the issuance of letters of credit in an amount of up to $8.0 million at any time outstanding. In July 2021, we repaid in full the outstanding principal of $521.6 million of our 2018 Term Loan with the proceeds raised from our IPO. Cash flows The following table sets forth a summary of our cash flows for the periods indicated: Six Months Ended June 30 2021 2020 (in thousands) Net cash provided by operating activities $ 40,696 $ 49,320 Net cash used in investing activities (6,004 ) (5,666 ) Net cash used in financing activities (7,246 ) (5,929 ) Effect of exchange rates on cash, cash equivalents and restricted cash equivalent 56 (243 ) Net increase in cash, cash equivalents and restricted cash equivalent $ 27,502 $ 37,482 41 Table of Contents Net cash provided by operating activities For the six months ended June 30, 2021, cash provided by operating activities was $40.7 million resulting from a net loss of $48.2 million, adjusted for non-cash expenses of $59.0 million and net cash flow provided by changes in operating assets and liabilities of $29.9 million. The $29.9 million of net cash flows provided from changes in our operating assets and liabilities included a $23.8 million increase in deferred revenue primarily as a result of the growth of our subscription units, which are predominantly billed in advance of our revenue recognition, a $7.9 million decrease in accounts payable and $3.2 million decrease in accrued expenses and other current liabilities, due to the timing of our payments, offset by a decrease in accounts receivable and prepaid and other assets $4.0 million. For the six months ended June 30, 2020, cash provided by operating activities was $49.3 million resulting from net loss of $8.9 million, adjusted for non-cash expenses of $26.3 million and net cash flow provided by changes in operating assets and liabilities of $31.9 million. The $31.9 million of net cash flows provided from changes in our operating assets and liabilities included a $21.7 million increase in deferred revenue primarily as a result of the growth of our subscription units, which are predominantly billed in advance of our revenue recognition, and a $11.9 million net increase in accounts payable and accrued liabilities due to the timing of our payments. Net cash used in investing activities For the six months ended June 30, 2021 and 2020, net cash used in investing activities was $6.0 million and $5.7 million, respectively, resulting primarily from purchases of property and equipment, including capitalized internal-use software. Net cash used in financing activities For the six months ended June 30, 2021, net cash used in financing activities was $7.2 million, resulting primarily from repayments on our 2018 Term Loan and hybrid debt of $4.0 million and offering costs of $2.8 million. For the six months ended June 30, 2020, net cash used in financing activities was $5.9 million, resulting primarily from the repayments on our 2018 Term Loan of $2.7 million and the payment of tax withholding obligations of $2.8 million. Contractual obligations and commitments Refer to Note 8. to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of material obligations and commitments subsequent June 30, 2021. There have been no other material changes to our contractual obligations from those described in the Prospectus. Off-balance sheet arrangements We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Non-GAAP Financial Measures To supplement our unaudited interim condensed consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles, or GAAP, we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We believe that these non-GAAP financial measures provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects and allow for greater transparency with respect to important measures used by our management for financial and operational decision-making. We are presenting these non-GAAP measures to assist investors in seeing our financial performance using a management view and because we believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry. 42 Table of Contents Adjusted EBITDA and Adjusted EBITDA Margin We define Adjusted EBITDA as net loss adjusted to exclude interest expense, net, provision for (benefit from) income taxes, depreciation and amortization, other (income) expense, net, non-cash stock-based compensation, losses from impairments of long-lived and other assets, impairments of available-for-sale debt securities, restructuring expenses, IPO-related costs and other transaction-related expense and certain other non-recurring expenses. Our Adjusted EBITDA financial measure differs from GAAP in that it excludes certain items of income and expense. We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of revenue. We define net loss margin as net loss as a percentage of revenue based on our unaudited condensed consolidated financial statements. Adjusted EBITDA is one of the primary performance measures used by our management and our board of directors to understand and evaluate our financial performance and operating trends, including period-to-period comparisons, prepare and approve our annual budget, develop short- and long-term operational plans and determine appropriate compensation plans for our employees. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management team and board of directors. In assessing our performance, we exclude certain expenses that we believe are not comparable period over period. Adjusted EBITDA should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of Adjusted EBITDA rather than net income, which is the nearest GAAP equivalent of Adjusted EBITDA, and it may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure. Some of these limitations include that the non-GAAP financial measure: • does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, which reduces cash available to us; • does not reflect provision for income taxes that may result in payments that reduce cash available to us; • excludes depreciation and amortization and, although these are non-cash expenses, the assets being depreciated may be replaced in the future; • does not reflect foreign currency exchange or other gains or losses, which are included in other income, net; • excludes stock-based compensation expense, which has been, and will continue to be, a significant recurring expense for our business and an important part of our compensation strategy; • excludes losses from impairments of goodwill, long-lived and other assets and available-for-sale debt securities; • excludes acquisition related expenses, which reduce cash available to us; • excludes restructuring expenses, which reduce cash available to us; • excludes IPO-related costs and other transaction related expenses that are not considered representative of our underlying performance, which reduce cash available to us; and • does not reflect certain other non-recurring expenses that are not considered representative of our underlying performance, which reduce cash available to us. 43 Table of Contents The following table presents a reconciliation of net loss, the most directly comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated (unaudited): Three Months Ended June 30 Six Months Ended June 30 2021 2020 2021 2020 (in thousands) Reconciliation of Net Loss to Adjusted EBITDA Net loss $ (38,395) $ (4,059) $ (48,218) $ (8,937) Interest expense, net 9,312 8,857 17,966 18,127 Provision for (benefit from) income taxes 1,995 563 (941 ) (1,492 ) Depreciation and amortization 3,663 4,827 7,829 9,747 Other (income) expense, net (420 ) 355 (668 ) 1,461 Stock-based compensation 44,798 3,090 48,584 7,178 Impairment of long-lived and other assets 379 — 379 555 Impairment of available-for-sale debt securities — 4,818 — 4,818 Restructuring expenses — 64 — 412 IPO-related costs and other transaction related expenses (1) 635 — 635 — Certain other non-recurring expenses (2) — 1,764 — 1,764 Adjusted EBITDA $ 21,967 $ 20,279 $ 25,566 $ 33,633 Net loss margin 26 % 4 % 17 % 4 % Adjusted EBITDA margin 15 % 18 % 9 % 16 % (1) IPO-related costs and other transaction related expenses includes certain non-recurring expenses, which occurred in connection with our IPO. (2) In 2020, we incurred a loss on sale from the disposal of Beaumont, our conveyancing business in the United Kingdom, of $1.8 million. Adjusted EBITDA increased from $20.3 million for the three months ended June 30, 2020 to $22.0 million for the three months ended June 30, 2021. The increase of $1.7 million was primarily driven by higher revenue of $39.4 million partially offset by increases in cost of revenue of $14.1 million, customer acquisition media spend of $16.9 million, and salaries and benefits of $4.8 million from our investment in headcount. Adjusted EBITDA decreased from $33.6 million for the six months ended June 30, 2020 to $25.6 million for the six months ended June 30, 2021. The decrease of $8.1 million reflects an increase in revenue of $68.3 million, which was offset by an increase in cost of revenue of $22.9 million driven by increases in customer care and fulfillment costs, and investment in customer acquisition media spend, which increased by $ 40.5 million as we invested to expand our customer base and build on our digital brand leadership and awareness. We expect our Adjusted EBITDA to increase in absolute dollars in the longer term, although the rate at which our Adjusted EBITDA may grow could vary based upon the interplay of the foregoing factors. 44 Table of Contents Free Cash Flow Free cash flow is a liquidity measure used by management in evaluating the cash generated by our operations after purchases of property and equipment including capitalized internal-use software. We consider free cash flow to be an important metric because it provides useful information to management and investors about the amount of cash generated by our business that can be used for strategic opportunities, including investing in our business and strengthening our balance sheet. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth. The usefulness of free cash flow as an analytical tool has limitations because it excludes certain items, which are settled in cash, does not represent residual cash flow available for discretionary expenses, does not reflect our future contractual commitments, and may be calculated differently by other companies in our industry. Accordingly, it should not be considered in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities. The following table presents a reconciliation of net cash provided by operating activities, the most directly comparable GAAP measure, to free cash flow (unaudited): Six Months Ended June 30 2021 2020 (in thousands) Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow Net cash provided by operating activities $ 40,696 $ 49,320 Purchase of property and equipment (6,004 ) (4,491 ) Free cash flow $ 34,692 $ 44,829 We experienced a decrease in our free cash flow from $44.8 million for the six months ended June 30, 2020 to $34.7 million for the six months ended June 30, 2021. The decrease in free cash flow was primarily due to our wider net loss adjusted for stock-based compensation and other non-cash items of approximately $33 million, an increase of $3.0 million in accounts receivable and prepaid expenses, lower accounts payable due to the timing of our payments partially offset by lower accrued expenses and growth in deferred revenue driven by an increase in subscription units of approximately $2.1 million. Free cash flow was also impacted by higher capital expenditures for the purchase of property and equipment, including capitalization of internal-use software. We expect our free cash flow to increase in absolute dollars in the over the longer term, although the rate at which our free cash flow may grow could vary based upon the interplay of the factors discussed above. For the six months ended June 30, 2021 and 2020, our free cash flow included cash payments for interest related to our 2018 Credit Facility of $12.2 million and $15.3 million, respectively. JOBS Act Accounting Election We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act , or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to avail ourselves of delayed adoption of new or revised accounting standards and, therefore, we will not be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not emerging growth companies. To the extent that we no longer qualify as an emerging growth company we will be required to adopt certain accounting pronouncements earlier than the adoption dates disclosed below which are for non-public business entities. Critical Accounting Policies and Estimates During the three months ended June 30, 2021, there have been no significant changes to our critical accounting policies and estimates compared with those disclosed in described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” and the notes to the audited consolidated financial statements appearing in the Prospectus filed with the SEC. 45 Table of Contents Recent Accounting Pronouncements See Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.