Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-35618
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
th Floor Glendale |
||
(Address of principal executive offices) |
(Zip Code) | |
Registrant’s telephone number, including area code: (323 ) 962-8600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation Yes
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2
of the Exchange Act. | Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer |
☒ | Smaller reporting company |
||||
| Emerging growth company | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule ☒
12b-2
of the Exchange Act). Yes ☐ No As of July 31, 2021, the registrant had 196,904,824 shares of common stock, $0.001 par value per share, outstanding.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form
10-Q
contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q
may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q
include, but are not limited to statements regarding our future results of operations and financial position, industry and business trends, stock compensation, business strategy, plans, market growth and our objectives for future operations. The forward-looking statements in this Quarterly Report on Form
10-Q
are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the important factors discussed in “Risk Factors” included in our prospectus, dated June 29, 2021, filed with the Securities and Exchange Commission, or the 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 and Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q
for the quarter ended June 30, 2021. The forward-looking statements in this Quarterly Report on Form 10-Q
are based upon information available to us as of the date of this Quarterly Report on Form 10-Q,
and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. You should read this Quarterly Report on Form
10-Q
and the documents that we reference in this Quarterly Report on Form 10-Q
and have filed as exhibits to this Quarterly Report on Form 10-Q
with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q.
Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q,
whether as a result of any new information, future events or otherwise. 2
TABLE OF CONTENTS
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3
PART I. – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except par values)
June 30, 2021 |
December 31, 2020 |
|||||||
| Assets |
||||||||
| Current assets: |
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| Cash and cash equivalents |
$ | $ | ||||||
| Accounts receivable |
||||||||
| Prepaid expenses and other current assets |
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| |
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| Total current assets |
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| Property and equipment, net |
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| Goodwill |
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| Intangible assets, net |
||||||||
| Deferred income taxes |
||||||||
| Restricted cash equivalent |
— | |||||||
| Available-for-sale |
||||||||
| Other assets |
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| |
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| Total assets |
$ | $ | ||||||
| |
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| Liabilities, redeemable convertible preferred stock and stockholders’ deficit |
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| Current liabilities: |
||||||||
| Accounts payable |
$ | $ | ||||||
| Accrued expenses and other current liabilities |
||||||||
| Deferred revenue |
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| Current portion of long-term debt |
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| |
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| Total current liabilities |
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| Long-term debt, net of current portion |
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| Deferred revenue |
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| Other liabilities |
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| Total liabilities |
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| Commitments and contingencies (Note 8) |
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| Series A redeemable convertible preferred stock, $ |
||||||||
| Stockholders’ deficit: |
||||||||
| Common stock, $ |
||||||||
| Additional paid-in capital |
||||||||
| Accumulated deficit |
( |
) | ( |
) | ||||
| Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total stockholders’ deficit |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total liabilities, redeemable convertible preferred stock and stockholders’ deficit |
$ | $ | ||||||
| |
|
|
|
|||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Revenue |
$ | |
$ | |
$ | |
$ | |
||||||||
| Cost of revenue |
||||||||||||||||
| |
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|
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| Gross profit |
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| Operating expenses: |
||||||||||||||||
| Sales and marketing |
||||||||||||||||
| Technology and development |
||||||||||||||||
| General and administrative |
||||||||||||||||
| Impairment of long-lived and other assets |
— | |||||||||||||||
| Loss on sale of business |
— | — | ||||||||||||||
| |
|
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|
|
|
|||||||||
| Total operating expenses |
||||||||||||||||
| |
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|
|||||||||
| (Loss) income from operations |
( |
) | ( |
) | ||||||||||||
| Interest expense, net |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other income |
( |
) | ( |
) | ||||||||||||
| Impairment of available-for-sale |
— | ( |
) | — | ( |
) | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Loss before income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Provision for (benefit from) from income taxes |
( |
) | ( |
) | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| |
|
|
|
|
|
|
|
|||||||||
| Net loss per share attributable to common stockholders – basic and diluted: |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| |
|
|
|
|
|
|
|
|||||||||
| Weighted-average shares used to compute net loss per share attributable to common stockholder – basic and diluted: |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
5
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Other comprehensive (loss) income, net of tax : |
||||||||||||||||
| Change in foreign currency translation adjustments: |
( |
) | ( |
) | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Change in available-for-sale |
||||||||||||||||
| Unrealized loss from available-for-sale debt securities |
( |
) | — | ( |
) | — | ||||||||||
| Loss on impairment |
— | ( |
) | — | ( |
) | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total net changes in available-for-sale |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Change in unrealized gain (loss) on cash flow hedges: |
||||||||||||||||
| Unrealized gain (loss) on interest rate cap and swaps |
( |
) | ( |
) | ||||||||||||
| Reclassification of prior hedge effectiveness and losses from interest rate cap to net loss |
||||||||||||||||
| |
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|
|
|
|||||||||
| Total net changes in cash flow hedges |
( |
) | ( |
) | ||||||||||||
| Total other comprehensive income (loss) |
( |
) | ( |
) | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total comprehensive loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| |
|
|
|
|
|
|
|
|||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
6
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Redeemable Convertible Preferred Stock
and Stockholders’ Deficit
(In thousands)
Series A Redeemable Convertible Preferred Stock |
Common Stock |
Additional Paid-In Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Total Stockholders’ Deficit |
|||||||||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
|||||||||||||||||||||||||||||
| Balance at December 31, 2020 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||||||
| Issuance of common stock upon exercise of stock options |
— | — | — | — | — | |||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock awards |
— | — | — | — | — | — | — | |||||||||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Shares surrendered for settlement of minimum statutory tax withholdings |
— | — | ( |
) | — | ( |
) | — | — | ( |
) | |||||||||||||||||||||
| Net interest and repayment of full recourse notes receivables |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Special dividends |
— | — | — | — | ( |
) | — | — | ( |
) | ||||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at March 31, 2021 |
$ | |
$ | |
$ | |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||||
| Issuance of common stock upon exercise of stock options |
— | — | — | — | — | |||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock awards |
— | — | — | — | — | — | — | |||||||||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Shares surrendered for settlement of minimum statutory tax withholdings |
— | — | ( |
) | — | ( |
) | — | — | ( |
) | |||||||||||||||||||||
| Special dividends |
— | — | — | — | ( |
) | — | — | ( |
) | ||||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
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|
|||||||||||||||||
| Balance at June 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
7
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Redeemable Convertible Preferred Stock
and Stockholders’ Deficit (continued)
(In thousands)
Series A Redeemable Convertible Preferred Stock |
Common Stock |
Additional Paid-In Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Total Stockholders’ Deficit |
|||||||||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
|||||||||||||||||||||||||||||
| Balance at December 31, 2019 |
$ | |
$ | |
$ | |
$ | ( |
$ | ( |
$ | ( |
) | |||||||||||||||||||
| Issuance of common stock upon exercise of stock options |
— | — | — | — | — | |||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock awards |
— | — | — | — | — | — | — | |||||||||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Shares surrendered for settlement of minimum statutory tax withholdings |
— | — | ( |
) | — | ( |
) | — | — | ( |
) | |||||||||||||||||||||
| Net interest and repayment of full recourse notes receivables |
— | — | — | — | ( |
) | — | — | ( |
) | ||||||||||||||||||||||
| Special dividends |
— | — | — | — | ( |
) | — | — | ( |
) | ||||||||||||||||||||||
| Other comprehensive loss |
— | — | — | — | — | — | ( |
) | ( |
) | ||||||||||||||||||||||
| Net loss |
— | — | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||||||
| |
|
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|
|
|
|
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|
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|
|||||||||||||||||
| Balance at March 31, 2020 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||||||
| Issuance of common stock upon exercise of stock options |
— | — | — | — | ||||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock awards |
— | — | — | — | — | — | — | |||||||||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Shares surrendered for settlement of minimum statutory tax withholdings |
— | — | ( |
) | — | ( |
) | — | — | ( |
) | |||||||||||||||||||||
| Special dividends |
— | — | — | — | ( |
) | — | — | ( |
) | ||||||||||||||||||||||
| Notes receivable from shareholder |
— | — | — | — | ( |
) | — | — | ( |
) | ||||||||||||||||||||||
| Other comprehensive loss |
— | — | — | — | — | — | ( |
) | ( |
) | ||||||||||||||||||||||
| Net loss |
— | — | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||||||
| |
|
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|
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|
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|
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|
|||||||||||||||||
| Balance at June 30, 2020 |
$ | |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||||
| |
|
|
|
|
|
|
|
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|
|
|
|
|||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
8
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended June 30 |
||||||||
2021 |
2020 |
|||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | ( |
) | $ | ( |
) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
||||||||
Amortization of debt issuance costs |
||||||||
Amortization of prior hedge effectiveness |
||||||||
Stock-based compensation |
||||||||
Impairment of long-lived assets |
||||||||
Impairment of investments |
— | |||||||
Loss on sale of business |
— | |||||||
Deferred income taxes |
( |
) | ( |
) | ||||
Change in fair value of financial guarantee |
( |
) | ( |
) | ||||
Change in fair value of derivative instruments |
||||||||
Unrealized foreign exchange (gain) loss |
( |
) | ||||||
Other |
( |
) | ||||||
Changes in operating assets and liabilities, net of effects of disposal of business: |
||||||||
Accounts receivable |
( |
) | ( |
) | ||||
Prepaid expenses and other current assets |
( |
) | ( |
) | ||||
Other assets |
( |
) | ( |
) | ||||
Accounts payable |
||||||||
Accrued expenses and other liabilities |
( |
) | ||||||
Income tax payable |
( |
) | ||||||
Deferred revenue |
||||||||
Net cash provided by operating activities |
||||||||
Cash flows from investing activities |
||||||||
Purchase of property and equipment |
( |
) | ( |
) | ||||
Sale of business, net of cash sold |
— | ( |
) | |||||
Net cash used in investing activities |
( |
) | ( |
) | ||||
Cash flows from financing activities |
||||||||
Repayment of capital lease obligations |
( |
) | ( |
) | ||||
Repayment of 2018 Term Loan |
( |
) | ( |
) | ||||
Proceeds from 2018 Revolving Facility |
— | |||||||
Repayment of 2018 Revolving Facility |
— | ( |
) | |||||
Repayment of hybrid debt |
( |
) | ( |
) | ||||
Payment of initial public offering costs |
( |
) | — | |||||
Payment of contingent consideration |
( |
) | — | |||||
Payment of special dividends |
( |
) | ( |
) | ||||
Repurchases of common stock for tax withholding obligations |
( |
) | ( |
) | ||||
Proceeds from exercise of stock options, net of cash paid for employee tax withholding |
||||||||
Net cash used in financing activities |
( |
) | ( |
) | ||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash equivalent |
( |
) | ||||||
Net increase in cash, cash equivalents and restricted cash equivalent |
||||||||
Cash, cash equivalents and restricted cash equivalent, at beginning of the period |
||||||||
Cash, cash equivalents and restricted cash equivalent, at end of the period |
$ | $ | ||||||
Reconciliation of cash, cash equivalents, and restricted cash equivalent reported in the consolidated balance sheets |
||||||||
Cash and cash equivalents |
$ | |
$ | |||||
Restricted cash equivalent |
— | |||||||
Total cash, cash equivalents, and restricted cash equivalent shown in the condensed consolidated statements of cash flows |
$ | $ | |
|||||
Non-cash investing and financing activities |
||||||||
Purchase of property and equipment included in accounts payable and accrued expenses and other current liabilities |
$ | $ | ||||||
Change in fair value of hedged interest rate swaps and interest rate cap |
( |
) | ||||||
Transfer of interest rate swaps derivative liability to hybrid debt |
— | |||||||
Deferred offering costs included in accounts payable and accrued expenses and other current liabilities |
— | |||||||
Deferred financing costs included in accounts payable and accrued expenses and other current liabilities |
— | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
9
LegalZoom.com, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Description of Business
LegalZoom.com, Inc., was initially formed as a California corporation in 1999 and reincorporated as a Delaware corporation in 2007. LegalZoom.com, Inc., and its wholly owned subsidiaries, or referred to herein as “we,” “us,” or “our” has its executive headquarters in Glendale, California, its operational headquarters in Austin, Texas and additional locations in Frisco, Texas and London in the United Kingdom, or U.K. We are a provider of services that meet the legal needs of small businesses and consumers. We offer a broad portfolio of legal services through our online legal platform that customers can tailor to their specific needs. In the United States, or U.S., we also offer several subscription services, including legal plans through which businesses and consumers can be connected to an experienced attorney licensed in their jurisdiction, registered agent services, tax and compliance services and unlimited access to our forms library.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S., or GAAP, for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP, have been condensed or omitted. Accordingly, these condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2020 and the related notes thereto, which are included in our prospectus dated June 29, 2021 filed with the Securities and Exchange Commission, or SEC, pursuant to Rule 424(b) of the Securities Act of 1933, as amended on June 30, 2021, or Prospectus, relating to our initial public offering, or IPO which closed on July 2, 2021. The December 31, 2020 condensed consolidated balance sheet was derived from our audited consolidated financial statements as of that date. Our unaudited condensed consolidated financial statements include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of the condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. There have been no significant changes in accounting policies during the three and six months ended June 30, 2021 from those disclosed in the annual consolidated financial statements for the year ended December 31, 2020 and the related notes.
The operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results expected for the full year ending December 31, 2021.
Segment Reporting and Geographic Information
Our Chief Executive Officer, as the chief operating decision maker organizes our company, manages resource allocations, and measures performance on the basis of one operating segment.
Revenue outside of the U.S., based on the location of the customer, represented 0.8 % and 1.2 %, for the three months ended June 30, 2021 and 2020, respectively and 0.9 % and 2.0 % of our consolidated revenue for the six months ended June 30, 2021 and 2020, respectively. Our property and equipment located outside of the U.S. was 1
Use of Estimates
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent liabilities in the unaudited condensed consolidated financial statements and accompanying notes. Estimates are used for, however not limited to, revenue recognition, sales allowances and credit reserves, debt securities, valuation of long-lived assets and goodwill, income taxes, commitments and contingencies, valuation of assets and liabilities acquired in business combinations, fair value of derivative instruments and stock-based compensation. Actual results could differ materially from those estimates.
available-for-sale
10
The extent to which
COVID-19
impacts our business and financial results will depend on numerous continuously evolving factors including, but not limited to, the magnitude and duration of COVID-19,
including resurgences; the impact on our employees; the extent to which it will impact worldwide macroeconomic conditions, including interest rates, employment rates, and health insurance coverage; the speed and degree of the anticipated recovery, as well as variability in such recovery across different geographies, industries, and markets; and governmental and business reactions to the pandemic. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19
as of June 30, 2021 and through the date of issuance of these unaudited condensed consolidated financial statements. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, sales allowances, and the carrying value of goodwill and other long-lived assets. While there was not a material impact on our unaudited condensed consolidated financial statements at and for the three and six months ended June 30, 2021, our future assessment of the magnitude and duration of COVID-19,
as well as other factors, could result in material impacts to our unaudited condensed consolidated financial statements in future reporting periods. Certain Risks and Concentrations
We maintain accounts in U.S. and U.K. banks with funds insured by the Federal Deposit Insurance Corporation, or FDIC, and the Financial Services Compensation Scheme, or FSCS. Our bank accounts may, at times, exceed the FDIC and FSCS insured limits. Financial instruments that potentially subject us to credit risk consist principally of cash and cash equivalents. Management believes that we are not exposed to any significant credit risk related to our cash or cash equivalents and have not experienced any losses in such accounts.
No single customer comprised 10 10 % or greater of the total receivable as of June 30, 2021. At December 31, 2020 there was one customer who accounted for 20 % of our accounts receivable balance.
Foreign Currency
British Pound Sterling, or GBP, is the functional currency for our foreign subsidiaries. The financial statements of these foreign subsidiaries are translated to U.S. Dollars using period-end rates of exchange for assets and liabilities, historical rates of exchange for equity, and average rates of exchange for the period for revenue and expenses. Translation gains and losses are recorded in the accumulated other comprehensive loss as a component of our unaudited condensed consolidated statements of redeemable convertible preferred stock and stockholders’ deficit. We recognized foreign currency transaction gains of $
million and losses of $
million during the three months ended June 30, 2021 and 2020, respectively and gains of $
million and losses of $
million during the six months ended June 30, 2021 and 2020, respectively.
Revenue Recognition
For the three and six months ended June 30, 2021 and 2020, revenue was comprised of the following (in thousands):
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Transaction |
$ | $ | $ | |
$ | |||||||||||
| Subscription |
||||||||||||||||
| Partner |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total revenue |
$ | |
$ | |
$ | $ | |
|||||||||
| |
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|
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|
|||||||||
11
Deferred Offering Costs
Deferred offering costs of $5.5 million have been recorded as other assets on the unaudited condensed consolidated balance sheet as of June 30, 2021 and consist of costs incurred in connection with the sale of our common stock in our initial public offering, or IPO, including certain legal, accounting, printing, and other IPO related costs. Upon the completion of our IPO in July 2021, deferred offering costs are recorded in stockholders’ deficit as a reduction from the proceeds of the offering. There were no deferred offering costs as of December 31, 2020.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update, or ASU, or ASU
No. 2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,
2019-12.
This Update removes certain exceptions for performing intraperiod tax allocations, recognizing deferred taxes for investments, and calculating income taxes in interim periods. The guidance also simplifies the accounting for franchise taxes, transactions that result in a step-up
in the tax basis of goodwill, and the effect of enacted changes in tax laws or rates in interim periods. We early adopted ASU 2019-12
in the first quarter of 2021 and the adoption had no material impact to our unaudited condensed consolidated financial statements. Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU ), the first accounting standard update in connection with Topic 842,, or Topic 842. The guidance requires lessees to recognize most leases as right of use assets and lease liabilities on the balance sheet and also requires additional qualitative and quantitative disclosures to enable users to understand the amount, timing and uncertainty of cash flows arising from leases. The original guidance required application on a modified retrospective basis to the earliest period presented. In August 2018, the FASB issued ASU , which includes an option to not restate comparative periods in transition, however, to elect to use the effective date of ASU , which made further targeted improvements including clarification regarding the determination of fair value of lease assets and liabilities and statement of cash flows and presentation guidance. In June 2020, FASB issued ASU , which extended the effective date of this guidance for
No. 2016-02,
Leases (Topic 842
Leases
2018-11,
Leases (Topic 842): Targeted Improvements
2016-02,
as the date of initial application of transition. In March 2019, the FASB issued ASU No. 2019-01,
Leases (Topic 842): Codification Improvements
2020-05,
Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities
non-public
entities to fiscal years beginning after December 15, 2021. Topic 842 is effective for our annual reporting period beginning on January 1, 2022. We are currently evaluating the impacts of the adoption on our consolidated financial statements. In June 2016, the FASB issued ASU , or Topic 326, as amended, which revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to, debt securities and accounts receivable. Topic 326 is effective for our annual reporting period beginning on January 1, 2023. We are currently evaluating the impacts of the adoption on our consolidated financial statements.
No. 2016-13,
Financial Instruments – Credit losses: Measurement of Credit Losses on Financial Instruments (Topic 326)
available-for-sale
In March 2020, the FASB issued ASU , that provides optional relief to applying reference rate reform to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate, or LIBOR, which will be discontinued by the end of 2021. Also, in January 2021, the FASB issued ASU , to clarify that cash flow hedges are eligible for certain optional expedients and exceptions for the application of subsequent assessment methods to assume perfect effectiveness as previously presented in ASU
No. 2020-04,
Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting
No. 2021-01,
Reference Rate Reform (Topic 848) — Scope
2020-04.
Topic 848 effective immediately and may be applied through December 31, 2022. We are currently evaluating the impacts of the adoption on our consolidated financial statements. 12
Note 3. Other Financial Statement Information
Accounts Receivable
Changes in the allowance consisted of the following (in thousands):
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Beginning balance |
$ | $ | |
$ | $ | |||||||||||
| Add: amounts recognized as a reduction of revenue |
||||||||||||||||
| Add: bad debt expense recognized in general and administrative expense |
||||||||||||||||
| Less: write-offs, net of recoveries |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Ending balance |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
The allowance recognized as a reduction of revenue primarily relates to our installment plan receivables for which we expect we will not be entitled to a portion of the transaction price based on our historical experience with similar transactions. The allowance recognized against general and administrative expense represents an allowance relating to receivables from partners that are no longer considered collectible.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
June 30, 2021 |
December 31, 2020 |
|||||||
| Prepaid expenses |
$ | |
$ | |
||||
| Deferred cost of revenue |
||||||||
| Other current assets |
||||||||
| |
|
|
|
|||||
| Total prepaid expenses and other current assets |
$ | |
$ | |
||||
| |
|
|
|
|||||
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
June 30, 2021 |
December 31, 2020 |
|||||||
| Accrued payroll and related expenses |
$ | |
$ | |
||||
| Accrued vendor payables |
||||||||
| Derivative liabilities and hybrid debt |
||||||||
| Sales allowances |
||||||||
| Accrued sales, use and business taxes |
||||||||
| Accrued advertising |
— | |||||||
| Other |
||||||||
| |
|
|
|
|||||
| Total accrued expenses and other current liabilities |
$ | $ | ||||||
| |
|
|
|
|||||
Depreciation and Amortization
Depreciation and amortization expense of our property and equipment, including capitalized
internal-use
software, and intangible assets consisted of the following (in thousands): Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Cost of revenue |
$ | |
$ | |
$ | |
$ | |
||||||||
| Sales and marketing |
||||||||||||||||
| Technology and development |
||||||||||||||||
| General and administrative |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total depreciation and amortization expense |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
13
Deferred Revenue
Deferred revenue as of June 30, 2021 and December 31, 2020 was $153.9 million and $130.1 million, respectively. We recognized $77.5 million and $57.7 million of revenue during the three months ended June 30, 2021 and 2020, respectively, that was included in the deferred revenue balances as of March 31, 2021 and 2020, respectively, and $102.3 million and $83.1 million during the six months ended June 30, 2021 and 2020, respectively, that was included in the deferred revenue balances as of December 31, 2020 and 2019, respectively. We expect to recognize substantially all of the remaining deferred revenue as of December 31, 2020 as revenue in 2021. We expect substantially all of the deferred revenue at June 30, 2021 will be recognized as revenue within the next twelve months.
We have omitted disclosure about the transaction price allocated to remaining performance obligations and when revenue will be recognized as revenue as our contracts with customers that have a duration of more than one year are immaterial.
Note 4. Disposition of Business
Beaumont ABS Limited
In April 2020, we sold our conveyancing business in the United Kingdom, Beaumont ABS Limited, to a third-party buyer and paid $1.2 million in working capital to the buyers. Our loss on sale of business was $1.8 million for the three months ended June 30, 2020.
Note 5. Investments
Impairment of Debt Securities
Available-for-sale
In June 2020, we fully impaired our investment in firma.de Firmenbaukasten AG and we incurred a loss of $4.8 million because the present value of cash flows expected to be collected is less than the amortized cost basis of the investment. Therefore, we recognized an other-than-temporary impairment of EUR €4.3 million ($4.8 million) in our condensed consolidated statements of operations during the three months ended June 30, 2020.
available-for-sale
14
Note 6. Long-term Debt
A reconciliation of the scheduled maturities to the condensed consolidated balance sheets is as follows (in thousands):
June 30, 2021 |
December 31, 2020 |
|||||||
Current portion of 2018 Term Loan |
$ | $ | ||||||
Current portion of discount and unamortized debt issuance costs |
( |
) | ( |
) | ||||
Total current portion of long-term debt |
||||||||
Noncurrent portion of 2018 Term Loan |
||||||||
Noncurrent portion of discount and unamortized debt issuance costs |
( |
) | ( |
) | ||||
Total long-term debt, net of current portion |
$ | |
$ | |
||||
At June 30, 2021, aggregate future principal payments are as follows (in thousands):
2021 (remaining six months) |
$ | |||
2022 |
||||
2023 |
||||
2024 |
||||
Total long-term debt, net of current portion |
||||
Less: current portion of 2018 Term Loan |
( |
) | ||
Outstanding principal of 2018 Term Loan, net of current portion |
$ | |
||
In November 2018, we entered into an amended first lien credit and guaranty agreement, or the 2018 Credit Facility, which consists of a first lien term loan facility, or 2018 Term Loan, with a principal amount of $535.0 million and a 2018 Revolving Facility of $40.0 million, or the 2018 Revolving Facility. The 2018 Term Loan matures in November 2024 and the 2018 Revolving Facility matures in November 2023 .
At June 30, 2021, total borrowings under our 2018 Term Loan was $521.6 million. We determined that the fair value of our long-term debt approximates its carrying value as of June 30, 2021 and December 31, 2020. We estimated the fair value of our long-term debt using Level 2 inputs based on recent observable trades of our 2018 Term Loan. The effective interest rate of the 2018 Term Loan is 5.0 % and 5.1 % for June 30, 2021 and December 31, 2020, respectively. At June 30, 2021 and December 31, 2020, we had no
In March 2020, in response to the World Health Organization’s declaration of 40.0
COVID-19,
we drew down the full $In July 2021 we repaid the outstanding principal of
$
million of our 2018 Term Loan in full from the proceeds from our IPO. We also amended and restated our 2018 Revolving Facility by increasing the availability to
$
million over a five-year period. See Note 15. Subsequent Events.
Note 7. Derivatives
In June 2021, our financial guarantee of the personal loan of a former executive officer was waived and we recognized a gain of $0.1 million from the cancellation of our financial guarantee derivative in other income (expense), net in the accompanying condensed consolidated statements of operations for the three months ended June 30, 2021. The associated restricted cash equivalent of $25.0 million became unrestricted and was reclassified to cash and cash equivalents.
15
Due to the impact of transactions to modify our initial swaps where the derivative liability of $12.3 million was carried over to the modified swaps, the fixed rate of 2.3 % on the initial swaps was modified to a new average fixed interest rate of 1.7 % and the maturity date was extended by two years to April 2024 . The notional amount of each modified swap was $96.6 million. At the time of modification, the initial swaps were
COVID-19
and decreases in LIBOR, in March 2020, we entered into two blend-and-extend
de-designated
as cash flow hedges and amounts in other comprehensive income were frozen and are amortized to interest expense over the life of the original hedge relationship. As the modified swaps were considered off-market,
they were accounted for as a debt host, and an embedded at-market
derivative was bifurcated from the debt host. The at-market
portion of the modified swaps were designated as cash flow hedges. The hybrid debt host is accounted for at amortized cost basis and will be amortized as we settle our modified swaps over the extended term with related interest recognized in interest expense, net in the accompanying condensed consolidated statements of operations. Derivative financial instruments and hybrid debt consisted of the following (in thousands):
June 30, 2021 |
December 31, 2020 |
|||||||
| Interest rate swap derivative liability, current portion |
$ | |
$ | |
||||
| Interest rate swaps |
||||||||
| Financial guarantee |
— | |||||||
| |
|
|
|
|||||
| Total derivative liability, net of current portion |
$ | $ | ||||||
| |
|
|
|
|||||
| Hybrid debt, current portion |
$ | $ | ||||||
| |
|
|
|
|||||
| Hybrid debt, net of current portion |
$ | $ | ||||||
| |
|
|
|
|||||
The impact from losses from our interest rate cap, interest rate swaps, and hybrid debt on our condensed consolidated statements of operations were as follows (in thousands):
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Net payments upon settlement of interest rate swaps |
$ | $ | $ | |
$ | |||||||||||
| Amortization of prior hedge effectiveness |
||||||||||||||||
| Amortization of interest rate cap premium |
— | |||||||||||||||
| Interest expense on hybrid debt |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total, recorded in interest expense, net |
$ | |
$ | |
$ | $ | |
|||||||||
| |
|
|
|
|
|
|
|
|||||||||
Note 8. Commitments and Contingencies
Operating Leases
We conduct operations from certain leased facilities in various locations. At June 30, 2021, we had various Future minimum payments under operating leases at June 30, 2021 are as follows (in thousands):
non-cancelable
operating leases for office space and equipment, which expire between December 2021 and December 2022. Operating Leases |
||||
| 2021 (remaining six months) |
$ | |
||
| 2022 |
||||
| |
|
|||
| Total minimum lease payments |
$ | |||
| |
|
|||
Advertising, Media and Other Commitments
We use a variety of media to advertise our services, including search engine marketing, television and radio. At June 30, 2021, we had 2.0 million, substantially all of which will be paid during 2021. We also have 13.8 million over a five-year period, of which $9.7 million remains to be paid as of June 30, 2021.
non-cancelable
minimum advertising and media commitments for future advertising spots of $non-cancelable
agreements with various vendors, which require us to pay $16
Legal Proceedings
We received a demand letter dated April 20, 2020 from service partner Dun & Bradstreet alleging that Dun & Bradstreet had overpaid us for services. The letter alleges these overpayments occurred between 2015 and 2019, amounted to $5.6 million, and were caused by overreporting by us. The parties have continued to negotiate, and no claim has been filed. We deny and will continue to deny all of the allegations and claims asserted by Dun & Bradstreet, including, but not limited to, any allegation that the respondent has suffered any harm or damages. We believe we have meritorious defenses to the claims and will vigorously defend any action. We are unable to predict the ultimate outcome of this matter. We have not recorded any loss or accrual in the accompanying condensed consolidated financial statements at June 30, 2021 for this matter as a loss is not probable and reasonably estimable. There is at least a reasonable possibility that a loss may have been incurred for this contingency, however, we cannot make an estimate of the possible loss or range of loss. If this matter is not resolved in our favor, the losses arising from the result of litigation or settlements may have a material adverse effect on our business, results of operations, cash flows and financial condition.
We initiated an arbitration on October 28, 2020 against one of our vendors. The demand for arbitration alleges breach of contract, breach of covenant of good faith and fair dealing, and seeks declaratory relief and at least $5.6 million in damages. On December 7, 2020, the vendor filed a counterdemand alleging breach of contract and breach of the covenant of good faith and fair dealing, seeking declaratory relief and at least $6.1 million in damages. We replied to the counterdemand on January 19, 2021. A hearing has been scheduled for November 19, 2021. We deny and will continue to deny all of the allegations and claims asserted in the counterdemand, including, but not limited to, any allegation that the respondent has suffered any harm or damages. We believe we have meritorious defenses to the claims and will vigorously defend any action. We are unable to predict the ultimate outcome of this matter. We have not recorded any loss or accrual in the accompanying condensed consolidated financial statements at June 30, 2021 for this matter as a loss is not probable and reasonably estimable. There is at least a reasonable possibility that a loss may have been incurred for this contingency, however, we cannot make an estimate of the possible loss or range of loss. If this matter is not resolved in our favor, the losses arising from the result of litigation or settlements may have a material adverse effect on our business, results of operations, cash flows and financial condition.
We were served on February 9, 2021 with a class action complaint, filed in Los Angeles Superior Court and removed to federal court on March 11, 2021, from a Florida resident who claims to have visited the www.legalzoom.com website. The plaintiff alleges that the website’s use of session replay software was an unlawful interception of electronic communications under the Florida Security Communications Act. The plaintiff sought damages on behalf of the purported class as well as injunctive and declaratory relief. On May 7, 2021, the plaintiff filed a notice of dismissal without prejudice. We are unable to predict the ultimate outcome of this matter. We have not recorded any loss or accrual in the accompanying condensed consolidated financial statements at June 30, 2021 for this matter as a loss is not probable and reasonably estimable. There is at least a reasonable possibility that a loss may have been incurred for this contingency, however, we cannot make an estimate of the possible loss or range of loss. If this matter is not resolved in our favor, the losses arising from the result of litigation or settlements may have a material adverse effect on our business, results of operations, cash flows and financial condition.
We are involved in inactive state administrative inquiries relating to the unauthorized practice of law or insurance. Because these are inquiries and no claims have been alleged or asserted against us, we cannot predict the outcome of these inquiries or whether these matters will result in litigation or any outcome of potential litigation.
From time to time, we may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. Other than described above, we are not currently a party to any material legal proceedings, nor are we aware of any pending or threatened litigation that would have a material adverse effect on our results of operations, cash flows, and financial condition, should such litigation be resolved unfavorably.
17
Indemnifications
Indemnification provisions in our third-party service provider agreements provide that we will indemnify, hold harmless, and reimburse the indemnified parties on a basis for losses suffered or incurred by the indemnified parties in connection with any claim by any third-party as a result of our website, advertising, marketing, payment processing, collection or customer service activities. The maximum potential amount of future payments we could be required to make under these indemnification provisions is undeterminable.
case-by-case
Note 9. Stock-based Compensation
Stock-based Compensation Cost
We recorded stock-based compensation cost in the following categories in the accompanying condensed consolidated statements of operations and balance sheets (in thousands):
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Cost of revenue |
$ | $ | $ | $ | ||||||||||||
| Sales and marketing |
||||||||||||||||
| Technology and development |
||||||||||||||||
| General and administrative |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total stock-based compensation expense |
||||||||||||||||
| Amount capitalized to internal-use software |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total stock-based compensation |
$ | |
$ | |
$ | |
$ | |
||||||||
| |
|
|
|
|
|
|
|
|||||||||
Stock Options
Stock option activity for the six months ended June 30, 2021 is as follows (in thousands, except weighted-average exercise price and remaining contract life):
Number of Options |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Life (in Years) |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding at December 31, 2020 |
$ | |||||||||||||||
| Granted |
||||||||||||||||
| Exercised |
( |
) | ||||||||||||||
| Cancelled/forfeited |
( |
) | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Outstanding at June 30, 2021 |
$ | |
$ | |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Vested and expected to vest at June 30, 2021 |
$ | $ | ||||||||||||||
| Exercisable at June 30, 2021 |
$ | $ | ||||||||||||||
At June 30, 2021, total unrecognized stock-based compensation expense is $93.3 million, which 2.9 years.
is
expected to be recognized over a weighted-average period of 18
The weighted-average assumptions used to calculate the grant-date fair value of our stock option grants using the Black-Scholes Option Pricing Model were as follows:
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Expected life (years) |
— | |||||||||||||||
| Risk-free interest rate |
% | — | % | % | ||||||||||||
| Expected volatility |
% | — | % | % | ||||||||||||
| Expected dividend yield |
% | — | % | % | ||||||||||||
In June 2021, we granted 970,970 options to our executive officers that were contingent on the effectiveness of our IPO, which occurred on June 29, 2021, or IPO options. Because the number of options and exercise price of the IPO Options were based on the IPO price to the public, the grant date for accounting purposes was not established until the effective date of our IPO. As the IPO was a performance condition, no stock-based compensation expense was recognized until our IPO was declared effective. Stock-based compensation expense for the three months ended June 30, 2021 was $0.2 million and stock-based compensation of $11.2 million will be recognized over a weighted-average requisite service period of approximately 4.1 years.
There were no awards granted for the three months ended June 30, 2020.
Restricted Stock Units
A summary of restricted stock unit, or RSU, activity for the six months ended June 30, 2021 is as follows (in thousands, except weighted-average grant-date fair value):
Number of Options |
Weighted- Average Grant- Date Fair Value |
|||||||
| Unvested at December 31, 2020 |
$ | |||||||
| Granted |
||||||||
| Cancelled/forfeited |
( |
) | ||||||
| Vested |
( |
) | ||||||
| |
|
|
|
|||||
| Unvested at June 30, 2021 |
$ | |
||||||
| |
|
|
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The fair value of vested RSUs for the six months ended June 30, 2021 and 2020 was $8.4 million and $2.3 million, respectively. Our RSUs consist of time-based RSUs and various performance RSUs. For the three and six months ended June 30, 2021, total stock-based compensation expense related to RSU’s was $11.7 million and $12.2 million, respectively. For the three and six months ended June 30, 2020, total stock-based compensation expense related to RSU’s was $0.8 million and $2.4 million, respectively. At June 30, 2021, total remaining stock-based compensation expense for unvested RSU awards was $67.7 million, which is expected to be recognized over a weighted-average period of 3.4 years.
In June 2021, we granted 388,389 RSUs with a value of $10.8 million to our executive officers that were contingent on the effectiveness of the registration statement of our IPO, or IPO RSUs. As the IPO was a performance condition, no stock-based compensation expense was recognized until our IPO was declared effective. Stock-based compensation expense for the three months ended June 30, 2021 was $0.2 million and stock-based compensation of $10.6 million will be recognized over a weighted-average requisite service period of approximately 4.1 years.
In June 2021, we granted 14,284 RSUs to a new director of our board of directors. The RSUs have a grant-date fair value of $0.4 million.
At June 30, 2021, there were 256,936 RSUs that vested upon the effectiveness of our IPO. Such shares of common stock will not be settled until after the
lock-up
period relating to our IPO ends in the fourth quarter of 2021. 19
During the six months ended June 30, 2021, we granted 1,338,028 liquidity event RSUs, or LERSUs, to various employees, which only vest upon the achievement of up to four-years of service and upon the consummation of a change in control, or CIC event, which includes an IPO, merger, acquisition, or sale of more than 50 % of our assets. Employees will be eligible to retain any vested awards up to a period of 6.5 years from their respective grant date. If the recipient employee terminates for any reason other than for cause, the employee shall retain any service-vested LERSUs until 6.5 years from the date of grant or the earlier settlement of the service-vested LERSUs upon the consummation of a CIC event. For the LERSUs, recognition of expense does not occur until the consummation of a CIC event and thereafter for any remaining service period, as such events are not considered probable of occurring prior to the CIC event for stock-based compensation purposes.
Upon the effective date of our IPO on June 29, 2021, we commenced recognition of stock-based compensation for all LERSUs as the performance and service conditions for vested RSUs were satisfied. Stock-based compensation expense for these LERSUs of
$
million was recognized on a graded vesting basis during the three months ended June 30, 2021 for the portion of service completed by the employee from the grant date through June 30, 2021.
In March 2021, we granted 30,434 RSUs to various employees where the RSUs will vest depending upon the appreciation of the fair value of our common stock compared to the grant-date fair value of our common stock upon the consummation of a CIC event, which includes an IPO, merger, acquisition, or sale of more than 50 % of our assets, or performance RSUs. The performance RSUs vest on a linear basis, starting at 0 % with a fair value of our common stock equal to $19.64 per share and ending at 100 % upon reaching a fair value of our common stock of $29.46 per share. The performance options were subsequently modified in June prior to the effective date of our IPO as
discussed below.
Stock-option and RSU activity described above, including total stock-based compensation expense recognized and total remaining stock-based compensation expense is inclusive of awards modified during the period as discussed below.
Modification of Stock-Based Compensation Awards
In June 2021, we modified the vesting conditions of certain stock options and RSUs as described below.
We modified the vesting conditions of 4,477,218 outstanding performance options of certain executive officers and employees so that the performance options do not fully vest immediately upon an IPO. Instead, subject to and contingent upon the effective date of an IPO, the modified performance options for executive officers will vest monthly over a four-year period from their original vesting commencement dates and the modified performance options of certain employees will vest 25 % on the first anniversary from the vesting commencement date, and then vest monthly over the remaining service period, subject to continued employment through the applicable vesting dates. As the modified awards contain a performance condition that is satisfied upon an IPO, we remeasured the fair value of the performance options on the date of modification. This new fair value of $76.6 million will be recognized as stock-based compensation expense using the graded vesting method, with an immediate stock-based compensation expense recognized on the effective date of our IPO for the modified performance options for which the service vesting condition was satisfied through the effective date of the IPO, and all remaining compensation will be recognized thereafter over the remaining service period. We recognized stock-based compensation expense of $23.3 million from the effective date of our IPO through June 30, 2021, and remaining compensation of $53.3 million will be recognized over a remaining weighted-average service period of 3.0 years.
We modified the vesting conditions of 3,627,936 outstanding 2019 performance options of an executive officer so that in the event of an IPO the modified 2019 performance options will vest monthly over a four-year period from the original vesting commencement date in 2019, subject to continued employment of the executive officer, rather than vesting upon the fourth anniversary of the original date of grant based on achieving certain stock price thresholds. Incremental stock-based compensation expense as a result of this modification was $11.4 million and was measured using a Monte Carlo simulation immediately prior to the modification date and a Black-Scholes Option Pricing Model immediately after the modification date. Upon an IPO, we recognize stock-based compensation expense for the modified 2019 performance options for which the service vesting condition was satisfied through the effective date of the IPO, and all remaining compensation will be recognized thereafter over the remaining service period using the graded vesting method. We recognized stock-based compensation expense of $6.6 million from the effective date of our IPO through June 30, 2021, and remaining compensation of $12.6 million will be recognized over a remaining weighted-average service period of 2.3 years.
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We modified the vesting conditions of 111,902 outstanding performance RSUs of certain employees so that the modified performance RSUs do not vest immediately upon an IPO. Instead, subject to and contingent upon the effective date of an IPO, the modified performance RSUs will vest 25 % on the first anniversary from their respective vesting commencement dates, then vest monthly over the remaining service period, subject to the continued employment through the applicable vesting dates. As the modified RSUs contain a performance condition that is satisfied upon an IPO, we remeasured the fair value of the performance RSUs on the date of modification. This new fair value of approximately $2.9 million will be recognized as stock-based compensation expense using the graded vesting method, with an immediate stock-based compensation expense recognized on the effective date of our IPO for the performance RSUs for which the service vesting condition was satisfied through the effective date of the IPO, and all remaining compensation will be recognized thereafter over the remaining service period. We recognized stock-based compensation expense of $0.2 million from the effective date of our IPO through June 30, 2021, and remaining compensation of $2.7 million will be recognized over a remaining weighted-average service period of 3.3 years.
We modified the vesting conditions of 1,725,942 outstanding LERSUs and 1,706,888 outstanding time-based options of certain executive officers to amend the severance vesting acceleration benefit applicable for the LERSUs and remove the CIC vesting acceleration benefit for the time-based options. There was no incremental stock-based compensation associated with the modification of the time-based options. We remeasured the fair value of the LERSUs on the date of modification and this new fair value of approximately $43.3 million will be recognized using the graded vesting method, with an immediate stock-based compensation expense recognized on the effective date of an IPO for the modified LERSUs that have satisfied the service-vesting condition through the effective date, and all remaining compensation will be recognized thereafter over the remaining service period. We recognized stock-based compensation expense of $7.4 million from the effective date of our IPO through June 30, 2021, and remaining compensation of $35.9 million will be recognized over a remaining weighted-average service period of 3.2 years.
We modified 48,300 vested options to extend the exercise period for terminated employees who are not able to exercise during the IPO 0.9 million in incremental stock-based compensation in June 2021.
lock-up
period. We recognized $The fair value of the modified 2020 performance options, 2019 performance option, performance RSUs and LERSUs were remeasured using the fair value of our common stock, as approved by the Pricing Committee of our board of directors, which was $25.50 per share, the midpoint of the price range set forth on the cover page of the preliminary prospectus filed with the SEC on June 21, 2021.
2021 Equity Incentive Plan
In June 2021, our board of directors adopted our 2021 Equity Incentive Plan, or 2021 Plan. All equity-based awards going forward will be granted under the 2021 Plan.
shares of our common stock are reserved for future issuance under our 2021 Plan, as well as any future automatic annual increases in the number of shares of common stock reserved for issuance under our 2021 Plan.
2021 Employee Stock Purchase Plan
In June 2021, our board of directors adopted our 2021 Employee Stock Purchase Plan, or 2021 ESPP. We authorized the issuance of 3,552,538 shares of common stock under the 2021 ESPP. Our 2021 ESPP is implemented through a series of offerings under which eligible employees are granted purchase rights to purchase shares of our common stock on specified dates during such offerings at a discounted price per share.
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Note 10. Income Taxes
We account for income taxes in accordance with Accounting Standard Codification, or ASC, 740, , which requires an estimate of the annual effective tax rate for the full year to be applied to the interim period, taking into accou
Income Taxes