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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
As filed with the Securities and Exchange Commission on August 1, 2012June 4, 2021.
Registration No. 333-181332333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
S-1
Amendment No. 5
to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of
UNDER
THE SECURITIES ACT OF 1933
LegalZoom.com, Inc.
(Exact name of Registrantregistrant as specified in its charter)
| | | | |
| Delaware | | 7370 | | 95-4752856 |
(State or other jurisdiction of
incorporation or organization) | | (Primary Standard Industrial
Classification Code Number) | | (I.R.S. Employer
Identification Number) |
101 North Brand Boulevard, 11th Floor
Glendale, California 91203
(323) 962-8600
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
Dan Wernikoff
Chief Executive Officer
LegalZoom.com, Inc.
101 North Brand Boulevard, 11th Floor
Glendale, California 91203
(323) 962-8600
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
| | | | |
C. Thomas Hopkins Jodie Bourdet Jonie Kondracki Cooley LLP 101 North Brand Boulevard, 111333 2thnd Floor
Glendale,Street, Suite 400
Santa Monica, California 91203
(323) 962-8600
90401 (310) 883-6400 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) |
John Suh
| Noel Watson Chief ExecutiveFinancial Officer
Nicole Miller General Counsel LegalZoom.com, Inc.
101 North Brand Boulevard, 11th Floor
Glendale, California 91203
(323) 962-8600
(Name, address, including zip code, and telephone number, including area code, of agent for service) |
Please send copies of all communications to: |
C. Thomas Hopkins, Esq.
Louis P.A. Lehot, Esq.
Sheppard, Mullin, Richter & Hampton LLP
1901 Avenue of the Stars, Suite 1600
Los Angeles, California 90067
(310) 228-3735 | | Fred Krupica
Chief Financial Officer
Chas Rampenthal, Esq.
General Counsel and Secretary
LegalZoom.com, Inc.
101 North Brand Boulevard, 11th Floor
Glendale, California 91203
(323) 962-8600 | | Steven B. Stokdyk, Esq.
Richard A. Kline Adam J. Gelardi Latham & Watkins LLP
355 South Grand Avenue
Los Angeles, 140 Scott Drive Menlo Park, California 90071
(213) 485-123494025 (650) 328-4600 |
Approximate date of commencement of the proposed sale to the public: As soon as practicable after the effective date of this Registration Statement becomes effective.Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o☐
If this Formform is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o☐
If this Formform is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o☐
If this Formform is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of "large“large accelerated filer," "accelerated” “accelerated filer,"” “smaller reporting company,” and "smaller reporting company"“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | |
| Large accelerated filer | | ☐ | | Accelerated filer | | ☐ |
| | | |
oNon-accelerated filer | | Accelerated filer o☒ | | Non-accelerated filer ý
(Do not check if a smaller
Smaller reporting company)company | | Smaller reporting☐ |
| | | |
| | | | Emerging growth companyo | | ☒ |
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 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
| | | | |
|
Title of each class of securities to be registered | | Proposed maximum aggregate offering price(1) | | Amount of
registration fee(2) |
Common stock, $0.001 par value per share | | $100,000,000 | | $10,910 |
|
|
| (1) | Estimated solely for the purpose of computing the amount of registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes the offering price of additional shares of common stock that the underwriters have the option to purchase. |
| (2) | Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
Table of Contents
The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling stockholdersThese securities may sell these securitiesnot be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and neither we nor the selling stockholders are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
PROSPECTUS (SubjectSubject to Completion)
Issued August 1, 2012completion, dated , 2021
8,000,000 Shares
COMMON STOCK
Preliminary prospectusLegalZoom.com, Inc. Shares
Common stock
This is the initial public offering 3,800,000of shares of its common stock and the selling stockholders are offering 4,200,000 shares ofour common stock. We will not receive any proceeds from the saleare offering shares of shares by the selling stockholders. This is our initial publiccommon stock.
Prior to this offering, andthere has been no public market currently exists for our shares.common stock. We anticipate thatcurrently expect the initial public offering price of our common stock willto be between $10.00$ and $12.00$ per share.share of common stock.
We have applied for listing of our common stock on the New York Stock ExchangeThe Nasdaq Global Select Market under the symbol "LGZ."“LZ”.
We are an "emerging“emerging growth company"company” as defined under the U.S. federal securities laws and, will be subjectas such, may elect to comply with certain reduced public company reporting requirements. Investing in our common stock involves risks. See "Risk Factors" beginning on page 13.requirements for this and future filings.
PRICE$ A SHARE
| | | | | | | | |
| | | | | |
|---|
| | Price to
PublicPer share | | | | | Underwriting
Discounts and
CommissionsTotal | | Proceeds to
LegalZoom
| | Proceeds
to Selling
Stockholders
| |
|---|
| | |
Initial public offering price | | $ | | | | $ | | |
| | |
Per ShareUnderwriting discounts and commissions(1)
| | $ | | $ | | $ | | $ |
| | |
TotalProceeds to us before expenses
| | $ | | $ | | $ | | $ |
| (1) | | We refer you to the section titled “Underwriting” for additional information regarding underwriter compensation. |
We and the selling stockholders have granted the underwriters the rightan option for a period of 30 days to purchase up to an additional 1,200,000 shares of common stock to cover over-allotments.at the initial public offering price, less the underwriting discounts and commissions.
Investing in our common stock involves a high degree of risk. See the section titled “Risk Factors” beginning on page 20.
TheNeither the Securities and Exchange Commission andnor any state regulators have notsecurities commission has approved or disapproved of these securities or determined ifpassed upon the accuracy or adequacy of this prospectus is truthful or complete.prospectus. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock to purchasers on , 2012.2021.
| | | | |
MORGAN STANLEYJ.P. Morgan | | BofA MERRILL LYNCHMorgan Stanley | | Barclays |
| | | | | | |
RBC CAPITAL MARKETSBofA Securities | | WILLIAM BLAIRCitigroup | | CANTOR FITZGERALD & CO.Credit Suisse | | MONTGOMERY & CO.
Jefferies |
, 2012
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| JMP Securities | | Raymond James | | William Blair |
, 2021
LEGAL ZOOM LET’S MAKE IT OFFICIAL OUR MISSION IS TO DEMOCRATIZE LAW
Once a small business is formed, we offer subscription services to protect the business, its ideas, and the families that create them. Business Formation Intellectual Property Estate Planning
“I would recommend LegalZoom because they will change your life overnight.” Dr. Toya and Dr. Tonya Harris Owners, The BluePrint “Having LegalZoom there to help us build this company was essential to the success of our company.” Mike Roberts Owner, The Horses Axe “Time and speed of execution. A trusted advisor for us.” Mark Co-Founders, and Victoria GenFree Thompson LLC
STRONG FINANCIAL PROFILE Revenue $471M 2020 Accelerated 27% Q1 2021 YoY Growth Revenue Growth Attractive ~50% Subscription Subscription Revenue Mix 2020 Model Margins Strong ~19% Margin Adj. EBITDA 2020 Efficient Unit <90 Day Marketing Economics Payback
Z LEGAL ZOOM “We believe every business deserves the full protection of the legal system as well as a simple way to start, operate and run their business daily” Dan Wernikoff CEO, LegalZoom
TABLE OF CONTENTS
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| | Page | |
Prospectus Summary | | | 1 | |
Risk Factors | | 13 | 20 | |
Special Note Regarding Forward-Looking Statements | | 28 | 58 | |
Market, Industry and Other Data | | 29 | 59 | |
Use of Proceeds | | 30 | 60 | |
Dividend Policy | | 30 | 61 | |
Capitalization Capitalization
| | 31 | 62 | |
Dilution Dilution
| | 33 | 65 | |
Selected Consolidated Financial Data
| | 35 |
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
| | 39 | 68 | |
Business Business
| | 67 | 112 | |
Management Management
| | 78 | 134 | |
Executive and Director Compensation | | 85 | 143 | |
Certain Relationships and Related Person Transactions | | 103 | 155 | |
Principal and Selling Stockholders | | 105 | 160 | |
Description of Capital Stock | | 109 | 163 | |
Shares Eligible Forfor Future Sale | | 114 | 169 | |
Material U.S. Federal Income Tax Considerations for Consequences to Non-U.S. Holders of Common Stock | | 116 | 173 | |
Underwriting Underwriting
| | 120 | 177 | |
Legal Matters | | 126 | 185 | |
Experts Experts
| | 126 | 185 | |
Where You Can Find More Information | | 126 | 185 | |
Index to Consolidated Financial Statements and Unaudited Interim Condensed Consolidated Financial Statements | | | F-1 | |
The information in this prospectus is not complete and is subject to change. No person should rely on the information contained in this document for any purpose other than participating in our proposed initial public offering, and only the prospectus dated , 2012,2021, is authorized by us to be used in connection with our proposed initial public offering. The prospectus will only be distributed by us and the underwriters named herein and no other person has been authorized by us to use this document to offer or sell any of our securities.
UntilWe have not, and the underwriters have not, authorized anyone to provide you any information or to make any representations other than those contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we nor the underwriters take responsibility for, or provide any assurance as to the reliability of, any other information others may give you. This prospectus is an offer to sell only the shares offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
Through and including , 2012 (25 days2021 (the 25th day after the commencementdate of our initial public offering)this prospectus), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in our initial publicthis offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
For investors outside the United States: Neither we nor the selling stockholders, norany of the underwriters have done anything that would permit our initial public offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.
i
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PROSPECTUS SUMMARY
This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider in making your investment decision. You should read this entire prospectus carefully before making an investment in our common stock. You should consider, among other things, our consolidated financial statements and the related notes and sections titled "Risk“Risk Factors," "Special” “Special Note Regarding Forward-Looking Statements" and "Management'sStatements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. Unless the context otherwise requires, the terms “LegalZoom.com,” “LegalZoom,” “the Company,” “we,” “us,” “our” and similar references refer to LegalZoom.com, Inc. and, where appropriate, its subsidiaries. With the exception of disclosures that refer to our consolidated financial information (including our financial summaries), as well as disclosures that refer to average order value, average revenue per subscription unit, numbers of subscription units, total transaction orders, and numbers of businesses formed per year (which disclosures are all made by reference to our consolidated global operations), all disclosures relating to our business and which are presented in this prospectus are made by reference solely to our U.S. operations.
LEGALZOOM.COM, INC.
Our Mission
Our mission is to democratize law. We believe that everyoneevery business deserves access to quality legal services so they can benefit from the full protection of the law.legal system and a simple way to stay compliant with it. Our missionplatform helps new businesses form. Once a small business is formed, we offer subscription services to beprotect the trusted destination wherebusiness, its ideas, and the families that create them. LegalZoom empowers small business owners to apply their energy and passion to their businesses instead of the legal and consumers address their important legal needs andregulatory complexity required to be our customers' legal partner for life.operate them.
OverviewOur Business
LegalZoom is thea leading online provider of services that meet theplatform for legal needs of small businesses and consumerscompliance solutions in the United States. In 2020, 10% of new limited liability companies, or LLCs, and 5% of new corporations in the United States were formed via LegalZoom. Our unique position at business inception allows us to become a trusted business advisor, supporting the evolving needs of a new business across its lifecycle. Along with formation, LegalZoom offerings 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 believeoperate across all 50 states and over 3,000 counties in the United States, and have more than 20 years of experience navigating complex regulation and simplifying the legal and compliance process for our customers.
The U.S. legal and regulatory landscape is broad and varied, complex, opaque, and constantly evolving, in particular with respect to the following:
| • | | Multiple third-party interactions. The simple act of forming an LLC or incorporating a corporation may require specific federal, state, county and city interactions, each with their own idiosyncrasies. |
| • | | Compliance requirements are complex. At formation, basic compliance requirements are not anticipated or understood. More advanced requirements are dictated by industry, geography, and employer type. |
| • | | Regulations change constantly. The myriad of regulatory bodies and potential compliance requirements are daunting on their own, and this dynamic is amplified by the fact that they are constantly changing and evolving. |
Many small businesses operate without forming a legal entity, unintentionally introducing financial risk to the owners’ personal assets. The businesses that recognize that risk upfront often struggle to address it. Once they understand the need to be protected, they often do not know what to do, where to turn or how much it will cost to
get help. Even when formed properly, small businesses often fail to comply with ongoing compliance requirements, thereby reintroducing personal liability or facing significant financial and operational risk. Furthermore, these difficulties are becoming more acute as the number of U.S. business formations increase, driven by various macroeconomic factors such as the rise of the gig economy and remote work, accentuating the need for a trusted, cost-effective, digital-first and simple legal and compliance solution.
LegalZoom commenced operations in 2000 so more people could access legal help. Initially, we are transformingfocused on business formation, intellectual property, and estate planning. Over the years, we have expanded our offerings to cover a broader set of legal, compliance, tax and business services for small businessbusinesses. In 2020, we helped form 10% of all new LLCs and consumerhelped incorporate 5% of all new corporations in the United States. In addition, 25,000 trademark applications, or 6% of all trademark registration applications in the United States in 2020, were made through LegalZoom. At December 31, 2020, we had over 1.0 million subscription units outstanding and were one of the largest registered agent providers for small businesses in the United States. As a result of this success, we have become the leading brand in online legal services, marketwith 70% aided brand awareness as of December 2020 according to a 2020 study hosted by leveragingDynata.
Our platform combines the power of technology and people.people to demystify and simplify complicated processes, creating user-friendly experiences for our customers. Our online legal platformproprietary technology enables us to deliver servicesautomate many complex legal and compliance processes, allowing us to offer solutions at scale withtransparent, flat-fee prices that are at a compellingsignificant discount to traditional offline alternatives. While the majority of our customers complete these transactions without human assistance, many prefer to have some guidance through the process. The combination of quality,technology and people is at the heart of our unique customer experience. For our customers looking for general help, our customer care and value. Our services include a portfoliosales organization of interactive legal documents that are personalized by our customers through our dynamic online processes, as well as subscription legal plans and registered agent services.
We developed our easy-to-use, online legal platformover 500 people is available for real-time guidance on how to make the law more accessible to small businesses and consumers. Our scalable technology platform enables the efficient creation of personalized legal documents, automates our supply chain and fulfillment workflow management, and provides customer analytics to help us improveuse our services. For customers preferring credentialed assistance, we embed the option for them to retain attorneys and certified public accountants, or CPAs, from the beginning of the customer journey at affordable and transparent pricing. In addition, our unique and trusted position at business formation gives us unparalleled knowledge of our customers’ needs prior to the business being operational or discoverable by other service providers. We leverage this valuable knowledge and our position as a small business’ first advisor to introduce our customers to the most relevant business solutions within our partner ecosystem to help them run other aspects of their business.
We believe we earn small businesses’ trust and drive significant organic traffic through our free proprietary educational content, which is often our first interaction with a potential customer. From there, our small business customers’ initial purchase is typically a formation product that streamlines the process of starting a business. Alongside and after this initial transaction, our customers generally purchase annual subscription services to solve additional legal, compliance and tax needs, deepening our relationship with our customers. The power of our platform yields highly efficient unit economics: over the past several years for customers in the United States, we have generated a lifetime customer value in excess of customer acquisition costs generally within the first 90 days of establishing a customer relationship. With recurring revenue through subscription services and repurchases from existing customers, we continue to benefit from an increasing customer lifetime value.
As a result of our traction with our customers, we have achieved economies of scale that we expect to continue to leverage as we accelerate the growth of our business. We generated revenue of $408.4 million in 2019 and $470.6 million in 2020, representing a year-over-year increase of 15.2%, and $105.8 million and $134.6 million for the three months ended March 31, 2020 and 2021, respectively, representing a period-over-period increase of 27.3%. We had net income (loss) of $7.4 million, $9.9 million, $(4.9) million and $(9.8) million in 2019, 2020, and the three months ended March 31, 2020 and 2021, respectively. The increase in net income between 2019 and 2020 was driven by higher revenue, which was partially offset by our investments in marketing spend to expand our customer base and build on our digital brand leadership. The increase in net loss between March 31, 2020 and 2021 largely resulted from increased investment in marketing spend, which nearly
offset the increase in revenue. Adjusted EBITDA decreased from $97.2 million in 2019 to $88.0 million in 2020 and from $13.4 million in the three months ended March 31, 2020 to $3.6 million in the three months ended March 31, 2021, as we invested further in marketing spend to expand our customer base and build on our digital brand leadership. Cash flows from operating activities increased from $52.7 million in 2019 to $93.0 million in 2020 and increased from $21.9 million in the three months ended March 31, 2020 to $31.4 million in the three months ended March 31, 2021. The increases in cash flows from operating activities between 2019 and 2020 and March 31, 2020 and 2021 were the result of increases in deferred revenue and other changes in operating assets and liabilities. Free cash flow increased from $34.3 million in 2019 to $82.5 million in 2020, primarily as a result of growth in deferred revenue, driven by an increase in subscription units, an increase in accounts payable due to the timing of our payments and lower capital expenditures for the purchase of property and equipment, including capitalization of internal-use software. Free cash flow increased from $19.9 million in the three months ended March 31, 2020 to $28.5 million in the three months ended March 31, 2021, primarily as a result of growth in deferred revenue driven by an increase in the number of transactions and subscription units. For 2019, 2020, and the three months ended March 31, 2020 and 2021, our free cash flow included cash payments for interest of $37.3 million, $27.9 million, $8.3 million and $6.1 million, respectively. Adjusted EBITDA and free cash flow are not financial measures calculated in accordance with GAAP. For further information about Adjusted EBITDA and free cash flow, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”
Industry Trends
Millions of people start small businesses every year, an accelerating trend driven by digital enablement and consumers who want legal advice, we offer subscription legal plans that connect our customersthe gig economy.
Small businesses are the engine of the U.S. economy, representing 65% of net new job creation since 2000, according to the Bureau of Labor Statistics. These businesses are often family affairs—according to a 2016 Annual Survey of Entrepreneurs conducted by the U.S. Census Bureau, during 2016, 64% were started with experienced attorneys who participate in our legal plan network.
We have served approximately two million customers overfamily or personal savings, and 31% were family owned. These entrepreneurs also come from diverse backgrounds: according to a 2018 Annual Business Survey conducted by the last 10 years. In 2011, nineU.S. Census Bureau, out of tenall employer firms in 2017, 20% were women-owned, 18% were minority-owned, 17% were immigrant-owned, and 6% were veteran-owned. Two major factors are driving an acceleration in small business creation: digital enablement and the gig economy. Today, an idea can become a digital business within a few days with the help of small business enablement tools. Further, with the rise of the approximately 34,000 customers who respondedgig economy and lead-generating platforms, a person can become a business in hours by engaging in independent work such as renting their home, driving their car, or selling their crafts or services on an established marketplace. According to a survey we provided said they would recommend LegalZoom to their friendsreport published by MBO Partners, there were 38 million independent workers in the United States in 2020.
People start small businesses when economic times are both good and family. Our customers placed approximately 490,000 orders and more than 20 percentbad. Based on information available from secretaries of new California limited liability companies were formed using our online legal platformstate, the number of business formations in 2011. We believe the volume of transactions processed through our online legal platform creates a scale advantage that deepens our knowledge and enables us to improve the quality and depthUnited States have grown for 26 out of the services we providepast 30 years on a year over year basis.
Small business owners often do not know that they may face personal liability and tax consequences depending on their business formation decision.
The first step to our customers.
The Small Businessform a business entity is choosing a business structure at formation. A person is automatically a sole proprietor if they do not register as any other kind of business. As a sole proprietor, a small business owner has unlimited personal liability for their business activities, impacting their families and Consumer Legal Services Market
The law provides numerous benefits and protections to businesses and consumers. For example, entrepreneurs incorporate their businesses to shield personal assets, limit liabilities and help raise capital, and consumers use estate planning tools to ensure their assets are distributed according to their wishes and to minimize tax liabilities.well-being. According to the U.S. Census Bureau, in 2009, there were approximately 2631.7 million small businesses with fewer than ten employees. We estimate that in 2010, approximately two million new businesses were formed in the United States.States in 2017 all of whom could benefit from protection. In spite of the risk and the complexity of the U.S. legal system, 35% of new business owners received no professional guidance in selecting a business formation structure, according to a survey conducted by Magid, a consumer-centered business strategy company, in 2021.
Many small business owners try to figure out legal requirements on their own, and often face regulatory problems for noncompliance. It can be frustrating, time consuming and expensive to navigate multiple layers of legal and compliance requirements.
The U.S. legal and compliance system is often opaque and complex, so it is challenging for people to access legal advice and protection and to stay compliant with regulations and taxes. According to a 2017 National Small Business Association, or NSBA, Small Business Regulations Survey, 44% of small firms in the U.S. BureauUnited States reported spending 40 hours or more each year dealing with new and existing federal regulations, and 30% spend 40 hours or more each year navigating state and local regulations. Overlapping, potentially contradicting, and changing guidelines increase the complexity small businesses face while navigating legal and compliance requirements on their own.
The difficulty in staying current with compliance requirements can also result in high expenses for a small business. According to a 2017 NSBA Small Business Regulations Survey, 10% of Economic Analysis,small businesses in the United States are fined for regulatory non-compliance, with an average total cost of citations of nearly $31,000 for regulatory non-compliance over a five-year period.
There are structural impediments that make traditional offline attorneys unable to adapt to consumer behaviors and technology advancements.
Traditional offline attorneys face significant challenges in creating a scaled technology platform. Attorneys cannot practice nationally without being licensed and regulated in each individual state, or limiting their practice exclusively to federal law. They also face numerous restrictions on the services they offer, how they advertise, their ability to work or partner with people who are not attorneys, and even receiving credit card payments. In addition, due to regulatory restrictions concerning law firm business models, offline attorneys are prohibited from offering equity to investors that are not law firms or attorneys and cannot offer equity to employees that are not attorneys. This results in a lack of available technical talent for significant investment in technology and innovation.
Online adoption of legal services lags behind other comparable industries.
While service industries like accounting, tax, marketing and payments have rapidly transitioned online, legal offerings largely remain offline. According to IBISWorld, approximately 8% of legal services in the United States were conducted online in 2010 represented2020, compared to approximately 70% of financial services and, according to Ernst & Young, 30% to 45% of healthcare services. According to the American Bar Association, more than 40% of solo attorneys do not have a $266website.
Online penetration has lagged in the legal industry due to the incredible complexity of the U.S. legal and regulatory landscape, which makes it difficult for an online platform to gain scale with use cases that are applicable and tailored to each local jurisdiction.
The gap between a small business owner’s legal and compliance needs and available offline solutions is widening.
The COVID-19 pandemic spurred new business formation and also highlighted the impact of policy and enforcement differences across local, regional and state levels. At the same time, the challenges associated with traditional offline “do it yourself” or “find an expert” options are becoming relatively worse as service level expectations increase as a result of small business enablement in other industries.
Technological advances are transforming consumer expectations for professional services. According to McKinsey, digital channels will help companies both meet changing customer needs and expectations and prepare for future industry disruption. The standard for digital convenience and efficiency, already high before the pandemic, has only increased.
Our Market Opportunity
We view our opportunity in terms of a $48.7 billion market.serviceable addressable market, or SAM, which we believe we address today, and a larger total addressable market, or TAM, which we believe we can address over the long term as we grow small business consumption of legal and compliance solutions. We primarily serve small businesses with up to 50 or fewer employees. In 2017, there were 31.7 million such businesses according to the U.S. Census Bureau. The small business market is dynamic, and we estimate that in 2011 approximately $97 billion of legal services were provided to small businesses and consumers,there are 4.4 million new business formations annually, based on a study conducted on our behalf by L.E.K. Consulting LLC.analysis of secretary of state filings.
Despite the enormous amount spent on legalOur SAM includes $18.3 billion in services we believe that small businesses and consumers have not been adequately served byuse at the options traditionally available to them. Every year, small
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businesses enter into legal contracts and become entangledbusiness formation, $21.5 billion in disputes, many of which require legal services to address. Consumers experience important life events that affect their families, including the birth of a child, marriage, divorce and death, all of which can also give rise to diverse needs for legal services. Small businesses and consumers often do not understand their legal needs or know where to start looking for an attorney. The high and unpredictable cost of traditional legal services also presents challenges. As a result, many small businesses use later in their lifetime, and consumers often are unsure$8.8 billion of or dissatisfied withconsumer estate planning services. We categorize our business formation and attach opportunity as total small business spending on business formation, registered agent and government filings, tax planning and bookkeeping/records, and intellectual property protection. We categorize our post-business formation opportunity as contracts, legal forms, and other legal matters and tax preparation. In spite of the benefits of third-party legal and compliance services, available to them, and many either elect not to seek help or take no action to address their important legal needs.
Our Opportunity
We founded LegalZoom with a vision of combining the power of online technology with deep legal experience to create a scalable online legal platform that would fundamentally transform the way legal services are delivered tothere is very little usage today by small businesses and consumers. We believe we are uniquely positioned to continue transforming the small business and consumer legal services market through the use of technology. Furthermore, there is a significant opportunity to expand the legal services market by making the benefits and protectionexternal providers of the law more accessible to small businesses and consumers. We are taking advantage of this opportunity by providing the following benefits to our customers:these services.
•Quality. Our deep legal knowledge, portfolio of interactive legal documents and subscription legal plans enable us to provide quality services designed to meet the specific needs of our customers.
•Customer Care. We strive to deliver an exceptional customer experience, and we guarantee customer satisfaction.
•Value.We believe that fixed, transparent pricing offers superior value comparedour TAM could grow to traditional hourly billing.
Our Strengths
Our key strengths include:
•Leading Brand. We arebe multiples of our SAM over the leading, nationally recognizedlong term with increased usage of legal brand forand compliance solutions by small businesses. By increasing access, we believe we will grow our market opportunity. Many small businesses are not aware of the various legal and consumers incompliance solutions that exist, or are daunted by the United States, with 60% aided brand awareness based on a survey we conducted using United Sample, Inc. in January 2012.complexity and uncertainty of traditional solutions. We believe that we are redefiningcan address the needs of every small business with our simple, transparent, and consumeraffordable solution. Beyond our core legal services market and that the strength ofcompliance solutions, our brand is enabling us to expand this market.
•Deep Legal Knowledge. We have a deep understanding of the legal needs oftrusted relationship with small businesses gives us further opportunities to increase our TAM by adding adjacent services through third-party partnerships, in categories such as business insurance and consumers based on over 10 yearsfinancial planning.Our Customer Journey
Our first interaction with potential customers is often through our free proprietary educational content, through which we earn trust and drive significant organic traffic.
Typically, our small business customers’ initial purchase is a business formation product that streamlines the process of experience servingstarting a business. We use our customers. We leverage our legal knowledge and team of experienced, in-house attorneys, often in consultation with outside attorneys from across the United States,technology platform to design, review and maintain our services. The high volume of transactions we handle and feedback we receive from customers and government agencies give uscreate a scale advantagesimple, user-friendly workflow that deepens our knowledge and enables us to further develop additional services to address our customers' needs and refine our business processes.
•Exceptional Customer Experience. Customer care is central to our culture and we are highly focused on providing exceptional customer experiences. Our online legal platform was designed to be easy for our customers to navigateconfidently form a business with just a few clicks. For many customers, getting real-time general information about the overall business entity formation process and use. our related products is an important benefit, so we provide care and sales support real time. As a result, our business formation products have a net promoter score, or NPS, of 51, which is over double that of traditional offline attorneys, who have an NPS of 25, and our NPS for our independent attorney network is 77, which is three times that of traditional offline attorneys, helping us form a trusted relationship with small business owners. Based on this trusted relationship, during 2020 and the three months ended March 31, 2021, over 60% of our small business customers purchased one year of one of our subscription services at the time of their initial formation purchase, and over half of our small business customers purchased at least one third-party solution at time of business formation.Our customerscompliance solutions are our largest group of subscription services. Compliance regulation and process are often cumbersome to follow and difficult to understand. For example, in most states, small businesses are required to have a registered agent, which generally must be an adult or authorized business that can receive mail or hand-delivered court documents at a physical address during normal business hours. With our registered agent subscription, we serve as our customer’s registered agent: accepting their documents through the mail, digitizing critical business documents, and alerting them of critical business documents or notices. This serves to help them adhere to critical tax and annual report deadlines, among other benefits. In this fashion, our compliance solutions simplify cumbersome processes and free up our customers’ time to focus on their businesses.
Customers can freely access to live help from our world class customer care representatives, and sales organization, while subscribers to our legal and tax advisory plans may consult with an experienced attorney licensed in their jurisdiction. If a customer is not completely satisfied with our services for any reason, we will attempt to correct the situation, or provide a refund or credit.
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•Advanced Systems and Processes. We have developed advanced systems and processes to efficiently deliver services at scale that meet the specific needs of our customers. Our technology allows us to efficiently serve thousands of small businesses and consumers every day. Our supply chain and fulfillment systems integrate external and internal technologies, enabling intelligent workflow management while increasing processing speed and efficiency.
•Accessible Services. Our online legal platform allows customers to access our services from their home, office or anywhere they have an Internet connection. Our fixed, transparent pricing is often more affordable when compared to traditional hourly billing, and our subscription legal plans allow our customers to avoid the often difficult process of finding and meeting with an attorney.
Our Strategy
The key elements of our strategy include:
•Expand and Improve Our Services. We plan to expand and improve the services we offer our customers to better address their legal needs and deepen our relationships with them.
•Leverage and Grow Our Subscription Legal Plans. We intend to offer our subscription legal plans to a wider group of customers by making them available in additional states, bundling them with more of our services, and offering them on a standalone basis. We plan to invest in marketing campaigns to promote our subscription legal plans. Our aim is to reach a broader group of customers through our legal plans, including those who are unsure of their legal needs or who want the added comfort of speaking with an attorney.
•Expand Internationally. We plan to replicate our U.S. model abroad in the near term, as we believe that our online legal platform represents a compelling value proposition to small businesses and consumers globally. We plan to partner with legal services providers outside of the United States to expand our operations internationally. We believe that the strength of our brand, focus on customer care, deep understanding of the legal needs of small businesses and consumers, and scalable technology will help us successfully enter markets outside the United States.
•Continue to Build a Trusted Brand and Drive Awareness of Our Services. We will continue to build a trusted brand by delivering a compelling combination of quality, customer care and value. We plan to enhance our marketing activities to build our brand and increase awareness of our services. We plan to continue to make significant investments in marketing campaigns, including through online, television and radio advertising, to enhance our ability to acquire new customers and increase customer retention.
Our Services
Through our online legal platform, we offer a variety of services to meet the specific needs of small businesses and consumers.
We offer a broad portfolio of interactive legal documents that our customers can tailor to their specific needs through our dynamic online processes and scalable technology. Our interactive legal documents are designed for use, as appropriate, at the federal level, as well as in all 50 states, the District of Columbia and approximately 2,900 U.S. counties. Our interactive legal document services for small businesses include limited liability company formations, incorporations and trademark applications. Our interactive legal document services for consumers include wills, living trusts and powers of attorney.
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For small businesses and consumers who want legal advice, we offer legal plans that connect subscribers with experiencedindependent attorneys licensed in their jurisdiction to provide legal advice, or an accountant for tax advice. With these assisted subscription services, our customers get the benefit of a credentialed professional that can provide advice at an affordable cost. For example, with our business advisory plan, our customers get fast and ongoing legal support from our independent network of attorneys for less than $40 a month. A significant number of our customers purchase attorney advice subscriptions when starting their business, and we have seen strong traction with our tax advice subscriptions, which include advice from a CPA or enrolled agent, since its launch in late 2020.
The majority of our customers have not begun operations when they begin their relationship with LegalZoom, giving us a unique position in the business lifecycle. To help our customers operate, we partner with a variety of third-party solutions, such as business license services, bookkeeping services, banking services, productivity tools and business insurance, among others. We provide our customers with seamless introductions to trusted partners, giving them access to the critical services they need to operate and grow their business. In 2020 and the three months ended March 31, 2021, over half of our small business customers purchased at least one third-party solution.
We continue to engage our customers after their initial purchase of transaction products and subscription services. For example, after forming their business entity, our customers can opt to register their company name and/or logo as a trademark or protect their intellectual property with a patent or copyright. Additionally, as forming a company is an important life event, some of our small business customers opt to purchase an estate plan offering when they form their company. Our ongoing customer engagement results in additional purchases. For each year since 2017, an average of 28% of our U.S. customers who purchased a transaction in such year had also purchased a transaction product in a prior year.
Our Value Proposition
Our offerings align with our mission of democratizing law and empowering small business owners to apply their energy and passion to their businesses instead of the legal and regulatory complexity required to operate them. We achieve this mission because our platform has:
Simplicity: Streamlined approach to legal and compliance. LegalZoom simplifies complicated legal and compliance processes, creating user-friendly experiences for customers. We offer extensive legal, compliance and tax information that anyone can freely access. Once customers decide to purchase a product, our platform removes the friction associated with filing documents with local, state, and federal regulators through an intuitive user-friendly questionnaire that guides customers through the process. Additionally, our products are reflective of our customers’ evolving behaviors: almost half of our traffic is through mobile devices, and we have built a simple mobile responsive experience.
Affordability: Accessible with fixed pricing. We believe our platform is significantly more efficient when compared to traditional offline legal services, allowing us to offer solutions at transparent, flat-fee prices. Our business formation product starts at a flat fee of $79, excluding state-imposed filing fees. We achieve this significant cost saving by automating aspects of the legal document production process and by utilizing customer care and fulfillment specialists to provide generalized help and only involve our independent attorney network and CPAs at the customer’s request and where legally required.
Trust: Confidence in quality. Through over 20 years of delivering high-quality solutions, LegalZoom has built a brand associated with ease of use, transparency, and trusted quality. When small businesses come to LegalZoom to form their business and stay protected, they know they are receiving consistently high-quality, comprehensive services that will meet their needs. This trust is reflected in our NPS for our business formation products, which is over double the score of traditional offline attorneys, and our NPS for our independent attorney network, which is three times that of traditional offline attorneys. These product features are supplemented by our customer care and sales organization, with over 500 team members that are able to answer customers’ general process questions in real time.
Expertise: Credentialed professional-assisted solutions. In instances where customers choose to engage a credentialed professional, our platform connects customers with independent attorneys in our network or in-house accountants. Our network of over 1,300 independent attorneys and 75 in-house tax advisors provides our users with access to legal and compliance support when they need it. Since 2011, our independent network of attorneys has provided over 611,000 individual consultations to small businesses and families.
Breadth: Comprehensive product and partner ecosystem. We have built a comprehensive product ecosystem that protects businesses, ideas and the families that create them. Our educational content and business formation products arm entrepreneurs at the start of their journeys, and our IP, compliance, attorney, and tax advisory subscriptions help small business owners as they run their businesses by protecting their ideas and ensuring they stay compliant. We supplement our products and services with a curated network of partnerships that customers can access through our platform, enabling our customers to discover additional services to run their businesses. We also offer a range of services for families including estate planning services, divorce, name change, residential leases, deed transfers and attorney subscription services.
Our Competitive Strengths
Leading legal platform. We provide a leading online legal platform that helps small businesses form, protect their ideas, stay compliant and run their businesses. We helped form 378,000 businesses in 2020 and helped create 250,000 estate plan documents in 2020. In 2020, approximately 10% of new LLCs and 5% of new corporations were formed through LegalZoom. In addition, 25,000 trademark applications, or 6% of all trademark registration applications in the United States in 2020, were made through LegalZoom. At December 31, 2020, we had over 1.0 million subscription units outstanding and were one of the largest registered agent providers for small businesses in the United States. We have invested significantly to create a highly recognizable legal brand, online and offline, with aided brand awareness of 70% and unaided brand awareness of 25% as of December 2020, more than eight times our nearest online competitor.
Proven ability to operate in a highly regulated market. We have spent more than 20 years building a systematic understanding of many aspects of the U.S. legal system, across 50 states and over 3,000 counties. There is a wide variety of individual statutes and requirements across the United States, making it difficult for small businesses and consumers to fulfill their legal obligations. We have filed millions of documents on behalf of our customers with various county and state agencies in the United States. Since we are a large filer of business formation and other documents with these agencies, our fulfillment teams have direct relationships with many of them and interact with many of these agencies every business day. Our compliance platform allows our customers to stay focused on running their businesses, while we help them manage the ever changing regulations and filing deadlines. Our compliance database tracks rules and deadlines across multiple jurisdictions and our platform provides notifications of rule changes and deadlines to our customers. In 2020, we sent approximately seven million notifications to our customers.
Attorney integration. Most people prefer the comfort of knowing an attorney is available to help them with their legal needs, even if on an as-needed basis. However, most other online providers are either positioned purely as self-help with no access to attorney advice, or for those who do provide access, it is often a service connecting customers to attorneys with limited integration of the network to ensure consistent service quality. Offering attorney advice nationally through a legal plan, as we do, requires significant initial and ongoing investment, including: sourcing law firms and attorneys licensed in each state; ensuring such plans are acceptable to state regulatory agencies with varying rules; and keeping up with the administration of the plan. It took LegalZoom seven years from service inception to offer 50-state coverage through our network of independent attorneys.
Unique position within small business lifecycle. Given our unique position at business inception, we are typically the first business advisor a small business interacts with. In 2020, approximately two-thirds of the small businesses that formed through LegalZoom had not even begun operations when they first engaged with us. Before a small business has employees, an address or a website, they have LegalZoom. By delivering quality business formation solutions, we are able to establish trust with small businesses, who then frequently trust us with other critical needs as well. We have leveraged this trust to extend our legal and compliance product portfolio over time, through both first-party solutions such as tax, given that, 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 specificentity formation, as well as our partner ecosystem, where we recommend third-party partners to our customers.
Authority in educational legal needs.and compliance content for small businesses. Our content library serves as a funnel for new customers. Our customers often interact with our educational content before making a purchase. We have grown our content library to thousands of educational articles across our services and established ourselves as a trusted source of expertise before a potential customer even begins seeking access to legal and compliance care.
Our technology platform. We have invested significantly since our inception in building proprietary technology that drives quality and efficiency on our platform. We use software to simplify the many archaic and last mile processes that are involved in processing formations at the state level. We deploy machine learning and natural language processing to power our registered agent offering. We consistently improve our technology platform, resulting in improved document generation, increased automation, and increased use of the cloud to enable digital collaboration. In addition, we have developed a highly accurate database of millions of business entities we have helped form. Over time, we have collected over 1.5 billion answers as part of the user-friendly questionnaires our customers complete as part of their experience with our products. We are able to leverage this data, in accordance with relevant privacy laws and our data stewardship principles, to understand new products that may be relevant to our customers and optimize our operations. We also use APIs to seamlessly integrate our formation products within third-party applications, further extending our platform reach.
Attractive business model. Our financial performance is a result of attracting new customers and delivering more value over time for customers as they stay on our platform. Our unique position at business formation allows us to grow our relationships with our small business customers as their businesses evolve. We have expanded our solutions to meet more of these needs, and have seen consistent lifetime value improvement over time. Given our efficient customer acquisition dynamics, we are able to profitably acquire new customers as we pursue our massive market opportunity. We have built a profitable and cash flow generative business, given this customer acquisition efficiency, economies of scale and favorable working capital dynamics.
Our Growth Strategy
We are in the early days of penetrating and growing the online market for small business legal and compliance services. We expect to continue to grow our customer base, retain and expand our customer relationships, and increase our market opportunity with the following strategies.
Grow our customer base.We continue to grow the top of our funnel and improve our customer experience in order to grow our customer base. To accelerate growth, we intend to:
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| • | | Increase LegalZoom brand awareness. We intend to continue to invest in our brand to increase awareness of the protection that legal and compliance services offer small businesses, and the ease and affordability of our platform. |
| • | | Improve conversion. We have millions of visitors to our website each month and a large opportunity to increase conversion of prospects into customers. We have invested in improving ease of use and optimizing the checkout flow to drive better conversion upon the first interaction with potential customers. |
| • | | Attract new customers through partner integration. We partner with leading players that can help our small business customers and improve our ecosystem. Through our APIs, our partners can offer our solutions within their experience, providing us with a highly efficient customer acquisition channel. We will continue to seek partner integrations to increase awareness of our brand and to grow our customer base. |
Retain and expand our customer relationships following formation. As we innovate for small businesses, we aim to become their trusted partner for life. In order to be considered for participationdo this, we intend to:
| • | | Launch adjacent services. Our strategy is to meaningfully expand our product line in the medium term to offer a solution for the majority of small business legal and compliance needs. We have collected a vast amount of data in the past 20+ years to both improve our own solutions as well as identify additional areas where we can launch new products for our customers throughout their lifetime. For example, in 2020, we introduced a tax advisory product. We plan on continuing to invest in a broader array of services to capture this opportunity. |
| • | | Partner to offer our customers broader ecosystem solutions. We plan to offer additional access to third-party solutions to further support small business needs in areas such as banking, payments, payroll, accounting, and website hosting. In 2020, two-thirds of our new customers had not yet started their businesses when they first engaged with us. We believe that by working with our partners, we can increase our customer engagement and retention. |
| • | | Increase customer lifetime value. We plan to continue to improve the lifetime value of our customers, particularly by increasing retention of our small business subscribers. We plan to maintain engagement post-purchase with additional investments in existing solutions, add new solutions to serve additional needs, and improve lifecycle marketing to increase retention rates. Through these initiatives, we plan to better monetize our existing customers by allowing them to realize continued value on our platform over time. |
Increase our market opportunity by introducing a new tier of higher-priced, higher-value products. We have a large opportunity to serve customer demand by offering assistance with their legal plan network, independent attorneys must satisfy certain quality standards established by us and be highly focused on customer care. Our small business and consumer subscription legal plans are currently available in 40 states and the District of Columbia. Our subscription legal plans include free attorney consultations on new legal matters, review of our interactive legal documents, and discounts on LegalZoom services and additional services provided by legal plan network attorneys.
We offer subscription registered agent services for business entities, who are required to appoint and maintain a registered agent in their state of formation to receive service of process and official government communications. We offer other services to our customers, including unlimited access to our forms library, electronic storage of applicable LegalZoom documents and document revisions. We also introduce our customers to relevant non-legal services and products through our relationships with leading credit card companies, commercial banks and other companies serving our customer base.
Risks Associated with Our Businesscompliance needs.
| • | | Broaden customer top of funnel. We aim to reduce peoples’ uncertainty and doubt about forming a business on their own, as well as to expand our opportunity to serve people who would not consider a “do it yourself” solution. We expect to continue to broaden the top of the funnel consideration for LegalZoom by highlighting our attorney integration. We believe the “assisted” market is multiples larger than the “do it yourself” market that we have historically served, because expertise increases customer confidence. |
| • | | Increase adoption of assisted offerings. We plan to provide more value to our customers from existing product lines by adding a tier of Attorney Assist solutions. In June 2020, our “Attorney Assist” product for trademarks became widely available, and we have seen higher average order value, or AOV, and more orders, over time, as customers value the ability to work directly with attorneys. Solutions that incorporate an attorney have higher completion rates. We plan to continue to expand our credentialed professional-assisted offerings to complement our technology-enabled solutions. |
Summary of Risk Factors
Our business is subject to numerous risks and uncertainties, as discussed more fully in the section entitled "Risk Factors"titled “Risk Factors” immediately following the prospectus summary and elsewhere in this prospectus.summary. You should carefully consider these risks before making an investment in our common stock. Some of these risks include:
•Our recent growth may not be indicative of our businessfuture growth and, services subject usif we continue to complexgrow, we may not be able to manage our growth effectively.
If we are unable to sustain our revenue growth rate, we may not maintain profitability in the future.
Our future quarterly results of operations may fluctuate significantly due to a wide range of factors, which makes our future results difficult to predict.
We have a history of net losses, we anticipate increasing expenses in the future, and evolving U.S. and foreign laws and regulations regarding the unauthorized practice of law, legal document processing and preparation, legal plans, privacy and other matters;
•ifwe may not be able to maintain profitability.If we fail to provide high qualityhigh-quality services, customer care and customer experience and add new services that meet our customers'customers’ expectations, we may not be able to attract and retain customers;
•- customers.
If we do not continue to innovate and provide a platform that is useful to our business model is evolving from a transaction model to a combined transaction and subscription model,customers, we may not remain competitive, and our existingresults of operations could suffer.
Our business depends on business formations.
Our subscription services are highly dependent upon our transaction products.
Our business depends substantially on our subscribers renewing their subscriptions with us and new customers may not become subscribers;
•if we fail to successfully promote and maintainexpanding their use of our brand and reputation, or if we incur excessive expenses in doing so, ourplatform.Our business may be adversely affected;
•if our marketing efforts are unsuccessful,depends on our ability to attract new customers or retain existing customersdrive additional purchases and cross-sell to our services may be adversely affected;
•if we fail to safeguard our customers' information and privacy, our brand and reputation may be harmed, customers may curtail or stop using our services and we may face claims and potential liabilities;
•we expect to face increasing competition in the online and offlinepaying customers.The legal services markets from law firms, solo attorneys, online legal document services, national legal plans and other service providers;
•if we are unable to effectively manage and minimize errors, failures, interruptions or delays caused by third parties, or if our third-party service providers cease to do business with us, our ability to deliver our services may be adversely affected;
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•weWe depend on top talent, including our senior management team, to grow and operate our business, and if we are unable to hire, retain and motivate our employees, we may not be able to grow effectively;
•- effectively, which may adversely affect our business and future prospects.
Our business and success depend in part on our strategic relationships with third parties, including our partner ecosystem, and our business would be harmed if we fail to maintain or expand these relationships.
Our business and services subject us to complex and evolving U.S. and foreign laws and regulations regarding the unauthorized practice of law, legal document processing, legal plans, and other related matters.
We have identified material weaknesses in our internal control over financial reporting and, if we fail to remediate these material weaknesses, we may experience significant disruptions innot be able to accurately or timely report our online servicesfinancial condition or otherwise fail to ensure thatresults of operations, which may adversely affect investor confidence and the price of our website is accessible; and
•we are involved in several class action lawsuits and other litigation matters that are expensive and time consuming and that could be resolved adversely.common stock.Corporate Information
We were initially formed as a California corporation in July 1999, we commenced operations in 2000 and we converted to a Delaware corporation in February 2007. Our principal executive offices are located at 101 North Brand Boulevard, 11th Floor, Glendale, California 91203, and our telephone number at this address is (323) 962-8600. Our corporate website is www.legalzoom.com. Information contained on, or that can be accessed through, our websitewebsites shall not be deemed incorporated into and is not a part of this prospectus or the registration statement of which it forms a part. Unless the context otherwise requires, the terms "LegalZoom.com," "LegalZoom," "company," "we," "us" and "our" refer to LegalZoom.com, Inc. and its direct and indirect subsidiaries.We have included our website in this prospectus solely as an inactive textual reference.
We are not a law firm, and we do not provide legal advice. We provide self-help legal documents at our customers' specific direction and general information on legal issues generally encountered. Independent, licensed attorneys participate in our attorney network to provide services to our customers through our legal plans.
LegalZoom, the LegalZoom.com logo and other LegalZoom-formative marks are trademarks of LegalZoom.com, Inc. in the United States or other countries. This prospectus also includes other trademarks of LegalZoom.com, Inc. and trademarks of other persons.
Reverse Stock Split
Our boardpersons, which are the property of directorstheir respective owners. Solely for convenience, trademarks and stockholders approved a 2-for-3 reverse stock split of our common stock and a proportional adjustmenttrade names referred to the conversion ratio of our Series A redeemable convertible preferred stock, or Series A, which was effected on July 31, 2012. We will issue cash in lieu of fractional shares in connection with this reverse split. All references to common stock, options and restricted stock units to purchase common stock, share, per share data and related information have been retroactively adjusted, where applicable, in this prospectus may appear without the ® or ™ symbols, but that does not mean that we will not assert, to reflect the reverse stock splitfull extent permitted by law, our rights to any such trademarks owned by us.
Implications of Being an Emerging Growth Company
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We may take advantage of certain exemptions from various public company reporting requirements, including not being required to have our common stock as if it had occurred at the beginninginternal control over financial reporting audited by our independent registered public accounting firm under Section 404 of the earliestSarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions for up to five years or until we are no longer an emerging growth company, whichever is earlier. We will cease to be an emerging growth company prior to the end of such five-year period presented.if certain earlier events occur, including if we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, our annual gross revenues exceed $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation related information that would be required if we were not an emerging growth company. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock. In addition, the JOBS Act provides that an “emerging growth company” can delay adopting new or revised accounting standards until those standards apply to private companies. We have elected to use the extended transition period under the JOBS Act. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
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THE OFFERING
| | |
Common stock offered by us | | shares |
By usOption to purchase additional shares of common stock
| | 3,800,000We have granted the underwriters an option to purchase up to an aggregate of shares from us. |
By the selling stockholders
| | 4,200,000 shares |
Total
| | 8,000,000 shares |
Total common stock to be outstanding after ourthis initial public offering | | 40,328,846 shares
( shares if the underwriters exercise their option to purchase additional shares from us in full). |
Over-allotmentUse of proceeds
| We estimate that the net proceeds from this offering will be approximately $ million (or approximately $ million if the underwriters exercise in full their option to purchase up to additional shares of common stock offeredfrom us), based on an assumed initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the selling stockholdersus. |
| | 1,200,000 shares
|
UseThe principal purposes of proceeds
| | this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and facilitate our future access to the public capital markets. We currently intend to use the net proceeds to us from this offering primarily (1) to repay $ million of the outstanding indebtedness under our 2018 Credit Agreement, and (2) for general corporate purposes, including working capital, operating expenses and capital expenditures associated with scaling our operations, technology and infrastructure to support our growth.expenditures. We will not receive anymay also use a portion of the net proceeds fromfor the saleacquisition of, shares byor investment in, technologies, businesses, products, services or other assets that complement our business or operations, although we have no present commitments or agreements to enter into any acquisitions or investments. See the selling stockholders. See "Usesection titled “Use of Proceeds" on page 30. Proceeds” for more information. |
Risk factors | | See "Risk Factors" beginning on page 13You should read the section titled “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.
|
Proposed New York Stock ExchangeNasdaq trading symbol | | "LGZ"
“LZ” |
The total number of shares of common stock to be outstanding after this offering is based on 36,528,846 shares of common stock outstanding as of June 30, 2012,March 31, 2021, and excludes, as of June 30, 2012:excludes:
•616,38314,952,784 shares of our common stock issuable upon the exercise of outstanding options as of March 31, 2021, granted pursuant to our 20002016 Stock OptionIncentive Plan, or 2016 Plan, at a weighted-average exercise price of $0.93$8.93 per share, 4,297,270share;
shares of common stock issuable upon the settlement of restricted stock units, or RSUs, outstanding as of March 31, 2021, granted pursuant to our 2016 Plan, that would not have satisfied the
| market vesting conditions or service-based vesting conditions as of March 31, 2021, which excludes 55,358 shares of common stock issuable pursuant to RSUs that would have satisfied the service-based vesting condition as of March 31, 2021; |
504,487 shares of common stock issuable upon the settlement of RSUs granted subsequent to March 31, 2021, and shares of common stock issuable upon the settlement of RSUs and options to purchase shares of our common stock issuable uponto be granted to certain of our executive officers immediately prior to the exerciseeffectiveness of outstanding optionsthe registration statement of which this prospectus forms a part, all granted pursuant to our 2010 Stock Incentive Plan at a weighted-average exercise price of $3.40 per share and 50,000 restricted stock units to be settled in2016 Plan;
shares of our common stock granted pursuant to our 2010 Stock Incentive Plan which will remain outstanding after this offering, unless earlier exercised;
•217,799 shares of common stock available for future issuance under our 2010 Stock Incentive Plan; and
•2,700,000 shares of common stock, subject to increase on an annual basis, reserved for future issuance under our 20122021 Equity Incentive Plan, or 2021 Plan, which will become effective immediately prior to the execution of the underwriting agreement related to this offering, as well as any future automatic annual increases in connection withthe number of shares of common stock reserved for issuance under our 2021 Plan; and shares of our common stock reserved for future issuance under our 2021 Employee Stock Purchase Plan, or ESPP, which will become effective immediately prior to the execution of the underwriting agreement related to this offering.offering, as well as any future automatic annual increases in the number of shares of common stock reserved for issuance under our ESPP.
Unless otherwise stated, information in this prospectus (except for the historical financial statements) assumes:
•2-for-3 reverse stock splitthe filing and effectiveness of our common stock and a proportional adjustment to the conversion ratio of our Series A that was effected on July 31, 2012;
•that our amended and restated certificate of incorporation which we will file in connection withimmediately after the completion of this offering is in effect;
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•- and the
automatic conversion of all outstanding shares of Series A into an aggregate of 15,256,000 sharesadoption of our common stockamended and restated bylaws immediately prior to the completion of this offering;
•
the exercise by a selling stockholderautomatic conversion of an option to purchase 40,000all 23,081,080 shares of our outstanding redeemable convertible preferred stock as of March 31, 2021 into an aggregate of 46,162,160 shares of our common stock atupon the completion of this offering;
no exercise or cancellation of outstanding options and no settlement or cancellation of RSUs subsequent to March 31, 2021, other than (1) the vesting of 55,358 RSUs, for which the service-based condition was satisfied as of March 31, 2021 and for which the performance-based vesting condition will be satisfied upon the effective date of the registration statement of which this prospectus is a weighted average exercise pricepart, net of $2.245,shares surrendered for total proceeds to uswithholding taxes (based on an assumed % tax withholding rate) and (2) the vesting of $89,800;RSUs, for which the performance-based vesting condition will be satisfied upon the effective date of the registration statement of which this prospectus is a part, net of shares surrendered for withholding taxes (based on an assumed % tax withholding rate); and
•no exercise by the underwriters of their option to purchase up to an additional 1,200,000 shares of common stock to cover over-allotments.
from us.
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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables summarize our historical consolidated financial and other data. You should read this summary consolidated financial and other data in conjunction with the sectionssection titled "Selected Consolidated Financial Data" and "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” and our consolidated financial statements and related notes all included elsewhere in this prospectus.
We derived the The summary consolidated statements of operations data for the years ended December 31, 2009, 20102019 and 2011 and the consolidated balance sheet data as of December 31, 2011,2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. We derivedThe summary consolidated statements of operations data for the three months ended March 31, 2020 and 2021 and the summary unaudited interim consolidated balance sheet data as of June 30, 2012 and the statements of operations data for the six months ended June 30, 2011 and 2012March 31, 2021 have been derived from our unaudited interimcondensed consolidated financial statements included elsewhere in this prospectus. The unaudited interimcondensed consolidated financial statements werehave been prepared on athe same basis consistent with our auditedas the annual consolidated financial statements, and include, in the opinion of management, reflect all adjustments, consisting ofwhich include only normal recurring adjustments, necessary for a fair statementto fairly state our financial position and results of operations. The summary consolidated financial and other data in this section are not intended to replace our annual and interim consolidated financial statements and the related notes and are qualified in their entirety by our annual and interim consolidated financial information containedstatements and the related notes included elsewhere in those statements. this prospectus.
Our historical results are not necessarily indicative of the results that may be expected in the future.
| | | | | | | | | | | | | | | | |
| | | Year
Ended December 31, | | | Three Months
Ended March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
| | | (in thousands, except per share data) | |
Revenue(1) | | $ | 408,380 | | | $ | 470,636 | | | $ | 105,795 | | | $ | 134,632 | |
Cost of revenue(2)(3) | | | 136,915 | | | | 154,563 | | | | 35,112 | | | | 43,960 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 271,465 | | | | 316,073 | | | | 70,683 | | | | 90,672 | |
Operating expenses: | | | | | | | | |
Sales and marketing(2)(3) | | | 115,913 | | | | 171,390 | | | | 43,481 | | | | 71,361 | |
Technology and development(2)(3) | | | 37,204 | | | | 41,863 | | | | 10,543 | | | | 10,499 | |
General and administrative(2)(3) | | | 57,762 | | | | 51,017 | | | | 12,661 | | | | 13,165 | |
Impairment of goodwill, long-lived and other assets | | | 14,321 | | | | 1,105 | | | | 555 | | | | — | |
Loss on sale of business | | | — | | | | 1,764 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total operating expenses | | | 225,200 | | | | 267,139 | | | | 67,240 | | | | 95,025 | |
| | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 46,265 | | | | 48,934 | | | | 3,443 | | | | (4,353 | ) |
Interest expense, net | | | (38,559 | ) | | | (35,504 | ) | | | (9,270 | ) | | | (8,654 | ) |
Other income (expense), net | | | 2,577 | | | | 3,713 | | | | (1,106 | ) | | | 248 | |
Impairment of available-for-sale debt securities | | | — | | | | (4,818 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes and income from equity method investment | | | 10,283 | | | | 12,325 | | | | (6,933 | ) | | | (12,759 | ) |
Provision for (benefit from) income taxes | | | 3,161 | | | | 2,429 | | | | (2,055 | ) | | | (2,936 | ) |
| | | | | | | | | | | | | | | | |
Income (loss) before income from equity method investment | | | 7,122 | | | | 9,896 | | | | (4,878 | ) | | | (9,823 | ) |
Income from equity method investment | | | 321 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 7,443 | | | $ | 9,896 | | | $ | (4,878 | ) | | $ | (9,823 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) attributable to common stockholders—basic | | $ | 5,422 | | | $ | 7,223 | | | $ | (4,878 | ) | | $ | (9,823 | ) |
Net income (loss) attributable to common stockholders—diluted | | $ | 5,476 | | | $ | 7,262 | | | $ | (4,878 | ) | | $ | (9,823 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) per share attributable to common stockholders—basic | | $ | 0.04 | | | $ | 0.06 | | | $ | (0.04 | ) | | $ | (0.08 | ) |
Net income (loss) per share attributable to common stockholders—diluted | | $ | 0.04 | | | $ | 0.06 | | | $ | (0.04 | ) | | $ | (0.08 | ) |
| | | | | | | | | | | | | | | | |
Weighted-average shares used to compute net income (loss) per share attributable to common stockholders—basic(4): | | | 123,826 | | | | 124,709 | | | | 124,411 | | | | 125,065 | |
Weighted-average shares used to compute net income (loss) per share attributable to common stockholders—diluted: | | | 128,546 | | | | 127,259 | | | | 124,411 | | | | 125,065 | |
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Table of Contents
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| | Year Ended December 31, | | Six Months Ended
June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| | (in thousands, except per share data)
| |
|---|
Consolidated Statements of Operations Data: | | | | | | | | | | | | | | | | |
Revenues(1) | | $ | 103,299 | | $ | 120,771 | | $ | 156,066 | | $ | 78,959 | | $ | 96,459 | |
Costs and operating expenses(2): | | | | | | | | | | | | | | | | |
Cost of services | | | 53,082 | | | 60,643 | | | 80,437 | | | 41,805 | | | 46,571 | |
Sales and marketing | | | 32,673 | | | 36,322 | | | 41,891 | | | 22,189 | | | 31,198 | |
Technology and development | | | 4,686 | | | 7,509 | | | 8,117 | | | 3,961 | | | 4,474 | |
General and administrative(1) | | | 13,154 | | | 20,024 | | | 19,343 | | | 9,447 | | | 11,717 | |
| | | | | | | | | | | | |
Total costs and operating expenses | | | 103,595 | | | 124,498 | | | 149,788 | | | 77,402 | | | 93,960 | |
| | | | | | | | | | | | |
Income (loss) from operations | | | (296 | ) | | (3,727 | ) | | 6,278 | | | 1,557 | | | 2,499 | |
Interest and other expense, net | | | (33 | ) | | (15 | ) | | (153 | ) | | (74 | ) | | (76 | ) |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | (329 | ) | | (3,742 | ) | | 6,125 | | | 1,483 | | | 2,423 | |
Income tax (provision) benefit | | | (311 | ) | | (282 | ) | | 5,998 | | | (143 | ) | | (1,166 | ) |
| | | | | | | | | | | | |
Net income (loss) | | $ | (640 | ) | $ | (4,024 | ) | $ | 12,123 | | $ | 1,340 | | $ | 1,257 | |
| | | | | | | | | | | | |
Accretion of Series A redeemable convertible preferred stock | | | (4,035 | ) | | (4,038 | ) | | (4,042 | ) | | (2,005 | ) | | (2,017 | ) |
Net income attributable to participating securities | | | — | | | — | | | (3,407 | ) | | — | | | — | |
| | | | | | | | | | | | |
Net income (loss) attributable to common stockholders | | $ | (4,675 | ) | $ | (8,062 | ) | $ | 4,674 | | $ | (665 | ) | $ | (760 | ) |
| | | | | | | | | | | | |
Net income (loss) per share attributable to common stockholders(3)(5): | | | | | | | | | | | | | | | | |
Basic | | $ | (0.25 | ) | $ | (0.42 | ) | $ | 0.22 | | $ | (0.03 | ) | $ | (0.04 | ) |
| | | | | | | | | | | | |
Diluted | | $ | (0.25 | ) | $ | (0.42 | ) | $ | 0.19 | | $ | (0.03 | ) | $ | (0.04 | ) |
| | | | | | | | | | | | |
Weighted-average shares used to compute net income (loss) per share attributable to common stockholders(3)(5): | | | | | | | | | | | | | | | | |
Basic | | | 18,700 | | | 19,360 | | | 20,925 | | | 20,878 | | | 21,136 | |
| | | | | | | | | | | | |
Diluted | | | 18,700 | | | 19,360 | | | 24,195 | | | 20,878 | | | 21,136 | |
| | | | | | | | | | | | |
Pro forma net income per share(4)(5): | | | | | | | | | | | | | | | | |
Basic: | | | | | | | | $ | 0.34 | | | | | $ | 0.03 | |
| | | | | �� | | | | | | | | | | |
Diluted: | | | | | | | | $ | 0.31 | | | | | $ | 0.03 | |
| | | | | | | | | | | | | | | |
Weighted average number of shares used in computing pro forma net income per share(4)(5): | | | | | | | | | | | | | | | | |
Basic | | | | | | | | | 36,181 | | | | | | 36,392 | |
| | | | | | | | | | | | | | | |
Diluted | | | | | | | | | 39,451 | | | | | | 40,598 | |
| | | | | | | | | | | | | | | |
(1)We recorded an estimated charge of $5.4 million during the year ended December 31, 2010 related to legal settlements, of which $4.6 million was included as part of general and administrative expenses and $0.8 million was recorded as a reduction of revenues. During the six months ended June 30, 2012, we recorded an additional $0.2 million charge related to a change in estimate of the settlement costs of these legal matters, which was recorded as a reduction of revenues. The ultimate costs of resolving these matters are dependent on a number of factors, including the resolution of any appeals of the approved settlements, actual claims made by, participation rates of, and the resulting payments, if any, to the class members. Any difference between the amount accrued and the ultimate costs of these matters will be recognized as an additional or lower expense in the period in which the matters are resolved. If the actual costs of these matters are higher than the amount we estimated, this difference could have a material adverse effect on our business, operating results, cash flows and financial
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| | | Year Ended December 31, | | | Three Months
Ended March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
| | | (in thousands, except per share data) | |
Pro forma net income per share (unaudited)(5) | | | | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | | $ | | |
| | | | | | | | | | | | | | | | |
Diluted | | | | | | | | | | | | | | $ | | |
| | | | | | | | | | | | | | | | |
Pro forma weighted-average shares used to compute pro forma net income per share (unaudited)(5): | | | | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Diluted | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Consolidated Statements of Cash Flows Data: | | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | 52,695 | | | $ | 93,049 | | | $ | 21,889 | | | $ | 31,415 | |
Net cash used in investing activities | | | (20,717 | ) | | | (12,727 | ) | | | (1,988 | ) | | | (2,911 | ) |
Net cash (used in) provided by financing activities | | | (12,852 | ) | | | (15,089 | ) | | | 36,589 | | | | (1,834 | ) |
| (1) | Comprises transaction, subscription and partner revenue as follows: |
Table of Contents
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| | | Year Ended December 31, | | | Three Months Ended March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
| | | (in thousands) | |
Transaction | | $ | 168,305 | | | $ | 212,114 | | | $ | 45,586 | | | $ | 61,388 | |
Subscription | | | 206,447 | | | | 229,840 | | | | 54,235 | | | | 65,493 | |
Partner | | | 33,628 | | | | 28,682 | | | | 5,974 | | | | 7,751 | |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 408,380 | | | $ | 470,636 | | | $ | 105,795 | | | $ | 134,632 | |
| | | | | | | | | | | | | | | | |
condition. See Note 6 to our consolidated financial statements included elsewhere in this prospectus for a full discussion of this legal settlement accrual.
(2)Stock-based compensation expense included in the above line items:
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| |
| | Year Ended December 31, | | Six Months Ended
June 30, | |
|---|
| |
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| |
| | (in thousands)
| |
|---|
| | Cost of services | | $ | 200 | | $ | 178 | | $ | 155 | | $ | 82 | | $ | 67 | |
| | Sales and marketing | | | 124 | | | 46 | | | 56 | | | 21 | | | 135 | |
| | Technology and development | | | 114 | | | 155 | | | 133 | | | 64 | | | 75 | |
| | General and administrative | | | 699 | | | 929 | | | 600 | | | 288 | | | 402 | |
| | | | | | | | | | | | | |
| | Total stock-based compensation expense | | $ | 1,137 | | $ | 1,308 | | $ | 944 | | $ | 455 | | $ | 679 | |
| | | | | | | | | | | | | |
(3)See Note 2 to our consolidated financial statements included elsewhere in this prospectus for a description of the method to compute basic and diluted net income (loss) per share attributable to common stockholders.
(4)Unaudited basic and diluted pro forma net income per share has been calculated assuming the conversion of all outstanding shares of our redeemable convertible preferred stock (using the if-converted method) into 15,256,000 shares of our common stock as though the conversion had occurred on January 1, 2011. See Note 2 to our consolidated financial statements included elsewhere in this prospectus.
(5)All share, per-share and related information have been retroactively adjusted, where applicable, to reflect the impact of the 2-for-3 reverse stock split, including an adjustment to the preferred stock conversion ratio, which was effected on July 31, 2012.
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| | Year Ended December 31, | | Six Months Ended
June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| | (in thousands, except percent data)
| |
|---|
Key Metrics(1): | | | | | | | | | | | | | | | | |
Number of orders placed(2) | | | 408 | | | 436 | | | 490 | | | 259 | | | 284 | |
Number of subscribers(3) | | | 47 | | | 116 | | | 228 | | | 187 | | | 300 | |
Subscription revenues as a percentage of total revenues | | | 5 | % | | 9 | % | | 18 | % | | 14 | % | | 22 | % |
(1)For additional information, see "Management'ssection titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics" and "—Unaudited QuarterlyComponents of our Results of Operations Data, Other Financial DataOperations” for a description of our sources of revenue.| (2) | Includes stock-based compensation expense as follows: |
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Three Months Ended March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
| | | (in thousands) | |
Cost of revenue | | $ | 205 | | | $ | 177 | | | $ | 37 | | | $ | 59 | |
Sales and marketing | | | 1,020 | | | | 1,122 | | | | 643 | | | | 207 | |
Technology and development | | | 1,314 | | | | 2,703 | | | | 950 | | | | 526 | |
General and administrative | | | 4,170 | | | | 9,719 | | | | 2,697 | | | | 3,150 | |
| | | | | | | | | | | | | | | | |
Total stock-based compensation expense | | $ | 6,709 | | | $ | 13,721 | | | $ | 4,327 | | | $ | 3,942 | |
| | | | | | | | | | | | | | | | |
| (3) | Includes depreciation and amortization expense for our property and equipment, including capitalized internal-use software, and intangible assets as follows: |
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Three Months
Ended March 31, | |
| | | 2019 | | | 2020 | | | 2021 | | | 2021 | |
| | | (in thousands) | |
Cost of revenue | | $ | 6,773 | | | $ | 8,324 | | | $ | 1,958 | | | $ | 1,678 | |
Sales and marketing | | | 6,469 | | | | 6,913 | | | | 1,849 | | | | 1,475 | |
Technology and development | | | 1,055 | | | | 2,800 | | | | 650 | | | | 587 | |
General and administrative | | | 2,093 | | | | 2,060 | | | | 463 | | | | 426 | |
| | | | | | | | | | | | | | | | |
Total depreciation and amortization expense | | $ | 16,390 | | | $ | 20,097 | | | $ | 4,920 | | | $ | 4,166 | |
| | | | | | | | | | | | | | | | |
| (4) | See Note 2 and Note 3 to our annual consolidated financial statements and Note 9 to our interim condensed consolidated financial statements included elsewhere in this prospectus for an explanation of the methods used to compute basic and diluted net income per share attributable to common stockholders and the weighted-average number of shares used in the computation of the per share amounts. |
| (5) | The pro forma net income per share (unaudited) and the pro forma weighted-average shares used to compute pro forma net income per share (unaudited) give effect to (1) the automatic conversion of all 23,081,080 outstanding shares of redeemable convertible preferred stock into an aggregate 46,162,160 shares of common stock as if the conversion occurred on January 1, 2020, (2) the sale of such number of shares of common stock at the assumed initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, as would be necessary for the repayment of $ million of outstanding indebtedness under the 2018 Term Loan after the completion of this offering, (3) the reversal of interest expense of $ relating to such debt repaid as if the repayment occurred on January 1, 2020, net of the estimated income tax effect using a blended statutory income tax rate of %, (4) additional stock-based compensation expense of approximately $ million, net of estimated income tax effect using a blended statutory income tax rate of %, associated with certain options and RSUs for which the performance condition is satisfied upon the completion of this offering, assuming the offering occurred on January 1, 2020, and (5) additional stock-based compensation expense of approximately $ , net of estimated income tax effect using a blended statutory income tax rate of %, associated with options for executive officers and employees for retention purposes that we intend to modify prior to, and contingent upon, the completion of this offering, assuming the offering occurred on January 1, 2020 and the modification of the options had occurred on January 1, 2020 or the date of grant, if later, based on the fair value of the awards as of the modification date. The pro forma weighted-average shares used to compute pro forma net income per share (unaudited) also gives effect to the weighted-average shares related to certain RSUs containing service, performance and market vesting conditions, as if such conditions were satisfied and the settlement had occurred as of January 1, 2020, or the date of issuance, if later, net of shares surrendered for withholding taxes (based on an assumed % tax withholding rate). |
Unaudited Pro Forma Net Income Per Share
The following table sets forth the computation of our unaudited pro forma basic and Seasonality" for information regarding numbersdiluted net income per share of orders placedcommon stock:
| | | | | | | | |
| | | Year Ended
December 31,
2020 | | | Three Months
Ended
March 31, 2021 | |
| | | (in thousands, except per
share data) | |
Numerator: | | | | | | | | |
Net income (loss) | | $ | 9,896 | | | $ | (9,823 | ) |
Add: Pro forma adjustment to reverse interest expense, net of taxes of $ | | | | | | | | |
Less: Pro forma adjustment to record stock-based compensation expense for awards for which the performance condition is satisfied upon this offering, net of taxes of $ | | | | | | | | |
Less: Pro forma adjustments to record stock-based compensation expense for options we intend to modify prior to, and contingent upon, the completion of this offering, net of taxes of $ | | | | | | | | |
| | | | | | | | |
Pro forma net income (loss)—basic and diluted | | $ | | | | $ | | |
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted-average common stock outstanding—basic | | | 124,709 | | | | 125,065 | |
Add: Pro forma adjustment to reflect assumed conversion of redeemable convertible preferred stock | | | 46,162 | | | | 46,162 | |
Add: Pro forma adjustment for the number of shares necessary for the repayment of $ of our 2018 Term Loan | | | | | | | | |
Add: Pro forma adjustment to reflect the settlement of RSUs upon this offering, net of shares surrendered for withholding taxes | | | | | | | | |
| | | | | | | | |
Weighted-average shares used in computing basic pro forma net income (loss) per share | | | | | | | | |
| | | | | | | | |
Effect of potentially dilutive securities | | | | | | | | |
| | | | | | | | |
Weighted-average shares used in computing diluted pro forma net income (loss) per share | | | | | | | | |
| | | | | | | | |
Pro forma net income (loss) per share: | | | | | | | | |
Basic | | $ | | | | $ | | |
| | | | | | | | |
Diluted | | $ | | | | $ | | |
| | | | | | | | |
| | | | | | | | | | | | |
| | | As of March 31, 2021 | |
| | | Actual | | | Pro Forma(2) | | | Pro Forma as
Adjusted(3)(4) | |
| | | (in thousands) | |
Consolidated Balance Sheet Data: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 141,175 | | | $ | | | | $ | | |
Working (deficit) capital(1) | | | (76,510 | ) | | | | | | | | |
Restricted cash equivalent | | | 25,000 | | | | | | | | | |
Property and equipment, net | | | 50,361 | | | | | | | | | |
Total assets | | | 284,809 | | | | | | | | | |
Long-term debt, net of current portion | | | 511,594 | | | | | | | | | |
Total liabilities | | | 767,523 | | | | | | | | | |
Redeemable convertible preferred stock | | | 70,906 | | | | | | | | | |
Total stockholders’ (deficit) equity | | | (553,620 | ) | | | | | | | | |
| (1) | Working (deficit) capital is defined as current assets less current liabilities. See our consolidated financial statements and the accompanying notes included elsewhere in this prospectus for further details regarding our current assets and current liabilities. |
| (2) | The pro forma consolidated balance sheet data gives effect to (1) the automatic conversion of all 23,081,080 outstanding shares of redeemable convertible preferred stock into an aggregate 46,162,160 shares of common stock and the related reclassification of the carrying value of the redeemable convertible preferred stock to stockholders’ deficit upon the completion of this offering, (2) additional stock-based compensation expense of approximately $ million associated with certain options and RSUs for which the performance condition is satisfied upon the completion of this offering, assuming the offering occurred on March 31, 2021, recorded as an increase to additional paid-in capital and accumulated deficit, (3) the vesting and settlement of RSUs outstanding as of March 31, 2021, net of shares surrendered for withholding taxes (based on an assumed % tax withholding rate), that will vest upon the completion of this offering, (4) additional stock-based compensation expense of approximately $ associated with |
| options for executive officers and employees that for retention purposes we intend to modify prior to, and contingent upon, the completion of this offering, assuming the offering and the modification of the options occurred on March 31, 2021, based on the fair value of the awards as of the modification date, and (5) the lapse of the restriction on $25.0 million of our restricted cash equivalent in June 2021 upon the release of collateral related to a personal loan by a former executive prior to the completion of this offering. See the section titled “Certain Relationships and Related Persons Transactions—John Suh Line of Credit.” |
| (3) | The pro forma as adjusted consolidated balance sheet data gives effect to (1) the pro forma adjustments described in footnote (2) above, (2) the sale of shares of common stock in this offering by us at an assumed initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and (3) the repayment of $ million of outstanding indebtedness under the 2018 Term Loan after the completion of this offering. |
| (4) | Pro forma as adjusted consolidated balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted cash and cash equivalents, working (deficit) capital, total assets and total stockholders’ deficit by $ million, assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of common stock offered by us would increase (decrease) our pro forma as adjusted cash and cash equivalents, working (deficit) capital, total assets and total stockholders’ deficit by approximately $ million, assuming the assumed initial public offering price of $ per share remains the same, and after deducting estimated underwriting discounts and commissions payable by us. |
Key Business Metrics
We regularly monitor a number of subscribers.
(2)This metric represents total customer orders placed in the period, which may include one or more services purchased at the same time.
(3)This metric includes total paid and free subscribers at the end of a period. | | | | | | | | | | | | | |
| |
| | As of June 30, 2012 | |
|---|
| | As of December 31,
2011 | | Actual | | Pro Forma(1) | | Pro Forma As
Adjusted(1)(2) | |
|---|
| | (in thousands)
| |
|---|
Consolidated Balance Sheet Data: | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 27,108 | | $ | 31,374 | | $ | 31,374 | | $ | 68,709 | |
Working capital (deficit) | | | (2,316 | ) | | (4,451 | ) | | (4,451 | ) | | 34,124 | |
Total assets | | | 53,501 | | | 61,895 | | | 61,895 | | | 96,193 | |
Total liabilities | | | 50,620 | | | 56,679 | | | 56,679 | | | 55,439 | |
Redeemable convertible preferred stock | | | 62,691 | | | 64,708 | | | — | | | — | |
Total stockholders' equity (deficit) | | | (59,810 | ) | | (59,492 | ) | | 5,216 | | | 40,754 | |
(1)The pro forma consolidated balance sheet data gives effect to the automatic conversion of all outstanding shares of convertible preferred stock into an aggregate of 15,256,000 shares of common stock immediately prior to the completion of this offering.
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(2)The pro forma as adjusted consolidated balance sheet data gives effect to (i) the pro forma adjustments described in footnote (1) above, (ii) the sale of 3,800,000 shares of common stock in this offering by us at an assumed initial public offering price of $11.00 per share (the mid-point of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and (iii) the exercise by a selling stockholder of an option to purchase 40,000 shares of common stock with total proceed to us of $89,800.
Non-GAAP Adjusted EBITDA
To provide investors and others with additional information regarding our financial results, we have disclosed in the table below and within this prospectus non-GAAP Adjusted EBITDA, a non-GAAP financial measure. We define non-GAAP Adjusted EBITDA as net income (loss) plus interest and other expense, net; income tax provision (benefit); certain non-cash charges, including depreciation, amortization and stock-based compensation; and loss from legal settlements. Our non-GAAP Adjusted EBITDA financial measure differs from GAAP in that it excludes certain items of income and expense. Non-GAAP Adjusted EBITDA or the equivalent is frequently used by securities analysts, investors and others as a common financial measure of operating performance.
Non-GAAP Adjusted EBITDA is one of the primary measures used by our management and board of directors to understand and evaluate our financial performance and operating trends,metrics, including periodthe following key business metrics, in order to period comparisons, to prepare and approve our annual budget and to develop short and long term operational plans. Additionally, non-GAAP Adjusted EBITDA is one ofevaluate the key measures used by the compensation committee of our board of directors to establish the target for and ultimately pay our annual employee bonus pool for virtually all bonus eligible employees. We also frequently use non-GAAP Adjusted EBITDA in our discussions with investors, commercial bankers and other users of our financial statements.
Management believes non-GAAP Adjusted EBITDA reflects our ongoing business in a manner that allows for meaningful period to period comparisons and analysis of trends. In particular, in calculating non-GAAP Adjusted EBITDA, we exclude certain income and expense items that we believe are not directly attributable to the underlying performancegrowth of our business, or aremeasure the result of long-term investment decisions in previous periods rather than day-to-day operating decisions, and may be used in future decisions for expansion and acquisition opportunities.
Our use of non-GAAP Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysiseffectiveness of our results as reported under GAAP. Somemarketing efforts, identify trends, formulate financial forecasts and make strategic decisions. For a further description of how we use these limitations are:
•although depreciationfinancial and amortization are non-cash charges,operating metrics, see the assets being depreciatedsection titled “Management’s Discussion and amortized may have to be replaced in the future, non-GAAP Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•non-GAAP Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•non-GAAP Adjusted EBITDA does not consider the potentially dilutive impactAnalysis of equity-based compensation;
•non-GAAP Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
•non-GAAP Adjusted EBITDA does not include losses associated with, or reflect the cash requirements for, legal settlements;Financial Condition and
•other companies, including companies in our industry, may calculate non-GAAP Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Results of Operations—Key Business Metrics.”
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Because of these limitations, you should consider non-GAAP Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.
The following table presents a reconciliation of net income (loss) to non-GAAP Adjusted EBITDA for each of the periods indicated:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months Ended
June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| | (in thousands)
| |
|---|
Net income (loss) | | $ | (640 | ) | $ | (4,024 | ) | $ | 12,123 | | $ | 1,340 | | $ | 1,257 | |
Interest and other expense, net | | | 33 | | | 15 | | | 153 | | | 74 | | | 76 | |
Income tax provision (benefit) | | | 311 | | | 282 | | | (5,998 | ) | | 143 | | | 1,166 | |
Depreciation and amortization | | | 2,937 | | | 3,509 | | | 4,562 | | | 2,058 | | | 2,537 | |
Stock-based compensation | | | 1,137 | | | 1,308 | | | 944 | | | 455 | | | 679 | |
Loss from legal settlements | | | 293 | | | 5,359 | | | — | | | — | | | 200 | |
| | | | | | | | | | | | |
Non-GAAP Adjusted EBITDA | | $ | 4,071 | | $ | 6,449 | | $ | 11,784 | | $ | 4,070 | | $ | 5,915 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Three Months
Ended March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
| | | (dollars in thousands, except average values) | |
Revenue | | $ | 408,380 | | | $ | 470,636 | | | $ | 105,795 | | | $ | 134,632 | |
Number of business formations(1) | | | 292 | | | | 378 | | | | 81 | | | | 122 | |
Number of transactions(2) | | | 691 | | | | 892 | | | | 210 | | | | 276 | |
Average order value(3) | | $ | 230 | | | $ | 236 | | | $ | 210 | | | $ | 223 | |
Number of subscription units at period end(4) | | | 921 | | | | 1,085 | | | | 936 | | | | 1,146 | |
Average revenue per subscription(5) | | $ | 221 | | | $ | 223 | | | $ | 226 | | | $ | 226 | |
Net income (loss) | | $ | 7,443 | | | $ | 9,896 | | | $ | (4,878 | ) | | $ | (9,823 | ) |
Net income (loss) margin(6) | | | 1.8 | % | | | 2.1 | % | | | (4.6 | )% | | | (7.3 | )% |
Adjusted EBITDA(7)(9) | | $ | 97,157 | | | $ | 87,975 | | | $ | 13,354 | | | $ | 3,599 | |
Adjusted EBITDA margin(7)(9) | | | 23.8 | % | | | 18.7 | % | | | 12.6 | % | | | 2.7 | % |
Net cash provided by operating activities | | $ | 52,695 | | | $ | 93,049 | | | $ | 21,889 | | | $ | 31,415 | |
Free cash flow(8)(9) | | $ | 34,346 | | | $ | 82,462 | | | $ | 19,901 | | | $ | 28,504 | |
| (1) | 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. |
| (2) | 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. Refunds, or partial refunds, may be issued under certain circumstances pursuant to the terms of our customer satisfaction guarantee. |
| (3) | 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, which was divested in April 2020. |
| (4) | 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, 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. |
| (5) | We define average revenue per subscription unit, or 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 subscription units from our employer group legal plan and small business concierge subscription services, which we ceased acquiring new subscribers in October 2020. |
| (6) | We define net income (loss) margin as net income (loss) as a percentage of revenue. |
| (7) | We define Adjusted EBITDA as net income adjusted to exclude interest expense, net, provision for income taxes, depreciation and amortization, other income, net, stock-based compensation, losses from impairments of goodwill, long-lived and other assets, impairments of available-for-sale debt securities, acquisition related expenses, restructuring expenses, legal reserves and settlements, and certain other non-recurring expenses. We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of revenue. |
| (8) | We define free cash flow as cash generated by operations after purchases of property and equipment including capitalized internal-use software. For 2019, 2020 and the three months ended March 31, 2020 and 2021, we also made interest payments of $37.3 million, $27.9 million, $8.3 million and $6.1 million on our 2018 Term Loan, respectively. |
| (9) | Adjusted EBITDA, Adjusted EBITDA margin and free cash flow are not financial measures calculated in accordance with GAAP. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for explanations of how we calculate these measures, the issues inherent in their use, why we consider them important for analyzing our business and for reconciliations to their most directly comparable GAAP financial measures. |
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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus, before deciding whether to invest in shares of our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks are realized,occur, our business, results of operations, financial condition and future prospects could be materially and adversely affected.harmed. In that event, the price of our common stock could decline, and you could lose part or all of your investment.
Risks Relating Toto Our Business and Industry
Our businessrecent growth may not be indicative of our future growth and, services subject usif we continue to complexgrow, we may not be able to manage our growth effectively.
We have experienced, and evolving U.S.continue to experience, growth in operations and foreign lawsheadcount, which has placed, and regulations regardingwill continue to place, significant demands on our management team and our administrative, operational and financial infrastructure. In particular, the unauthorized practicenumber of law, or UPL, legal document processingtransactions processed grew from 691,000 transactions in 2019 to 892,000 in 2020, and preparation, legal plans, privacyfrom 210,000 to 276,000 in the three months ended March 31, 2020 and other matters. These laws2021, respectively. Our number of subscription units increased from 921,000 at December 31, 2019 to 1,085,000 at December 31, 2020, and regulations mayfrom 936,000 at March 31, 2020 to 1,146,000 at March 31, 2021. We have also significantly increased the size of our customer base over the last several years. We anticipate that we will continue to expand our operations and headcount in the near term. Our success will depend in part on our ability to manage this growth effectively. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. As we continue to grow, we must effectively integrate, develop and motivate a large number of new employees, and maintain the beneficial aspects of our corporate culture. To attract top talent, we have had to offer, and believe we will need to continue to offer, highly competitive compensation packages before we can validate the productivity of those employees. Failure to effectively manage our growth could result in claims, changesdifficulty or delays in providing services to customers, declines in service quality or discontinuancecustomer satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties. Any of some ofthese difficulties could adversely impact our services, potential liabilities or additional costs that could have a material adverse effect on ourbrand and reputation, business, results of operations, financial condition andor future prospects.
Our business involves providing services that meet the legal needs ofgrowth also makes it difficult to evaluate future prospects. Our ability to forecast our customers and, as a result,future operating results is subject to a varietynumber of complexuncertainties, including our ability to plan for and evolving U.S.model future growth. If our assumptions regarding these uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in our markets, or if we do not address these uncertainties successfully, our results of operations and foreign laws and regulations, including the following:
•Ourfinancial condition could differ materially from our expectations, our business model includes the provision of services that represent an alternative to traditional legal services, which subjects us to allegations of UPL. UPL generally refers to an entity or person giving legal advice who is not licensed to practice law. However, laws and regulations defining UPL,could suffer and the governing bodiestrading price of our stock may decline.If we are unable to sustain our revenue growth rate, we may not maintain profitability in the future.
From 2019 to 2020, our revenue grew from $408.4 million to $470.6 million, which represents an annual growth rate of 15.2%, and from $105.8 million to $134.6 million in the three months ended March 31, 2020 and 2021, respectively, which represents a growth rate of 27.3%. Although our revenue growth rate has increased in certain recent periods, even if our revenue increases in the future to higher levels on an absolute basis, our revenue growth rate may decline. As we grow our business, our revenue growth rate may slow in future periods due to a number of reasons. Any success that enforce UPL rules, differwe may experience in the future will depend in large part on our ability to, among other things:
maintain and expand our customer base;
increase revenue from existing customers through increased or broader use of our services;
provide high-quality services to customers;
improve the various jurisdictionsperformance and capabilities of our services through research and development;
maintain the rate at which customers purchase our subscriptions;
identify and acquire or invest in new businesses, products or technologies that we believe could complement or expand our platform;
continue to successfully expand our business; and
successfully compete with other companies.
If we are unable to maintain consistent revenue or revenue growth, our stock price could be volatile, and it may be difficult to maintain profitability. You should not rely on our revenue for any prior quarterly or annual periods as any indication of our future revenue or revenue growth.
Our future quarterly results of operations may fluctuate significantly due to a wide range of factors, which makes our future results difficult to predict.
Our revenue and results of operations have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control, including:
the number of business formations;
the level of demand for our services;
the rate of renewal of subscriptions with, and extent of sales of additional subscriptions to, existing customers;
customers failing to renew their subscriptions;
the size, timing and terms of our subscription agreements with existing and new customers;
the timing and growth of our business, in particular through our hiring of new employees;
changes in stock-based compensation expenses;
the timing of our adoption of new or revised accounting pronouncements and the impact on our results of operations;
the introduction of new products and product enhancements by existing competitors or new entrants into our market, and changes in pricing for solutions offered by us or our competitors;
network outages, security breaches, technical difficulties or interruptions with our platform;
changes in the growth rate of the markets in which we operate. We are unablecompete;
the mix of subscriptions and services sold during a period;
customers delaying purchasing decisions in anticipation of new developments or enhancements by us or our competitors or otherwise;
changes in customers’ budgets;
seasonal variations related to acquire a licensesales and marketing and other activities;
our ability to practice lawattract new customers or retain existing customers;
our ability to increase, retain and incentivize the strategic partners that market and sell our platform;
our ability to control costs, including our operating expenses;
our ability to hire, train and maintain our customer care specialists and direct sales force;
unforeseen litigation, regulatory actions, and intellectual property infringement claims;
the rate of failure for small businesses;
changes in governmental or other regulations affecting our business;
variations in our provision for income taxes, which may be affected by the mix of income we earn in the United States and in jurisdictions with comparatively lower tax rates, the effects of stock-based compensation, the effects of changes in our business, and the impact of changes in tax laws or employ licensed attorneys to provide legal advice to our customers, because we do not meet thejudicial or regulatory requirementinterpretations of being exclusively owned by licensed attorneys. We are also subject to lawstax laws;
adverse economic and regulations that govern business transactions between attorneys and non-attorneys, includingmarket conditions, such as those related to the ethics of attorney fee-splittingcurrent COVID-19 pandemic, currency fluctuations, and adverse global events; and
general economic and political conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers operate.
Fluctuations in our quarterly operating results and the corporate practice of law.
•Regulation of legal document processing and preparation services varies among the jurisdictions in which we conduct business.
•Regulationprice of our legal plans varies considerably amongcommon stock may be particularly pronounced in the insurance departments, bar associationscurrent economic environment due to the uncertainty caused by the current COVID-19 pandemic and attorneys generalits potential future impact on consumer spending patterns, the success of small businesses and the formation of new small businesses, as well as the impacts of the particular statesreopening of the offline economy and lessening of restrictions on movement and travel. For example, starting in the second quarter of 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. Fluctuations in our quarterly operating results may cause those results to fall below our financial guidance or other projections, or the expectations of analysts or investors, which could cause the price of our common stock to decline. Fluctuations in our results could also cause a number of other problems. For example, analysts or investors may change their models for valuing our common stock, particularly post-pandemic, we offer,could experience short-term liquidity issues, our ability to retain or plan to offer,attract key personnel may diminish, and other unanticipated issues may arise.We believe that our legal plans. In addition, some statesquarterly operating results may seek to regulatevary in the future and that period-to-period comparisons of our legal plans as insurance or specialized legal service products.
Additionally, we are required to comply with laws and regulations related to privacyoperating results may not be meaningful. For example, our overall historical growth rate and the storing, use, processing, disclosureimpacts of the COVID-19 pandemic may have overshadowed the effect of seasonal variations on our historical operating results. Any seasonal effects may change or become more pronounced over time, which could also cause our operating results to fluctuate. You should not rely on the results of any given quarter as an indication of future performance.
We have a history of net losses, we anticipate increasing expenses in the future, and protectionwe may not be able to maintain profitability.
Since inception, we have incurred an accumulated deficit and may incur net losses in the foreseeable future. We generated net income of personal information$7.4 million and other customer data.$9.9 million for the years ended December 31, 2019 and 2020, respectively, and net losses of $4.9 million and $9.8 million for the three months ended March 31, 2020 and 2021, respectively. At March 31, 2021, we had an accumulated deficit of $649.2 million.
Our business operations also subject usWe will need to lawsgenerate and regulations relatingsustain increased revenue levels in future periods in order to general business practices andmaintain or increase our level of profitability. We expect our operating expenses to increase in the manner in which we offer our services to customers subjects us to various consumer laws and regulations, including false advertising and deceptive trade practices.
The scope of these laws and regulations are often vague and broad, and their applications and interpretations are often uncertain and conflicting. Compliance with these disparate laws and regulations requires us to structure our business and services differently in certain jurisdictions. We dedicate significant management time and expense to dealing with these issues and expect that these issues will continue to be a significant focusfuture as we expand intoour operations. Furthermore, as a public company, we will incur additional legal, accounting and other servicesexpenses that we did not incur as a private company. If our revenue and jurisdictions, including those outside the United States.
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In addition, any failuregross profit do not continue to grow at a greater rate than our operating expenses, we will not be able to maintain or perceived failure by us to comply with applicable laws and regulationsincrease profitability. We may subject us to regulatory inquiries, claims, suits and prosecutions. We have incurred in the past, and expect to incur significant losses in the future costs associated with responding to, defendingfor a number of reasons, including without limitation the other risks and settling such proceedings, particularly those related to UPL,uncertainties described herein. Additionally, we may encounter unforeseen operating or legal expenses, difficulties, complications, delays and the provision of our services more generally. We can give no assuranceother factors that we will prevail in such regulatory inquiries, claims, suits and prosecutions on commercially reasonable terms or at all. Responding to, defending and/or settling regulatory inquiries, claims, suits and prosecutions may be time-consuming and divert management and financial resources or have other adverse effects on our business. A negative outcome in any of these proceedings may result in changes to or discontinuance of some oflosses in future periods. If our services, potential liabilities or additional costs that could have a material adverse effect onexpenses exceed our revenue, we may not maintain profitability and our business results of operations, financial condition and future prospects.may be harmed.
If we fail to provide high qualityhigh-quality services, customer care and customer experience and add new services that meet our customers'customers’ expectations, we may not be able to attract and retain customers.
In order to increase revenue and maintain profitability, we must attract new customers and retain existing customers. The rate at which new and existing customers purchase and renew subscriptions to our services depends on a number of factors, including those outside of our control. The quality and value of our services, customer care and customer experience, as well as the quality and accuracy of the services provided by our accountants and the licensedindependent attorneys who participate in our legal plan network,and our partner’s networks, are critical to our ability to attract and retain customers.
We have made substantial investments in developing our website, interactivewebsites, mobile platform, legal documents, educational content, customer relationship management, automated supply chain and fulfillment, integrated digital workflow management and other dynamic online processes that comprise our online legal platform to improve the quality of our services, customer care and customer experience. We also intend to add new services such as our legal plans and enhance our existing product and services. For example, in October 2020, we introduced LZ Tax, a LegalZoom fulfilled tax advisory service. We may fail to attract new customers or lose existing customers if these or future development efforts or services fail to meet changing customer preferences on a timely basis or if the licensedindependent attorneys who participate in our legal services plan, or legal plan, or the tax experts who complete the tax preparation services in our network fail to provide high qualityaccurate, high-quality services, customer care and customer experience. In addition, larger enterprises may demand more support services and features, which puts additional pressure on us to satisfy the increased support required for these customers. If we are unable to attract new customers or lose existing customers, our business, revenues, results of operations, financial condition and future prospects would be adversely affected.
OurAdditionally, we offer many forms of documents on our platform, such as business modelformations and wills, that must comply with the latest local jurisdiction requirements. While we have never experienced defects that have resulted in material liability, if there is evolving from a transaction model to a combined transaction and subscription model. If a sufficient numberdefect in any of our existingforms, or if we fail to update our forms to comply with new or modified jurisdiction requirements, this could result in negative consequences to our customers, legal liability, harm our brand and new customers do not become subscribers,adversely affect our business, revenues, results of operations, financial condition and future prospects would be adversely affected.prospects.
Our revenues have historically been derived mostly from providing business formation, estate planning and other interactive legal documents to our customers for a one-time fee. In 2010, we began offering subscription legal plans for small businesses and consumers. Providing access toThe independent attorneys who participate in a legal plan network to small businesses and consumers via the Internet is in large part commercially untested. We have invested, and intend to continue to invest, in expanding our subscription services for small businesses and consumers, including continuing to develop technology and infrastructure to support our legal plans and attorneys who fulfill our attorney networkassisted legal offerings, as well as accountants who fulfill our tax offering, are critical to the success of our business. The failure or perceived failure of these independent attorneys and expandingaccountants to satisfy customer expectations could impede our salesability to attract and marketing efforts, particularly to promoteretain customers. Further, the independent attorneys who participate in our legal plans and attorneys who fulfill our brand.attorney assisted legal offerings have duties both to the courts and their clients. These duties, including the associated responsibilities, such as confidentiality and the rules relating to the attorney-client and attorney work product privileges, are paramount. Although we have not experienced this problem to date, there could be circumstances in which the attorneys who participate in our network and fulfill the attorney assisted offerings believe that in order to comply with these duties they may have to act against the interests of our stockholders and the short-term profitability of our business.
In addition, because our platform is available over the internet or on mobile networks, we need to continually modify and enhance our platform to keep pace with changes in internet-related hardware, software, communications and database technologies and standards. If we are unable to respond in a timely and cost-effective manner to these rapid technological developments and changes in standards, our platform may become less marketable, less competitive, or obsolete, and our business, results of operations, financial condition and future prospects will be harmed. If new technologies emerge that are able to deliver competitive services at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely impact our ability to compete. Our platform must also integrate with a variety of network, hardware, mobile, and software platforms and technologies, and we need to continually modify and enhance its services to adapt to changes and innovation in these technologies. Any failure of our platform to operate effectively with future infrastructure
platforms and technologies could reduce the demand for our platform. If we are unable to respond to these changes in a cost-effective manner, our platform may become less marketable, less competitive or obsolete, and our business, results of operations, financial condition and future prospects may be adversely affected.
If we do not continue to innovate and provide a platform that is useful to our customers, we may not remain competitive, and our results of operations could suffer.
Our success depends on continued innovation to provide features that make our platform useful for our customers. We expectmust continue to invest resources in technology and development in order to continually improve the simplicity and effectiveness of our platform. We may introduce significant changes to our platform or develop and introduce new and unproven services, including using technologies with which we have little or no prior development or operating experience. We have in the past invested resources and introduced new services that have failed to produce the customer interest that we expected, and we have since removed these services from our platform. If we are unable to continue offering innovative solutions or if new or enhanced solutions fail to engage our customers, we may be unable to attract additional customers or retain our current customers, which may adversely affect our business, results of operations, financial condition or future prospects.
Our business depends on business formations.
Our success significantly depends on 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. In each of 2019 and 2020 as well as the three months ended March 31, 2020 and 2021, business formations represented the largest share of our total operating expenses to increase in the foreseeable futuretransaction orders. The number of business formations on our platform could decline or fluctuate as a result of continued investmentsa number of factors, including an overall decline in the number of U.S. business formations, an economic downturn, increased competition, regulatory obstacles, changes in law (including changes in tax laws and regulations) and dissatisfaction with our services. Any decline in the overall number of business formations or the number of business formations on our platform may adversely affect our business, results of operations, financial condition or future prospects.
Our subscription services are highly dependent upon our transaction products.
For the past few years, a significant amount of our revenue has been derived from our subscription legal plan services. These investments will occur in advanceIn 2020 and the three months ended March 31, 2021, approximately 50% of realizing any benefitour revenue came from such investments, and therefore itsubscriptions. Subscriptions have primarily originated from transactional customers who opted to become subscribers. However, we may not be difficult for usable to determine if we are effectively allocating resources in these areas. In addition, we cannot predict whether sufficient numbers of our existing or new customers will continue to subscribe to our registered agent services, legal plans or other subscription services.services, or if they will continue to subscribe at the same rate. If we are unable to continue to convert our transactional customers to subscribers, our business, results of operations, financial condition and future prospects would be adversely affected.
Our business depends substantially on our subscribers renewing their subscriptions with us and expanding their use of our platform.
A large portion of our revenue stream comes from our subscriptions for small businesses and individuals. For us to maintain or improve our operating results, it is important that we retain our existing customers and that our subscribers renew their subscriptions with us when the existing subscription term expires. Our subscribers have no obligation to renew their subscriptions upon expiration, and we cannot assure you that subscribers will renew subscriptions at the same or higher level of service, if at all.
We cannot accurately predict renewal rates. Our retention rate may decline or fluctuate as a result of a number of factors, including subscribers’ satisfaction or dissatisfaction with our platform, the effectiveness of our
customer support services, the quality and perceived quality of the services provided by our tax professionals and the independent attorneys who participate in our legal plan network, the attorneys who fulfill our attorney assisted offering, our pricing, the prices of competing products or services, the effects of global economic conditions, regulatory changes or reductions in subscribers’ spending levels. If we are unable to attract new subscribers to grow our legal plansubscription services, or our existingif subscribers cancel their legal plansubscriptions at a higher rate than anticipated or otherdo not renew their subscriptions or if we are unable to attract attorneys torenew on less favorable terms, our legal network, our revenues,business, results of operations, financial condition and future prospects would be adversely affected.
Table If our renewal rates fall below the expectations of Contentsthe public market, securities analysts or investors, the price of our common stock could also be harmed.
Our business depends on our ability to drive additional purchases and cross-sell to paying customers.
Our future success depends on our ability to expand our relationships with our customers by selling additional solutions to serve their needs, by offering more subscription products that increase engagement. This may require more sophisticated and costly sales efforts. Similarly, the rate at which our customers purchase additional services from us depends on a strongnumber of factors, including general economic conditions and customer reaction to pricing of these services. If our efforts to sell additional services to our customers are not successful, our business, results of operations, financial condition or future prospects may be harmed.
The legal solutions market is highly competitive.
We operate in a very competitive industry. We face intense competition from law firms and solo attorneys, online legal document services, legal plans, secretaries of state, tax preparation companies and other service providers. The online legal solutions market is evolving rapidly and is becoming increasingly competitive. Other companies that focus on the online legal document services market or business formations, such as BizFilings, LegalShield, MyCorporation, and RocketLawyer, and law firms that may elect to pursue the online legal document services market, can and do directly compete with us. Law firms and solo attorneys, who provide in-person consultations and are able to provide direct legal advice that we cannot offer due to laws and regulations regarding the unauthorized practice of law, or UPL, compete with us offline and have or may develop competing online legal services. We compete in the registered agent services business with several companies that target small businesses, including Wolters Kluwer, and these competitors have extensive experience in this market. In addition, if U.S. state agencies increase their offerings of free and easy-to-use business formation services, such as limited liability company formations and other document filings, or filing portals to the public, it could have a significant adverse effect on our business, financial condition or results of operations. For example, states such as Nevada and Louisiana offer online portals where consumers may file their articles of organization for free other than filing fees. We also compete in tax advisory service business with several companies, including H&R Block and Jackson Hewitt.
Our business depends on our brand and reputation. If we fail to successfully promote and maintain our brand and reputation, or if we incur excessive expenses in doing so, our business, revenues and results of operations may be adversely affected.
We believe our brand has contributed to the success of our business and we have made substantial investments to build and strengthen our brand and reputation. Maintaining and enhancing the LegalZoom brand and our reputation is critical to growing and retaining our customer base. Regulatory proceedings, consumer claims, litigation, customer complaints or negative publicity through word-of-mouth, social media outlets, blogs, the Better Business Bureau and other sources related to our business practices, services,as well as customer care, data privacy and security issues, or reputation of our endorsers, irrespective of their validity, could diminish confidence in our services and adversely affect our brand and reputation and our ability to attract and retain customers.
Our services, as well as those of our competitors, are regularly reviewed and commented upon by online and social media sources. Negative reviews, or reviews in which our competitors’ services are rated more highly than ours, irrespective of their accuracy, could negatively affect our brand and reputation. We have in the past
received negative reviews wherein our customers expressed dissatisfaction with our services, including dissatisfaction with our customer support, our billing policies and the way our subscriptions operate, and we may receive similar reviews in the future. If we do not handle customer complaints effectively, our brand and reputation may suffer. We may lose our customers’ confidence, they may choose not to renew their subscriptions or additional services from us, and we may fail to attract new customers. In addition, maintaining and enhancing our brand and reputation may require us to incur significant expenses and make substantial investments, which may not be successful. If we fail to successfully promote and maintain our brand and reputation, or if we incur excessive expenses in doing so, our business, revenues and our results of operations, financial condition and future prospects may be adversely affected.
Furthermore, our brand and reputation are in part reliant on third parties, including the independent attorneys and accountants who participate in our and our partner’s networks. The failure or perceived failure of these attorneys and accountants to satisfy customer expectations could negatively impact our brand and reputation.
If our marketing efforts are unsuccessful, our ability to attract new customers or retain existing customers to our services may be adversely affected, which may adversely affect our business, revenues, results of operations, financial condition and future prospects.
Our ability to attract new customers and retain existing customers to our services depends in large part on the success of our marketing channels. Our primary marketing channels tothat generate traffic for our websitewebsites include search engine marketing, television, radio, and radio.our inside sales team.
We rely on both algorithmic and paid listing Internetinternet search results to drive customer traffic to our website.websites. Algorithmic listings are determined and displayed solely by a set of formulas designed by Internetinternet search engine companies, such as Google and Bing. Paid listings can be purchased and then are displayed if particular words or terms are included in a customer's Internetcustomer’s internet search. We bid on words or terms we expect customers will use to search for our services in the search engine'sengine’s auction system for preferred placement on its results page. Placement in paid listings is generally not determined solely on the bid price, but also takes into accountconsiders the search engines'engines’ assessment of the quality of the website featured in the paid listing and other factors. Our ability to maintain or increase customer traffic to our websitewebsites from Internetinternet search engines is not entirely within our control. For example, Internetinternet search engines sometimes revise their algorithms to optimize their search result listings or maintain their internal standards and strategies. Changes in search algorithms could cause our websites to receive less favorable placement and reduce traffic to our website.websites. In addition, we bid for paid listings against our competitors and third parties that may outbid us for preferred placement, which could adversely impact advertising efficiency and customer acquisition efforts. If competition for paid listings increases, we may be required to increase our marketing expenses or reduce the number or prominence of these paid listings. If we reduce our Internetinternet search engine advertising, the number of customers who visit our websitewebsites could decline significantly.
In Additionally, changes in regulations could limit the ability of search engines and social media platforms, including but not limited to Google and Facebook, to collect data from users and engage in targeted advertising, making them less effective in disseminating our radio advertising, we currently rely heavily on the use of advertisements featuring exclusive endorsements from prominent on-air radio personalities to drive prospects to our website. A loss of our relationships with, or decline in the reputation or effectiveness of, any endorser could reduce our prospective traffic or harm our brand.target customers.
A reduction or loss of any of our advertising channels may adversely affect our ability to attract new customers, to our services, which could adversely affect our business, revenues, results of operations and future prospects.
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If we fail to safeguard our customers' information and privacy, our brand and reputation may be harmed, customers may curtail or stop using our services and we may face claims and potential liabilities, which could adversely affect our business, results of operations, financial condition and future prospects.
Our online legal platform involves the receipt, use, storage, processing and transmission of information from and about our customers, some of which may be personal or confidential. We rely on encryption and authentication technology licensed from third parties to secure the storage and transmission of customer information. Sophistication of intrusion techniques used to gain unauthorized access to or sabotage systems change frequently and are generally not recognized until launched against a target. We may be unable to anticipate these techniques or implement adequate preventative measures. Third parties may also attempt to fraudulently induce our employees or customers to disclose information in order to gain access to customer information. A third party that is able to circumvent our security measures could misappropriate customer or proprietary information or cause interruptions in our business and operations. Computer malware, viruses, hacking and phishing attacks, and spamming could also harm our business and operations. If an actual or perceived breach of our security measures occurs as a result of third-party action, employee error, malfeasance or otherwise, our brand and reputation may be harmed, customers may curtail or stop using our services and we may face claims and potential liabilities, which could adversely affect our business, results of operations, financial condition and future prospects.
Our business is subject to seasonal fluctuations that may cause our results of operations to vary from period to period.
Many of the factors that contribute to seasonal fluctuations in our results of operations are out of our control. We have experienced, and expect that we will continue to experience, seasonality in the number of orders placed. Customers tend to place a higher number of orders in the first quarter of the year as we believe the demand for forming businesses is the highest at the beginning of the year. Further seasonality is reflected in the timing of our revenue recognition in the second quarter, when we typically recognize a high amount of revenues from orders placed in the first quarter but fulfilled in the second quarter. Also, we generally see demand for our services decline around the beginning of the third quarter with summer vacations and in the last two months of the fourth quarter around the winter holidays. We expect this seasonality to continue into the future, which may cause period to period fluctuations in certain of our operating results and financial metrics and thus limit our ability to predict our future results.
We expect to face increasing competition in the online and offline legal services markets from law firms, solo attorneys, online legal document services, national legal plans and other service providers and our failure to effectively compete with these providers may adversely affect our business, results of operations, financial condition and future prospects.
We face intense competition from law firms and solo attorneys, online legal document services, national legal plans and other service providers. The online legal document services market is evolving rapidly and is becoming increasingly competitive. Other companies that focus on the online legal document services market, such as BizFilings, RocketLawyer, and The Company Corporation, and law firms that may elect to pursue the online legal document services market, can and do directly compete with us. Law firms and solo attorneys, who provide in-person consultations and are able to provide direct legal advice that we cannot offer due to laws and regulations regarding UPL, compete with us offline and have and may develop competing online legal services. We also compete with several national legal plans, including Hyatt Legal Plans (a MetLife company), ARAG and LegalShield. Many legal plan competitors have focused on employer-sponsored markets or have acquired customers through in-person multi-level marketing. At least one of these competitors, LegalShield, has recently rebranded itself from a multi-level marketing operation to a direct-to-consumer operation that more closely competes with our legal plans. Other legal plan companies may similarly decide to migrate into the direct-to-consumer market and offer plans that compete with ours. We compete in the registered agent services business with several companies, including
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CT Corporation and Corporation Services Company, and these competitors have extensive experience in this market.
Our competitors, whether they are online legal document providers, legal plan providers, law firms or solo attorneys, may also be developing innovative and cost-effective services that target our existing and potential customers. We expect to face increasing competition from offline and online legal services providers in our market, and our failure to effectively compete with these providers may adversely affect our business, results of operations and future prospects.
If we are unable to effectively manage and minimize errors, failures, interruptions or delays caused by third parties, or if our third-party service providers cease to do business with us, our ability to deliver services to our customers, business, brand and reputation and results of operations may be adversely affected.
We rely on third parties to fulfill portions of the services we offer and to support our operations. For example, we rely on government agencies, including secretary of state offices and the United States Patent and Trademark Office, to process business formation documents and intellectual property applications. If these agencies are unable to process submissions in a timely manner, our brand and reputation may be adversely affected or customers may seek other avenues for their business formation or intellectual property needs. We have other third parties who fulfill our services, including the independent attorneys in our legal plan network. If we cannot attract additional, qualified attorneys into our legal plan network to service the needs of our legal plan subscribers, we may not be able grow our legal plan subscription business effectively and our business, revenues, results of operations and future prospects may be adversely affected. Our data centers, which host many facets of our online legal platform, are also operated out of third-party facilities, and we rely on third-party technology licenses for many aspects of our operations. We exercise limited control over these third parties, which increases our vulnerability to problems with the products and services they provide for us. These third parties may also be subject to financial issues and other unanticipated problems or events. Delays in the services provided by the third parties we rely on could result in deferred revenue recognition. If we are unable to effectively manage and minimize errors, failures, interruptions or delays caused by third parties, or if our third-party service providers cease to do business with us, our ability to deliver services to our customers, business, brand and reputation and results of operations may be adversely effected.
If we fail to effectively manage our growth, our business, brand and reputation, results of operations and financial condition may be adversely affected.
We have experienced, and continue to experience, rapid growth in headcount and operations, which has placed, and will continue to place significant demands on our management team and our operational and financial infrastructure. As we continue to grow, we must effectively integrate, develop and motivate a large number of new employees, and maintain the beneficial aspects of our corporate culture. To attract top talent, we have had to offer, and believe we will need to continue to offer, highly competitive compensation packages before we can validate the productivity of those employees. The risks of over-hiring or over compensating and the challenges of integrating a rapidly growing employee base into our corporate culture are exacerbated by our expected international expansion.
Additionally, if we do not effectively manage our growth, the quality of our services could suffer, which could adversely affect our business, brand and reputation, results of operations and financial condition. If operational, technology and infrastructure improvements are not implemented successfully, our ability to manage our growth will be impaired and we may have to make significant additional expenditures to address these issues. To effectively manage our growth, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. This will require that we refine our information technology systems to maintain effective online services and enhance information and communication systems to ensure that our employees effectively communicate with each other and our growing base of customers. These system enhancements and
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improvements will require significant incremental and ongoing capital expenditures and allocation of valuable management and employee resources. If we fail to implement these improvements and maintenance programs effectively, our ability to manage our expected growth and comply with the rules and regulations that are applicable to publicly reporting companies will be impaired and we may incur additional expenses.
We expect to invest significant resources in pursuing opportunities in new products and markets and expect our expenses to increase as we broaden our customer base, hire additional employees and expand internationally. Historically, our costs have increased each year due to new opportunities and investments in technology, and we expect these costs to increase including as a result of additional investments in software licenses and data centers to support our anticipated future growth. Our expenses may be greater than we anticipate, and our investments to make our business and our online legal platform more efficient may not be successful. In addition, we may increase marketing, sales, and other operating expenses to grow and expand our operations and to remain competitive. Increases in our costs may adversely affect our results of operations and financial condition, including, for example, that we expect to make investments over the next few quarters to grow our business that will reduce non-GAAP Adjusted EBITDA and compress related margins.
We may be unsuccessful in expanding our operations internationally, which may adversely affect our business, results of operations, financial condition and future prospects.
We are considering expanding our operations internationally in the near term, which may not be successful. Expanding internationally may subject us to new risks or increase risks that we currently face, including risks associated with:
•entering into strategic transactions, acquisitions or joint ventures to establish our presence in international markets;
•developing and customizing services that conform to the local legal systems to address the needs of small businesses and consumers in international markets;
•difficulties in developing and marketing our services and brand as a result of language and cultural differences;
•competition from local legal service providers;
•compliance with varied, unfamiliar, unclear and changing laws and regulations, including consumer protection, data protection and privacy laws;
•recruiting and retaining talented and capable employees;
•currency exchange rate fluctuations;
•political, economic and social instability in some countries;
•potential adverse tax consequences;
•higher costs of doing business internationally;
•negotiating economically beneficial agreements with local vendors and strategic partners;
•the inability to extend proprietary rights in our brand, content or technology into new jurisdictions;
•implementing alternative payment methods to comply with local laws and practices and prevent fraud, higher levels of credit risk and payment fraud;
•protectionist laws and business practices that favor local businesses in some countries; and
•delays and interruptions to our business in the United States.
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As a result of these obstacles, we may find it difficult or prohibitively expensive to expand internationally, and we may be unsuccessful in our attempt to do so, which may adversely affect our business, results of operations, financial condition and future prospects.
Adverse application of existing tax laws, rules or regulations or implementation of new unfavorable laws, rules or regulations, could adversely affect on our business, results of operations and financial condition.
The application of domestic and international sales, use, occupancy, value-added, payroll and other tax laws, rules and regulations to our services is subject to interpretation by the applicable authorities. We currently pay sales or other transaction taxes for certain services in jurisdictions where we do business. A successful assertion by any state, local jurisdiction or country that we should be paying sales or other transaction taxes on services with respect to which we have not been paying such taxes, or the imposition of new laws requiring the payment of sales or other transaction taxes on services in which we do not currently pay such taxes, or increase in the tax rates, or some combination of the foregoing, could result in substantial increase in our sales and other transaction taxes, create increased administrative burdens or costs, discourage customers from purchasing services from us, decrease our ability to compete or otherwise adversely affect our business, results of operations and financial condition.
The current administration in the United States has publicly stated that international tax reform is a priority, and key members of the United States Congress have conducted hearings and proposed new legislation in that area. Recent changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and use foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to applicable tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings. Given our plans to expand internationally in the near term, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate which could adversely affect our business, results of operations and financial condition.
We depend on top talent, including our senior management team, to grow and operate our business, and if we are unable to hire, retain and motivate our employees, we may not be able to grow effectively, which may adversely affect our business and future prospects.
Our future success will depend upon our continued ability to identify, hire, develop, motivate and retain top talent. Competition for such talent is intense. We have from time to time experienced, and we expect to continue
to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications which may, among other things, impede our ability to execute our growth strategies. If we are not able to effectively attract and retain quality employees, our ability to achieve our strategic objectives will be adversely impacted, our brand or reputation could suffer, and our business will be adversely affected. Our ability to execute efficiently depends upon contributions from all of our employees in particular our chief executive officer, John Suh, and the rest of our senior management team. Key institutional knowledge remains with a small group of long-term employees and directors whom we may not be able to retain. In addition, from time to time, there may be changes in our senior management team that may be disruptive to our business. If our senior management team, including any new hires that we may make, fails to work together effectively and execute our plans and strategies on a timely basis, our business and future prospects may be adversely affected.
If we cannot attract additional, qualified independent attorneys to participate in our legal plan network to service the needs of our legal plan subscribers, if we cannot attract additional, qualified certified public accountants, enrolled agents, and tax professionals to service the needs of our subscribers, or if these attorneys, accountants and tax professionals encounter regulatory issues that prevent them from being able to service the needs of our customers, we may not be able grow and maintain our legal plan subscription business effectively and our business, revenue, results of operations and future prospects may be adversely affected.
Our business and success depend in part on our strategic relationships with third parties, including our partner ecosystem, and our business would be harmed if we fail to maintain or expand these relationships.
We depend on, and anticipate we will continue to depend on, various third-party relationships to sustain and grow our business. For example, we partner with a variety of third parties to provide business license services, bookkeeping services, credit card and banking services, productivity tools and business insurance, among others. Our sales and our customers’ user experience are dependent on our ability to connect and integrate easily to such third-party solutions. We may fail to retain and expand relationships for many reasons, including due to third parties’ failure to maintain, support, or secure their technology platforms in general, restrictions imposed by regulatory compliance, and our integrations in particular. Any such failure could harm our relationship with our customers, our reputation and brand, and our business and results of operations.
As we seek to add different types of partners to our partner ecosystem, it is uncertain whether these third parties will be successful in building integrations, co-marketing our solutions to provide a significant volume and quality of lead referrals and orders, or continuing to work with us as their own products evolve. Identifying and negotiating new and expanded partner relationships requires significant resources. In addition, integrating third-party technology can be complex, costly, and time-consuming. Third parties may be unwilling to build integrations, and we may be required to devote additional resources to develop integrations for business applications on our own. The contracts applicable to third parties’ development tools may be unfavorable and add costs or risks to our business or may require us to push additional contract terms to our customers that affect our relationship with our customers. Providers of business applications with which we have integrations may decide to compete with us or enter into arrangements with our competitors, resulting in such providers withdrawing support for our integrations. In addition, any failure of our solutions to operate effectively with business applications could reduce the demand for our solutions and harm to our business. If we are unable to respond to these changes or failures in a cost-effective manner, our solutions may become less marketable, less competitive, or obsolete, and our results of operations may be negatively impacted.
If we are unable to effectively manage and minimize errors, failures, interruptions or delays caused by third parties, or if our third-party service providers cease to do business with us, our ability to deliver services to our customers, business, brand and reputation and results of operations may be adversely affected.
We rely on third parties to fulfill portions of the services we offer and to support our operations. For example, we rely on government agencies, including secretary of state offices and the U.S. Patent and Trademark Office, to process business formation documents and intellectual property applications. If these agencies are unable or refuse to process submissions in a timely manner, including as a result of any government shutdowns or slowdowns, including as a result of the COVID-19 pandemic, our brand and reputation may be adversely
affected, or customers may seek other avenues for their business formation or intellectual property needs. We also utilize other third parties in connection with the fulfillment and distribution of our services, including the independent attorneys in our legal plan network, as well as accountants and tax professionals through our subscription plans, and a third party to support our registered agent subscription services. Our platform also interoperates with certain third-party sites. As a result, our results may be affected by the performance of those parties and the interoperability of our platform with other sites. If certain third parties limit certain integration functionality, change their treatment of our services at any time, or experience quality issues, such as bugs and defects, our revenue, results of operations and future prospects may be adversely affected.
In addition, we may be unable to renew or replace our agreements with these third parties on comparable terms, or at all. Moreover, we cannot guarantee that the parties with which we have relationships can and will continue to devote the resources necessary to operate and expand our platform. Further, some of these third parties offer, or could offer, competing services or also work with our competitors. As a result of these factors, many of these third parties may choose to develop alternative services in addition to, or in lieu of, our platform, either on their own or in collaboration with others, including our competitors. If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete or our revenue, results of operations and future prospects may be adversely affected. Even if we are successful in establishing and maintaining these relationships with third parties, we cannot ensure that these relationships will result in increased usage of our platform or increased revenue. We may also be held responsible for obligations that arise from the actions or omissions of these third parties.
We also utilize various types of data, technology, intellectual property and services licensed or otherwise obtained from unaffiliated third parties in order to provide certain elements of our solutions. We exercise limited control over these third parties, which increases our vulnerability to problems with the services they provide for us and to security incidents or breaches affecting the data and information they hold or process on our behalf. Any errors or defects in any third-party data or other technology could result in errors in our solutions that could harm our business, damage our reputation and result in losses in revenue, and we could be required to undertake substantial additional research and expend significant development resources to fix any problems that arise. In addition, such licensed data, technology, intellectual property and services may not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any of these on commercially reasonable terms, or at all, could result in delays in producing or delivering our solutions until equivalent data, technology, intellectual property or services are identified and integrated, which delays could harm our business. In this situation we would be required to either redesign our solutions to function with such equivalent data, technology, intellectual property or services available from other parties or to develop these components or services ourselves, which would result in increased costs and potential delays in service. Furthermore, we might be forced to limit the features available in our current or future solutions. If we fail to maintain or renegotiate any of these data, technology or intellectual property licenses or services, we could face significant delays and diversion of resources in attempting to develop similar or replacement technology, or to license and integrate a functional equivalent of the relevant data, technology, intellectual property or service. The occurrence of any of these events may have an adverse effect on our business, financial condition, results of operations and future prospects.
The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.
Market opportunity estimates and growth forecasts included in this prospectus are based on data published by third parties and on internally generated data and assumptions, which are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. We have not independently verified any third-party information and cannot assure you of its accuracy or completeness. While we believe our market size estimates are reasonable, such information is inherently imprecise. Even if the market in which we compete meets the size estimates and growth forecasted in this prospectus, our business could fail to grow for a variety of reasons, which would adversely affect our business, results of operations, financial condition and future
prospects. For more information regarding the estimates of market opportunity and the forecasts of market growth included in this prospectus, see the section titled “Market, Industry and Other Data.”
We may also face potential competition from large internet providers, such as Amazon or Alphabet, who may choose to enter into the online legal solutions business. These businesses have disrupted multiple industries and routinely enter new verticals. While they have no particular expertise in providing legal solutions online, their extensive resources and brand recognition would make them formidable competitors and could adversely affect our business.
Our direct and indirect competitors, whether they are online legal document providers, legal plan providers, law firms, accounting firms, solo attorneys or large internet providers, may also be developing innovative and cost-effective services, including automated corporate formation document processing, that target our existing and potential customers. We expect to face increasing competition from offline and online legal services providers in our market, and our failure to effectively compete with these providers could result in revenue reductions, reduced margins, and loss of market share, any of which could materially and adversely affect our business, results of operations, financial condition and future prospects.
Our failure to successfully address the evolving market for transactions on mobile devices and to build mobile products could harm our business.
A significant and growing portion of our customers access our platform through mobile devices. Almost half of our traffic is through mobile devices. The number of people who access the internet and purchase services through mobile devices, including smartphones and handheld tablets or computers, has increased significantly in the past few years and is expected to continue to increase. If we are not able to provide customers with the experience and solutions they want on mobile devices, we may not be able to attract or retain customers or convert our website traffic into customers and our business may be harmed.
While we have created mobile applications and versions of some of our web content, if these mobile applications and versions are not well received by customers, or if they don’t offer the information, services and functionality required by customers that widely use mobile devices, our business may suffer and we may experience difficulty in attracting and retaining customers. In addition, we face different fraud risks and regulatory risks from transactions sent from mobile devices than we do from personal computers. If we are unable to effectively anticipate and manage these risks, our business, results of operations, financial condition and future prospects may be harmed.
We may acquire or invest in companies, which may divert our management’s attention and result in additional dilution to our stockholders.
We have in the past acquired or invested in businesses, products or technologies that we believed could complement or expand our current platform, enhance our technical capabilities or otherwise offer growth opportunities. As part of our business strategy, we may in the future continue to seek to acquire or invest in businesses, products or technologies that we believe could complement or expand our services, enhance our technical capabilities or otherwise offer growth opportunities. The risks we face in connection with acquisitions, whether or not they are consummated, include:
an acquisition may negatively affect our results of operations because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences, may expose us to claims and disputes by stockholders and third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;
we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;
we may not be able to realize anticipated synergies;
an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;
an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company;
we may encounter challenges integrating the employees of the acquired company into our company culture;
we may find it difficult to, or may be unable to, successfully sell any acquired services or products;
our use of cash to pay for acquisitions would limit other potential uses for our cash;
if we incur debt to fund any acquisitions, such debt may subject us to material restrictions on our ability to conduct our business financial maintenance covenants; and
if we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease.
We have in the past faced these difficulties successfully integrating some of our acquisitions and we may face similar problems in the future. We may also decide to restructure, divest or sell businesses, products or technologies that we have acquired or invested in. The occurrence of any of these risks could have an adverse effect on our business, results of operations, financial condition and future prospects and could adversely affect the market price of our common stock.
Our focus on the long-term best interests of our company and our consideration of all of our stakeholders, including our stockholders, customers, employees, and other stakeholders that we may identify from time to time, may conflict with short- or medium-term financial interests and business performance, which may negatively impact the value of our common stock.
We believe that focusing on the long-term best interests of our company and our consideration of all of our stakeholders, including our stockholders, customers, partners, the communities in which we operate, and other stakeholders we may identify from time to time, is essential to the long-term success of our company and to long-term stockholder value. Therefore, we have made decisions, and may in the future make decisions, that we believe are in the long-term best interests of our company and our stockholders, even if such decisions may negatively impact the short- or medium-term performance of our business, results of operations, and financial condition or the short- or medium-term performance of our common stock. Our commitment to pursuing long-term value for the company and its stockholders, potentially at the expense of short- or medium-term performance, may materially adversely affect the trading price of our common stock, including by making owning our common stock less appealing to investors who are focused on returns over a shorter time horizon. Our decisions and actions in pursuit of long-term success and long-term stockholder value, which may include changes to our platform to enhance the experience of our customers, partners and the communities in which we operate, including by improving the trust and safety of our platform, enable equitable access to legal and compliance services, investing in our relationships with our customers, partners, and employees, investing in and introducing new services, or changes in our approach to working with local or national jurisdictions on laws and regulations governing our business, may not result in the long-term benefits that we expect, in which case our business, results of operations, and financial condition, as well as the trading price of our common stock, could be materially adversely affected.
We may not effectively ensure that our website is accessibleonline services and physical locations are protected from significant outages, denial or degradation of service attacks, natural disasters, including adverse weather conditions, and other disruptions, any significant disruption in our online servicesof which could adversely affect our business, brand and reputation, business, results of operations, financial condition and future prospects.
A key element of our continued growth is the ability of our customers to access our websitewebsites and mobile applications and our ability to fulfill orders.orders placed through such platforms. Our systems may not be adequately designed with the necessary reliability to avoid performance delays, disruptions or outages that could be harmful to our business. In addition, any steps we take to increase the reliability and redundancy of our systems may be expensive and may not be successful in preventing system failures. At times we have experienced, or may in the future experience, website disruptions, outages, and other performance problems due to a variety of factors, including infrastructure maintenance, human or software errors,
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ransomware attacks, capacity constraints, denial-of-service,denial of service, fraud or security attacks. In some instances, we may not be able to identify the cause or causes of these website or mobile application performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our website or mobile application performance, especially during peak usage times, if the number of online services we offer increases, our services become more complex, or our customer traffic grows. If our website iswebsites or mobile applications are unavailable when customers attempt to access it,them, our customers may seek other solutions to address their legal needs and may not return to our websitewebsites or mobile applications in the future. To the extent that we do not effectively address future capacity constraints, upgrade and protect our systems, as needed and continually develop our online legal platform to accommodate actual and anticipated technology changes, our business, brand and reputation, business, results of operations, financial condition and future prospects could be adversely affected.
In particular, our online services may be vulnerable to denial or degradation of service attacks or ransomware attacks, which are designed to adversely impact our operations by reducing the capacity or availability of our IT systems, the speed of operations of online services or disrupt the public’s ability to access websites or applications. Although we have taken steps to prevent these attacks and mitigate their potential impact on our systems and operations, such steps may be ineffective to prevent service disruptions or outages. We have experienced denial-of-service attacks in the past, and we may be subject to additional attacks or threats of attacks in the future. Any similar events or failure to maintain performance, reliability, security and availability of our legal document services and online technology platform to the satisfaction of our customers may harm our brand and reputation, as well as our ability to retain existing customers and attract new customers, which could adversely affect our business, results of operations, financial condition and future prospects. Further, if our customers are unable to access the information they store on our platform for even limited periods of time, data protection laws may require us to notify regulators and affected individuals, which may increase the likelihood of regulatory investigations into our data protection practices, loss of customers, litigation and other liabilities.
Our operations and online services also rely on the continued functioning and accessibility of certain physical locations, including our product fulfillment locations and data centers, which are vulnerable to damage or interruption from natural disasters, adverse weather conditions, power losses, telecommunication failures, terrorist attacks, human errors, break-ins and similar events. The occurrence of a natural disaster or other unanticipated problems at our facilities could result in lengthy interruptions in our services. We may not be able to efficiently relocate our fulfillment and delivery operations due to disruptions in service if one of these events occurs and our insurance coverage may be insufficient to compensate us for such losses. Because the Los Angeles area, where our corporate and executive headquarters is located, is in an earthquake fault zone and because both the Los Angeles area and Austin, Texas, where our operational headquarters is located, are subject to the increased risk of wildfires, tornadoes, and power outages, we are particularly sensitive to the risk of damage to, or total destruction of, our primary officeoffices and onetwo of our key fulfillment and delivery centers. WeAlthough we are not insured up to certain limits against any such losscertain losses or expenseexpenses that may result from a disruption to our business due to earthquakes which,or wildfires, either of these events, if incurred, could adversely affect our business, results of operations, financial condition and financial condition.future prospects.
We have been or are involved in, severaland may in the future become involved in, litigation matters that are expensive and time consuming, and, if resolved adversely, could harm our business, brand and reputation, business, results of operations, financial condition or results of operations.future prospects.
We have been or are involved in several lawsuits and other actions brought by customers, orpurported competitors, regulators, and other parties alleging that we engage in the unauthorized practice of law, unfairly compete or otherwise violate the law. The plaintiffs in these actions generally seek disgorgement, monetary damages, penalties, and/or injunctive relief. For example, class action lawsuits were filed against us in California state court in September 2009 and May 2010 alleging, primarily, that we failed to comply with the California Legal Document Assistant Act, engaged in unfair business practices and made misrepresentations in our business operations. Between the cases, plaintiffs sought to have all contracts between LegalZoom and its customers for the prior four years declared void, a return of all revenues generated from these customers, punitive damages, penalties and injunctive relief. A statewide class action lawsuit was filed against us in Missouri state court in December 2009, alleging that we were engaged in the unauthorized practice of law and had violated the Missouri Merchandising Practices Act and seeking damages of five years of fees charged to Missouri customers with the fees from the two years immediately preceding the complaint trebled and an injunction enjoining us from continued operation in Missouri. While we have denied and continue to deny all of the allegations and claims asserted in these lawsuits, without admitting liability,proceedings, and to avoid additional legal costs to defend these matters, we signed settlement agreements to resolvebelieve our services do not constitute the claims inpractice of law, unfairly compete, or otherwise violate the California cases in June 2011 andlaw, we cannot predict the Missouri case in August 2011. The maximum settlement for these matters, assuming all eligible claimants made a valid claim, was estimated to be $16 million. The ultimate costoutcome of these two pending settlements are dependent on a number of factors, including the resolution of any appeals of the approved California settlement, and actual claims made by, and the resulting payments to, the class members. As of December 31, 2011, we had reasonably estimated the collective range of aggregate probable losses for these matters to be between $5.4 million and $7 million and, in accordance with GAAP, had accrued $5.4 million included in other current liabilities, the low end of the range. The determination of the probability of loss and the range of loss requires significant judgment. The range of loss has been estimated based on an analysis of numerous factors, including possible claim amounts within the class, whether the claim amounts are payable in-kindsuch proceedings or in cash, the date when the services subject to the class were sold, comparable class action settlement and redemption rate statistics, experience available from other companies for similar types of settlements, and the claims rates to date. Based on the claims received through May 14 and 15, 2012, the claims submission
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deadlines for these two matters, and claims processed to date, we have reasonably estimated the collective aggregate probable loss to be approximately $5.6 million ($2.9 million estimated for the California matter and $2.7 million estimated for the Missouri matter), resulting in an additional $0.2 million accrual during the six months ended June 30, 2012. In June 2012, we paid $1.9 million to the plaintiffs' attorneys related to the Missouri matter for their fees and expenses pursuant to the settlement agreement bringing the total accrued liability for both matters to $3.7 million as of June 30, 2012. The ultimate costs of these two matters are dependent on a number of factors, including the resolution of any appeals of the approved California settlement, and actual claims made by, and the resulting payments to, the class members. There is at least a reasonable possibility that we may incur an additional loss in excess of the amount accrued at June 30, 2012. We are unable to estimate the amount of additional losstime and expense that will be required to resolve these and other proceedings. If such litigation were to be determined adversely to our interests, or range of additional loss, if any, relatingwe were forced to these matters. If the actual paymentssettle such matters for thea significant amount, such resolutions or settlements are materially higher than the amount estimated by us, this difference could have a material adversenegative effect on our business, results of operations, financial condition and results of operations.
future prospects. We anticipate that we will continue to be a target for such lawsuits in the future. Any litigation to which we are a party may result in an onerous or unfavorable judgment that may not be reversed upon appeal, or we may decide to settle lawsuits on unfavorable terms. In addition, defending these claims is costly and can impose a significant burden on management and employees, and we may receive unfavorable preliminary or interim rulings in the course of litigation. Any such negative outcome could result in payments of substantial monetary damages or fines, injunctive relief, adverse effects on the market price of our common stock or changes to our products or business practices, and accordingly our business, brand and reputation, business, results of operations, financial condition, or future prospects could be materially and adversely affected.
We also may encounter future claims. For example, our U.K. subsidiary operates as an alternative business structure, or ABS, which allows corporate entities to become licensed providers of reserved legal activities in that jurisdiction. As a result, our U.K. subsidiary may be susceptible to potential claims from clients, such as breach of contract, product liability, negligence, or other claims. Any such claims could result in reputational damage or an adverse effect on our results of operations. In addition, while we believe this structure is legally permissible, it is generally untested in U.S. courts and we cannot assure you that it will insulate us from claims of CPL or UPL. Even though our U.K. subsidiary holds professional liability insurance, limiting its liability in accordance with its engagement letters with clients, such insurance and limitations in liability may not insure or protect against all potential claims or sufficiently indemnify us or our U.K. subsidiary for all liability that may be incurred. Any such liability, inclusive of the costs and expenses that may be incurred in defending any such claims, that exceeds the insurance coverage could have a material adverse effect on our business, results of operations, financial condition, or future prospects.
Furthermore, our employees may, from time to time, bring lawsuits against us regarding injuries, a hostile workplace, discrimination, wage and hour disputes, sexual harassment, or other employment issues. In recent years there has been an increase in the number of discrimination and harassment claims against employers generally. Coupled with the expansion of social media platforms, employer review websites and similar devices that allow individuals access to a broad audience, these claims have had a significant negative impact on some businesses. Certain companies that have faced employment- or harassment-related claims have had to terminate management or other key personnel and have suffered reputational harm that has negatively impacted their business, including their ability to attract and hire top talent. If we were to face any employment- or harassment-related claims, our business could be negatively affected in similar or other ways.
As we face increasing competition and gain an increasingly high profile, including in connection with our initial public offering, third parties may make intellectual property rights claims, file lawsuits or initiate regulatory actions or other proceedings against us. In addition, we may introduce new services, including in areas where we currently do not compete, which could increase our exposure to lawsuits, regulatory actions, or intellectual property claims. Defending against lawsuits, regulatory actions, and other intellectual property claims is costly and can place a significant burden on management and employees. If such claims are made against us, there can be no assurances that favorable final outcomes will be obtained and, if resolved adversely, may result in
changes to or discontinuance of some of our services, potential liabilities or additional costs, which could adversely affect our business, results of operations, financial condition and future prospects.
We are subject to risks related to accepting credit and debit card payments that may harm our business or expose us to additional costs and liabilities.
We accept payments from our customers primarily through credit and debit card transactions. Our customers generally pay for transactions in advance by credit or debit card except for certain services provided under installment plans where we allow customers to pay for their order in two or three equal payments. For credit and debit card payments, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide payment processing services, including the processing of our credit and debit card transactions, and to provide payment collection services, and it could interrupt our business if these third parties become unwilling or unable to provide these services to us, or if we are otherwise unable to collect payments. For example, if our processing vendors have problems with our billing software, or the billing software malfunctions, we could lose customers who subscribe to our legal plans, registered agent services and other subscription services, which could decrease our revenue. In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our subscribers’ credit cards on a timely basis or at all, our revenue could be adversely affected.
We are also subject to payment card industry rules, certification requirements and rules governing electronic funds transfer, any of which could change or be reinterpreted to make it more difficult for us to comply. Our failure to comply fully with these rules or requirements may subject us to fines, higher transaction fees, penalties, damages, and civil liability and may result in the loss of our ability to accept credit and debit card payments, which could have a material adverse effect on our business, results of operations, financial condition and future prospects.
Risks Relating to Our Financial Condition, Indebtedness and Capital Requirements
Our business is subject to seasonal fluctuations that may cause our results of operations to vary from period to period.
Many of the factors that contribute to seasonal fluctuations in our results of operations are out of our control. We have experienced, and expect that we will continue to experience, seasonality in the number of orders placed and when we enter into subscription agreements with customers. Customers tend to place a higher number of orders and enter into new or renewed subscriptions in the first quarter of the year, which is when we believe the demand for forming businesses is the highest. Further seasonality is reflected in the timing of our revenue recognition in the second quarter, when we typically recognize a high amount of revenue from orders placed in the first quarter but fulfilled in the second quarter. Also, we generally see demand for our services decline around the beginning of the third quarter as a result of summer vacations and in the last two months of the fourth quarter as a result of the winter holidays. Seasonality in our business may cause period-to-period fluctuations in certain of our operating results and financial metrics and thus limit our ability to predict our future results.
Our results of operations may not immediately reflect downturns or upturns in sales because we recognize revenue from our customers over the term of their paid subscriptions with us.
We recognize revenue from paid subscriptions to our services over the respective term of the subscription period. After a short introductory trial period, if any, most paying subscribers make a one-year subscription commitment, with the upcoming annual subscription fee paid upon subscribing. As a result, much of our revenue is generated from the recognition of deferred revenue relating to subscriptions entered into during previous quarters. Consequently, a shortfall in demand for our services or a decline in new or renewed subscriptions in any one quarter may have a small impact on the revenue that we recognize for that quarter but could negatively affect
our revenue in future quarters. Accordingly, the effect of significant downturns in sales and potential changes in our pricing policies or rate of customer expansion or retention may not be fully reflected in our results of operations until future periods. In addition, a significant majority of our costs are expensed as incurred, while revenue is recognized over the life of the subscription agreement. As a result, growth in the number of customers could continue to result in our recognition of higher costs and lower revenue in the earlier periods of our subscription agreements. Finally, our subscription-based revenue model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers and significant increases in the size of subscriptions with existing customers must be recognized over the applicable subscription term.
We track certain financial and operating metrics with internal systems and tools and do not independently verify such metrics. Certain of our financial and operating metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
We track certain financial and operating metrics, including key business metrics such as number of transactions, number of subscription units and average revenue per customer, with internal company data, systems and tools that are not independently verified by any third party. Our internal systems and tools have a number of limitations, and our methodologies for tracking these metrics may change over time, which could result in unexpected changes to our metrics, including the metrics we publicly disclose. If the internal systems and tools we use to track these metrics undercount or overcount performance or contain algorithmic or other technical errors, the data we report may not be accurate. While these numbers are based on what we believe to be reasonable estimates of our metrics for the applicable period of measurement, there are inherent challenges in measuring how our services are used across large populations globally. For example, there are customers who have multiple subscriptions, which we treat as multiple subscription units for purposes of calculating our subscription units.
In addition, limitations or errors with respect to how we measure data or with respect to the data that we measure may affect our understanding of certain details of our business, which could affect our long-term strategies. If our financial and operating metrics are not accurate representations of our business, or if we discover material inaccuracies in our metrics, our reputation may be harmed, and our business, results of operations, financial condition and future prospects could be adversely affected.
We are in the process of implementing an Enterprise Resource Planning, or ERP, software system and challenges with the implementation of the system may impact our business and operations.
We are in the process of implementing a company-wide ERP software program and the related infrastructure to support future growth and to integrate our processes. Our ERP software program has involved, and will continue to involve, substantial expenditures on system hardware and software, as well as design, development and implementation activities. The implementation of the ERP software program may prove to be more difficult, costly, or time consuming than expected, and it is possible that the system will not yield the benefits anticipated. Any disruptions, delays or deficiencies in the design and implementation of our new ERP software program could materially impact our operations and adversely affect our ability to process orders, fulfill contractual obligations or otherwise operate our business. Additionally, future cost estimates related to our new ERP software system are based on assumptions that are subject to wide variability.
We have identified material weaknesses in our internal control over financial reporting and, if we fail to remediate these material weaknesses, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence and the price of our common stock.
We have identified three material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that
there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
The material weaknesses we identified are listed below:
We did not maintain an effective control environment. Specifically, we did not maintain sufficient accounting resources commensurate with our structure and financial reporting requirements. This material weakness contributed to the additional material weaknesses below.
We did not design and maintain effective controls to address the initial application of complex accounting standards and accounting of non-routine, unusual or complex events and transactions.
We did not design and maintain effective controls over our financial statement close process. Specifically, we did not design and maintain effective controls over certain account analyses and account reconciliations.
These material weaknesses resulted in adjustments to our current and prior year financial statements primarily related to debt extinguishment costs, goodwill, revenue, accounts receivable, foreign exchange expense and deferred revenue, and could result in a misstatement of any account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be materiallyprevented or detected.
We are in the early stages of designing and implementing a plan to remediate the material weaknesses identified. Our plan includes:
hiring additional experienced accounting, financial reporting and internal control personnel and changing roles and responsibilities of our personnel as we transition to being a public company and are required to comply with Section 404 of the Sarbanes Oxley Act of 2002. We have recently hired additional resources and we are engaging with a third-party consulting firm to assist us with our formal internal control plan and provide staff augmentation of our internal audit function;
implementing controls to enhance our review of significant accounting transactions and other new technical accounting and financial reporting issues and preparing and reviewing accounting memoranda addressing these issues; and
implementing controls to enable an effective and timely review of account analyses and account reconciliations.
We cannot assure you that these measures will significantly improve or remediate the material weaknesses described above. The implementation of these remediation measures is in the early stages and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles and as a result the timing of when we will be able to fully remediate the material weaknesses is uncertain and we may not fully remediate these material weaknesses during 2021. If the steps we take do not remediate the material weaknesses in a timely manner, there could continue to be a reasonable possibility that these control deficiencies or others would result in a material misstatement of our annual or interim financial statements that would not be prevented or detected on a timely basis. This, in turn, could jeopardize our ability to comply with our reporting obligations, limit our ability to access the capital markets and adversely affected.impact our stock price.
We and our independent registered public accounting firm were not required to perform an evaluation of our internal control over financial reporting as of December 31, 2020 in accordance with the provisions of the Sarbanes-Oxley Act of 2002. Accordingly, we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses. Material weaknesses may still exist when we report on the effectiveness of our internal control over financial reporting as required by reporting requirements under Section 404 after the completion of this offering. If we are unable to successfully remediate the existing material
weakness in our internal control over financial reporting, the accuracy and timing of our financial reporting, and our stock price, may be adversely affected and we may be unable to maintain compliance with the applicable stock exchange listing requirements.
Implementing any appropriate changes to our internal controls may distract our officers and employees, entail substantial costs to modify our existing processes and take significant time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and harm our business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely basis may harm our stock price and make it more difficult for us to effectively market and sell our services to new and existing customers.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may decline.
As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning with our 2022 annual report on Form 10-K to be filed in 2023, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our first annual report on Form 10-K following the date on which we are no longer an “emerging growth company.”
We have commenced the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, and we may not be able to complete our evaluation, testing and any required remediation in a timely fashion. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404.
During the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be additional material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be negatively affected, and we could be subject to sanctions or investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could also require additional financial and management resources. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.
We have substantial indebtedness, which reduces our capability to withstand adverse developments or business conditions.
We have incurred substantial indebtedness. In November 2018, we entered into an amended first lien credit and guarantee agreement, or the 2018 Credit Agreement, with JPMorgan Chase Bank, N.A., an affiliate of one of
the underwriters in this offering, as administrative agent, and the other lenders party thereto, which provided for $575.0 million of loans, consisting a $535.0 million term loan, or the 2018 Term Loan, and $40.0 million of availability under a revolving credit facility, or the 2018 Revolving Facility. We refer to the 2018 Term Loan and 2018 Revolving Facility collectively as the 2018 Credit Facility. Pursuant to the 2018 Credit Agreement, debt under the 2018 Credit Facility is guaranteed by certain of our material wholly owned domestic restricted subsidiaries and is secured by substantially all of our and such subsidiaries’ assets and property, including our and such subsidiary’s intellectual property.
We expect to enter into an Amended and Restated Credit Agreement that will contain the New Credit Facility (as defined below) concurrently with the consummation of this offering. Loans under the New Credit Facility may be borrowed, at our option, at a rate equal to either (i) LIBOR or Euro LIBOR (or a comparable successor rate approved by the administrative agent and us), in each case, subject to a 0.00% floor, plus a margin of 2.00% per annum or (ii) the Base Rate, defined as the greatest of the administrative agent’s prime rate, the federal funds rate plus one-half of 1%, and the sum of one-month LIBOR plus 1.00% per annum, subject to a floor of 1.00%, plus a margin of 1.00% per annum. Each such margin may decrease depending on our total net first lien leverage ratio. The New Credit Facility has a commitment fee of 0.35% per annum, which steps down to 0.25% per annum upon achieving a certain total net first lien leverage ratio level. The New Credit Facility is due in full on maturity on .
At March 31, 2021, our total aggregate indebtedness under the 2018 Credit Agreement was $523.0. million of principal outstanding under the 2018 Term Loan and we had $40.0 million available for additional borrowings under 2018 Revolving Facility. We intend to use the net proceeds from this offering to repay $ million of the outstanding indebtedness under the 2018 Credit Facility, and we expect to have $ million outstanding under the 2018 Term Loan immediately after such repayment. Our payments on our outstanding indebtedness are significant in relation to our revenue and cash flow, which exposes us to significant risk in the event of downturns in our businesses (whether through competitive pressures or otherwise), our industry or the economy generally, since our cash flows would decrease but our required payments under our indebtedness would not.
Economic downturns may impact our ability to comply with the covenants and restrictions in the Amended and Restated Credit Agreement and may impact our ability to pay or refinance our indebtedness as they come due, which may (i) allow the lenders under the New Credit Facility to accelerate the debt under the New Credit Facility and/or seize our assets, including our intellectual property, (ii) allow third parties to terminate certain contracts to which we are a party or (iii) otherwise adversely affect our business, results of operations, financial condition and future prospects.
Despite our current indebtedness level, we and our restricted subsidiaries may be able to incur substantially more indebtedness, which could further exacerbate the risks associated with our substantial indebtedness.
Although the terms of the agreements governing our outstanding indebtedness contain restrictions on the incurrence of additional indebtedness, such restrictions are subject to a number of important exceptions and indebtedness incurred in compliance with such restrictions could be substantial. If we and our restricted subsidiaries incur significant additional indebtedness, the related risks that we face could increase. If new debt is added to our or our subsidiaries’ current debt levels, the related risks that we now face would increase, and we may not be able to meet all our debt obligations. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowings.”
The agreements governing our indebtedness require us to meet certain operating and financial covenants and place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.
The Amended and Restated Credit Agreement that we expect to enter into concurrently with the consummation of this offering will contain affirmative and negative covenants, indemnification provisions and events of default. The affirmative covenants include, among others, administrative, reporting and legal covenants, in each case subject to certain exceptions. The negative covenants include, among others, limitations on our and certain of our subsidiaries’ abilities to, in each case subject to certain exceptions:
incur additional indebtedness and guarantee indebtedness;
pay dividends and distributions or repurchase capital stock;
merge, liquidate and make asset sales;
change lines of business;
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 Amended and Restated Credit Agreement will also contain a financial covenant that requires us to maintain a total net first lien leverage ratio of 4.50:1.00 on the last day of any fiscal quarter during which our New Credit Facility usage exceeds 35% of the New Credit Facility capacity. As a result of the restrictions described above, we will be limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders or amend the covenants.
Our ability to comply with the covenants and restrictions contained in the Amended and Restated Credit Agreement may be affected by economic, financial and industry conditions beyond our control. The restrictions in the Amended and Restated Credit Agreement may prevent us from taking actions that we believe would be in the best interests of our business and may make it difficult for us to execute our business strategy successfully or effectively compete with companies that are not similarly restricted. Even if the Amended and Restated Credit Agreement is terminated, any additional debt that we incur in the future could subject us to similar or additional covenants.
The Amended and Restated Credit Agreement will include customary events of default, including: failure to pay principal, interest or certain other amounts when due; material inaccuracy of representations and warranties; violation of covenants; specified cross-default and cross-acceleration to other material indebtedness; certain bankruptcy and insolvency events; certain events relating to ERISA; certain undischarged judgments; material invalidity of guarantees or grant of security interest; and change of control, in certain cases subject to certain thresholds and grace periods.
Our failure to comply with the restrictive covenants described above that we expect to enter intoconcurrently with the consummation of this offering as well as other terms of our indebtedness could result in an
event of default, which, if not cured or waived, could result in the lenders declaring all obligations, together with accrued and unpaid interest, immediately due and payable and take control of the collateral, potentially requiring us to renegotiate the Amended and Restated Credit Agreement on terms less favorable to us. If we are forced to refinance these borrowings on less favorable terms or are unable to refinance these borrowings, our business, results of operations, financial condition and future prospects could be adversely affected. In addition, such a default or acceleration may result in the acceleration of any future indebtedness or result in the termination of certain other contracts with third parties, in each case to which a cross-acceleration or cross-default provision applies. If we are unable to repay our indebtedness, lenders having secured obligations, such as the lenders under the Amended and Restated Credit Agreement, could proceed against the collateral securing the indebtedness. In any such case, we may be unable to borrow under our New Credit Facility and may not be able to repay the amounts due under our New Credit Facility. This could have serious consequences to our business, results of operations, financial condition and future prospects and could cause us to become bankrupt or insolvent.
When LIBOR is discontinued, borrowing costs under the Amended and Restated Credit Agreement or agreements governing any of our future indebtedness will be calculated using another reference rate, which may cause substantial uncertainty as to the effect of such replacement on our borrowing costs
On November 30, 2020, the Chief Executive of the United Kingdom Financial Conduct Authority, or FCA, which regulates LIBOR, announced that the FCA intends to cease the publication of one-week and two-month LIBOR by the end of 2021 and all other LIBOR tenors (overnight, one-month, three-month, six-month and 12-month) on June 30, 2023. In addition, the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee consisting of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate, or SOFR, a new index calculated by short-term repurchase agreements, backed by Treasury securities. Although there have been a few transactions utilizing SOFR and similar rates, it is unknown whether these alternative reference rates will attain market acceptance as replacements for LIBOR. LIBOR is used as a benchmark reference throughout the Amended and Restated Credit Agreement. While the Amended and Restated Credit Agreement provides fallback language in the event LIBOR ceases to be published, including the possibility of designation of a replacement rate by the administrative agent under the Amended and Restated Credit Agreement, there is substantial uncertainty as to the effect of such replacement on our borrowing costs. In addition, in such event, we may need to renegotiate the Amended and Restated Credit Agreement in order to determine the interest rate to replace LIBOR with the new standard that is established. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our borrowing costs or the effectiveness of certain related transactions such as hedges cannot yet be determined.
We are subject to fluctuations in interest rates.
Borrowings under the New Credit Facility that we expect to enter intoconcurrently with the consummation of this offering are subject to variable rates of interest and expose us to interest rate risk. In April 2019, we entered into interest rate swap agreements for an aggregate notional amount of $131.9 million to swap our variable interest rate on our 2018 Term Loan for a fixed interest rate of 2.2745%. The interest rate swaps were to expire in March 2022. In March 2020, in response to a drop in LIBOR, we modified our interest rate swap agreements to extend the terms to March 2024 and also lower the fixed interest rate from 2.2745% to a revised average rate of 1.6786%. Our obligations under these interest rate swaps (and any other derivative transaction entered into with the administrative agent, an arranger, a lender or any affiliate thereof under the 2018 Credit Facility) are secured by substantially all of our and our subsidiaries’ assets and property, including our and our subsidiaries’ intellectual property on a pari passu basis with the 2018 Credit Facility and the New Credit Facility.
We may decide to terminate or modify the above derivative financial instruments or enter into additional derivative financial instruments in the future. If we do, we may not maintain interest rate swaps, caps or other applicable financial instruments with respect to all of our indebtedness and any financial instrument we enter into may not fully mitigate our interest rate risk, may prove disadvantageous or may create additional risks.
Certain of our indebtedness may be denominated in foreign currencies, which subjects us to foreign exchange risk, which could cause our debt service obligations to increase significantly.
The New Credit Facility also permits borrowings denominated in Euros, GBP and other alternative currencies that may be approved by the administrative agent and revolving lenders. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowings.” Such non-U.S. dollar-denominated debt may not necessarily correspond to the cash flow we generate in such currencies. Sharp changes in the exchange rates between the currencies in which we borrow and the currencies in which we generate cash flow could adversely affect us. In the future, we may enter into contractual arrangements designed to hedge a portion of the foreign currency exchange risk associated with any non-U.S. dollar-denominated debt. If these hedging arrangements are unsuccessful, we may experience an adverse effect on our business, results of operations, financial condition and future prospects.
Changes in tax laws or tax rulings could affect our financial condition, results of operations, and cash flows.
The tax regimes we are subject to or operate under, including income and non-income taxes, are unsettled and may be subject to significant change. Changes in tax laws, regulations, or rulings, or changes in interpretations of existing laws and regulations, could affect our financial condition, results of operations and cash flows. For example, the 2017 Tax Cuts and Jobs Act, or the Tax Act, made broad and complex changes to the U.S. tax code, including changes to U.S. federal tax rates, additional limitations on the deductibility of interest, both positive and negative changes to the utilization of future net operating loss, or NOL, carryforwards, allowing for the expensing of certain capital expenditures, and putting into effect the migration from a “worldwide” system of taxation to a largely territorial system. The issuance of additional regulatory or accounting guidance related to the Tax Act could affect our tax obligations and effective tax rate in the period issued. In addition, many countries in Europe, as well as a number of other countries and organizations, have recently proposed or recommended changes to existing tax laws or have enacted new laws that could significantly increase our tax obligations in the countries where we do business or require us to change the manner in which we operate our business.
The Organization for Economic Cooperation and Development has been working on a Base Erosion and Profit Shifting Project, and issued a report in 2015, an interim report in 2018, and is expected to continue to issue guidelines and proposals that may change various aspects of the existing framework under which our tax obligations are determined in many of the countries in which we do business. Similarly, the European Commission and several countries have issued proposals that would change various aspects of the current tax framework under which we are taxed. These proposals include changes to the existing framework to calculate income tax, as well as proposals to change or impose new types of non-income taxes, including taxes based on a percentage of revenue. For example, several countries have proposed or enacted taxes applicable to digital services, which could apply to our business.
Our ability to use our net operating loss carryforwards may be limited.
We have incurred substantial losses during our history and may not be able to maintain profitability. Unused U.S. federal NOLs for taxable years beginning before January 1, 2018, may be carried forward to offset future taxable income, if any, until such unused NOLs expire. Under legislation enacted in 2017, informally titled the Tax Act, as modified by legislation enacted on March 27, 2020, entitled the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, U.S. federal NOLs incurred in taxable years beginning after December 31, 2017, can be carried forward indefinitely, but the deductibility of such U.S. federal NOLs in taxable years beginning after December 31, 2020 is limited to 80% of taxable income. It is uncertain if and to what extent various states will change their tax laws to conform to the Tax Act or the CARES Act.
At December 31, 2020, we had U.S. federal and state NOL carryforwards of $11.7 million and $49.8 million, respectively. Of the $11.7 million U.S. federal NOL carryforwards, $7.4 million may be carried forward indefinitely with utilization limited to 80% of taxable income. The remaining $4.3 million will begin to expire in 2031. The state NOL carryforwards begin to expire in 2022.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50 percentage point change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards to offset its post- change income or taxes may be limited. We have completed a Section 382 study and have determined that none of our net operating losses will expire solely due to Section 382 limitations. However, we may experience ownership changes as a result of our initial public offering or in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. This could limit the amount of NOLs that we can utilize annually to offset future taxable income or tax liabilities. Subsequent ownership changes and changes to the U.S. tax rules in respect of the utilization of NOLs may further affect the limitation in future years. 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 permanently increase state taxes owed.
Changes in our effective tax rate or tax liability may have an adverse effect on our results of operations.
We are subject to income taxes in the United States and various foreign jurisdictions. The determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain. We believe that our provision for income taxes is reasonable, but the ultimate tax outcome may differ from the amounts recorded in our consolidated financial statements and may affect our financial results in the period or periods in which such outcome is determined.
Our effective tax rate could increase due to several factors, including:
changes in the relative amounts of income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates;
changes in tax laws, tax treaties, and regulations or the interpretation of them, including the Tax Act and the CARES Act;
changes to our assessment about our ability to realize our deferred tax assets that are based on estimates of our future results, the prudence and feasibility of possible tax planning strategies, and the economic and political environments in which we do business;
the outcome of current and future tax audits, examinations, or administrative appeals; and
the effects of acquisitions.
Any of these developments could adversely affect our results of operations.
Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition or results of operations.
New income, sales, use, or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could adversely affect our business operations and financial performance. Further, existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us. For example, the Tax Act enacted many significant changes to the U.S. tax laws. Future guidance from the Internal Revenue Service and other tax authorities with respect to the Tax Act may affect us, and certain aspects of the Tax Act could be repealed or modified in future legislation. For example, the CARES Act modified certain provisions of the Tax Act. In addition, it is uncertain if and to what extent various states will conform to the Tax Act, the CARES Act, or any newly enacted federal tax legislation. Changes in corporate tax rates, the realization of net deferred tax assets relating to our operations, the taxation of foreign earnings, and the deductibility of expenses under the Tax Act or future reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges, and could increase our future U.S. tax expense.
Risks Relating to Legal, Compliance and Regulatory Matters
Our business and services subject us to complex and evolving U.S. and foreign laws and regulations regarding the unauthorized practice of law, legal document processing, legal plans, and other related matters.
Our business involves providing services that meet the legal and accounting needs of our customers and, as a result, is subject to a variety of complex and evolving U.S. and foreign laws and regulations, including the following:
Our business model includes the provision of services that represent an alternative to traditional legal services, which subjects us to allegations of UPL. UPL generally refers to an entity or person giving legal advice who is not licensed to practice law or advertising their services as the practice of law. However, laws and regulations defining UPL, and the governing bodies that enforce UPL rules, differ among the various jurisdictions in which we operate and are often vague.
In the United States, we are unable to hire attorneys as employees to provide legal advice directly to our customers, because we do not meet certain regulatory requirements such as being exclusively owned by licensed attorneys. In addition, we are currently unable to acquire a license to practice law in the United States. Laws, regulations, and professional responsibility rules impose limitations on business transactions between attorneys and persons who are not licensed attorneys, including those related to the ethics of attorney fee-splitting and CPL. This position can be contrasted with that in the United Kingdom, where we operate an ABS, which allows certain corporate entities to become licensed providers of reserved legal activities in that jurisdiction, pursuant to the U.K. Legal Services Act 2007, or the LSA. As the regulatory environment in the United States continues to evolve, we may consider implementing alternative structures to conduct our business in the United States. For example, the Arizona Supreme Court recently approved regulatory reform that will permit nonlawyers to co-own law firms and other legal service operations. While the structure would be legally permissible in Arizona, we cannot assure you that it will insulate us from claims of CPL or UPL in other jurisdictions.
Regulation of legal document processing services and registered agent services varies among the jurisdictions in which we conduct business.
Regulation of our legal plans varies considerably among the insurance departments, bar associations and attorneys general of each U.S. state. In addition, some U.S. states and federal agencies may seek to regulate our legal plans or other subscription plans, such as Business Advantage Plus, as insurance, legal expense insurance, specialized legal service products or financial planning.
Our business operations also subject us to laws and regulations relating to general business practices, and the manner in which we offer our services to customers subjects us to various consumer laws and regulations, including false advertising, payment laws, telephone sales, email marketing, automatic contract or subscription renewal, and deceptive trade practices.
The scope of these laws and regulations are often vague and broad, and their applications and interpretations are often uncertain and conflicting. Compliance with these disparate laws and regulations requires us to structure our business and services differently in certain jurisdictions. Additionally, these laws and regulations are evolving, and changes in such laws could require us to significantly change the ways in we structure our business and services. These laws and regulations could also make it more difficult for us to convert our transactional customers to subscribers or attract new subscribers to grow our subscription services. We dedicate significant management time and expense to dealing with these issues and expect that these issues will continue to be a significant focus as we expand into other services and jurisdictions.
In addition, any failure or perceived failure by us to comply with applicable laws and regulations may subject us to regulatory inquiries, claims, suits and prosecutions. For example, in February 2020, a complaint was filed in California against us alleging violations of the Florida Security of Communications Act for violations of privacy based on a claim of wiretapping. In May 2021, the plaintiffs of this class action complaint filed a notice
of dismissal without prejudice. However, these plaintiffs could refile in court or arbitration and may be the subject of similar complaints in the future. We have also incurred in the past, and expect to incur in the future, costs associated with responding to, defending, resolving, and/or settling proceedings, particularly those related to UPL, competitor claims and the provision of our services more generally. We can give no assurance that we will prevail in such regulatory inquiries, claims, suits and prosecutions on commercially reasonable terms or at all. Responding to, defending and/or settling regulatory inquiries, claims, suits and prosecutions may be time-consuming and divert management and financial resources or have other adverse effects on our business. A negative outcome in any of these proceedings may result in claims, changes to or discontinuance of some of our services, potential liabilities or additional costs that could have a material adverse effect on our business, results of operations, financial condition, future prospects and brand.
Our U.K. subsidiary, being a “licensed body” law firm, is subject to restrictions under the LSA.
Under the LSA, there are restrictions on the holding of “restricted interests” in “licensed body” law firms. A restricted interest for the purpose of these restrictions is an interest of 10% or more in the issued share capital of the licensed body or the parent company of such licensed body. As our wholly owned U.K. subsidiary is a licensed body for the purposes of the LSA, the restrictions referred to above will apply to any holder(s) of 10% or more of our common stock following the completion of this offering.
The consent of the U.K. Solicitors Regulatory Authority, or the SRA, is required should any person who is a “non-deemed approved lawyer” seek to acquire a restricted interest. It is a criminal offense in the United Kingdom for any “non-deemed approved lawyer” to acquire a restricted interest without having given prior notification to the SRA or, having given prior notification to the SRA, to acquire a restricted interest without having obtaining the SRA’s consent. The SRA may attach conditions to any consent that it may give in respect of the holding of a restricted interest. However, should any stockholder wish to consider owning a stake in our common stock in excess of this threshold, it is possible for the SRA to be approached and grant pre-approval in advance of any such acquisition.
The SRA can force any person who acquires a restricted interest in contravention of the applicable rules to divest its share ownership in the licensed body (or its parent company). The SRA also has the ability to suspend or revoke the relevant entity’s licensed body status in respect of any such contravention. Any suspension or revocation of our U.K. subsidiary’s licensed body status would have a serious detrimental impact on our business, and, in such circumstances, we would seek to collaborate with the SRA to minimize any resultant business disruption.
If the independent professionals who participate in our or our partner’s networks are characterized as employees, we would be subject to employment and withholding liabilities and regulatory risks.
We structure our relationships with the independent attorneys and independent accountants who participate in our and our partner’s networks in a manner that we believe results in an independent contractor relationship, not an employee relationship. On the other hand, our LZ Tax offering is fulfilled by our own employee accountants and tax professionals. An independent contractor is generally distinguished from an employee by his or her degree of autonomy and independence in providing services. A high degree of autonomy and independence is generally indicative of a contractor relationship, while a high degree of control is generally indicative of an employment relationship. Although we believe that the independent attorneys and independent accountants who participate in our and our partner’s networks are properly characterized as independent contractors, tax or other regulatory authorities may in the future challenge our characterization of these relationships. If such regulatory authorities or state, federal or foreign courts were to determine that these attorneys or accountants are employees, and not independent contractors, we would be required to withhold income taxes, to withhold and pay social security, Medicare and similar taxes, to pay unemployment and other related payroll taxes and could face allegations of UPL or CPL. We would also be liable for unpaid past taxes and subject to penalties. As a result, any determination that these independent attorneys or independent accountants are our employees could have a material adverse effect on our business, results of operations, financial condition and future prospects.
We are subject to stringent and changing laws, regulations and standards, and contractual obligations related to data privacy and security. The actual or perceived failure to comply with applicable data protection, privacy, and security laws, regulations, standards, and other requirements could adversely affect our business, results of operations, and financial conditions.
We are subject to numerous foreign and domestic laws, regulations, and standards regarding privacy and data security governing the personal information and other data that we may collect, store, use, or process. Privacy has become a significant issue in the United States. The regulatory framework for privacy issues is rapidly evolving and is likely to remain uncertain for the foreseeable future. Many government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use, storage, destruction, and disclosure of personal information and breach notification procedures. We are also required to comply with laws, rules and regulations relating to data security. Interpretation of these laws, rules and regulations in applicable jurisdictions is ongoing and cannot be fully determined at this time.
In June 2018, California adopted the California Consumer Privacy Act of 2018, or CCPA, which took effect on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA also provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase litigation involving misuse of personal information of California residents. The CCPA may increase our compliance costs and potential liability. In addition, California voters recently approved the California Privacy Rights Act of 2020, or CPRA, which goes into effect on January 1, 2023. It is expected that the CPRA would, among other things, give California residents the ability to limit the use of their personal information, further restrict the use of cross-contextual advertising, establish restrictions on the retention of personal information, expand the types of data breaches subject to the CCPA’s private right of action, provide for increased penalties for CPRA violations concerning California residents under the age of 16, and establish a new California Privacy Protection Agency to implement and enforce the new law. Some observers have noted that the CCPA and CPRA could mark the beginning of a trend of states adopting more stringent privacy legislation in the United States, which could further increase our compliance costs, potential liability and adversely affect our business.
The global data protection landscape is also rapidly evolving, and we expect that there will continue to be new and proposed laws, regulations, and industry standards concerning privacy, data protection, and information security, and we cannot yet determine the impact that such future laws, regulations and standards may have on our business. For example, in May 2018, the General Data Protection Regulation, or the GDPR, went into effect in the EU. The GDPR imposes stringent data protection requirements and to date, has increased compliance burdens on us, including by mandating burdensome documentation requirements and granting certain rights to individuals to control how we collect, use, disclose, retain and process information about them. The GDPR also provides for more robust regulatory enforcement and greater penalties for noncompliance than previous data protection laws, including fines of up to €20 million or 4% of global annual revenue of any noncompliant company for the preceding financial year, whichever is greater.
European data protection laws including the GDPR also generally prohibit the transfer of personal information from Europe to the United States and most other countries unless the parties to the transfer have implemented specific safeguards to protect the transferred personal information. The Court of Justice of the European Union, or CJEU, recently raised questions about whether the European Commission’s Standard Contractual Clauses, one of the primary mechanisms used by U.S. companies to import personal information from Europe, complies with the GDPR. While the CJEU upheld the validity of Standard Contractual Clauses, the CJEU ruled that the underlying data transfers must be assessed on a case-by-case basis by the data controller to determine whether the personal information will be adequately protect protected. Further, the European Commission recently proposed updates to the Standard Contractual Clauses. At present, there are few if any viable alternatives to the Standard Contractual Clauses and, therefore, there is uncertainty regarding how to ensure that transfers of personal information from Europe to the United States comply with the GDPR. As such, any transfers by us, or
our websitethird-party service providers, of personal information from computer malware, viruses, hacking, phishingEurope may not comply with European data protection laws; may increase our exposure to the GDPR’s heightened sanctions for violations of its cross-border data transfer restrictions; and denial-of-service attacks,may reduce demand for our services from companies subject to European data protection laws. Loss of our ability to transfer personal information from Europe may also require us to increase our data processing capabilities in those jurisdictions at significant expense.
Further, the United Kingdom’s decision to leave the European Union, often referred to as Brexit, has created uncertainty with regard to the regulation of data protection in the United Kingdom, including with respect to whether laws or regulations will apply to us consistent with the GDPR in the future and how data transfers to and from the United Kingdom will be regulated. Following December 31, 2020, and the expiry of transitional arrangements between the United Kingdom and European Union, the data protection obligations of the GDPR continue to apply to U.K.-related processing of personal data in substantially unvaried form under the so-called U.K. GDPR (i.e., the GDPR as it continues to form part of U.K. law by virtue of section 3 of the EU (Withdrawal) Act 2018, as amended). However, going forward, there is increasing risk for divergence in application, interpretation and enforcement of the data protection laws as between the United Kingdom and European Economic Area, or EEA. Furthermore, the relationship between the United Kingdom and the EEA in relation to certain aspects of data protection law remains uncertain. For example, it is unclear whether transfers of personal data from the EEA to the United Kingdom will be permitted to take place on the basis of a future adequacy decision of the European Commission, or whether a transfer mechanism such as the SCCs will be required. Under the post-Brexit Trade and Cooperation Agreement between the European Union and the United Kingdom, the United Kingdom and European Union have agreed that transfers of personal data to the U.K. from EEA member states will not be treated as ‘restricted transfers’ to a non-EEA country for a period of up to four months from January 1, 2021, plus a potential further two months extension, or the “Extended Adequacy Assessment Period.” Although the current maximum duration of the Extended Adequacy Assessment Period is six months, it may end sooner, for example, in the event that the European Commission adopts an adequacy decision in respect of the United Kingdom, or the United Kingdom amends the U.K. GDPR and/or makes certain changes regarding data transfers under the U.K. GDPR/Data Protection Act 2018 without the consent of the European Union (unless those amendments or decisions are made simply to keep relevant U.K. laws aligned with the European Union’s data protection regime). If the European Commission does not adopt an adequacy decision in respect of the United Kingdom prior to the expiry of the Extended Adequacy Assessment Period, from that point onwards the United Kingdom will be an inadequate third country under the GDPR and transfers of personal data from the EEA to the United Kingdom will require a ‘transfer mechanism’ such as the Standard Contractual Clauses.
The type of challenges we face in Europe will likely also arise in other jurisdictions that adopt laws similar in construction to the GDPR or regulatory frameworks of equivalent complexity. For example, Brazil enacted the General Data Protection Law, New Zealand enacted the New Zealand Privacy Act, China released its draft Personal Information Protection Law, and Canada introduced the Digital Charter Implementation Act.
Compliance with these and any other applicable privacy and data security laws, including the Gramm-Leach-Bliley Act and Code Section 7216, and regulations is a rigorous and time-intensive process, and we may be required to put in place additional mechanisms to ensure compliance with the new data protection rules. Any failure or perceived failure by us or third parties working on our behalf to comply with applicable laws and regulations, any privacy and data security obligations pursuant to contract, our stated privacy or security policies, or obligations to customers or other third parties may result in governmental enforcement actions (including fines, penalties, judgments, settlements, imprisonment of company officials and public censure), civil claims, litigation, damage to our brand and reputation and loss of goodwill (both in relation to existing customers and prospective customers), any of which could have a material adverse effect on our business, operations and financial performance.
Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, which could, if widely adopted, result in the use of third-party cookies and other methods
of online tracking becoming significantly less effective. The regulation of the use of these cookies and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ such practices could adversely affect our business, financial condition, and results of operations.
Breaches and other types of security incidents of our networks or systems, or those of our third-party service providers, could negatively impact our ability to conduct our business, our brand and reputation, our ability to retain existing customers and attract new customers, could be harmed.
Computer malware, viruses, hacking, phishing and denial-of-service attacks have become more prevalent in the online services industry. Denial-of-service attacks, a type of security attack which affects access to and speed of operation of our website, have occurred on our systems in the past, and may occur on our systems in the future. We have experienced two instances of service interruption as a result of denial-of-service attacks in the past. Both instances caused our websitecause us to be intermittently unavailable for several hours. Any failure to maintain performance, reliability, security,incur significant liabilities and availability of our interactive legal documents services and online technology platform to the satisfaction of our customers may harm our brand and reputation and our ability to retain existing customers and attract new customers, which could adversely affect our business, results of operations, financial condition, and future prospects.
We collect, use, store, transmit and process data and information about our customers, employees and others, some of which may be sensitive, personal, or confidential. Any actual or perceived breach of our security measures or those of our third-party service providers could adversely affect our business, operations and future prospects. A third party that is able to circumvent our security measures or those of our third-party service providers may access, misappropriate, delete, alter, publish or modify this information, which could cause interruptions in our business and operations, fraud or loss to third parties, regulatory enforcement actions, litigation, indemnity obligations and other possible liabilities, as well as negative publicity. Widespread negative publicity may also result from real, threatened or perceived security compromises affecting our industry, competitors, and customers. Concerns regarding data privacy and security could cause some of our customers to stop using our services and fail to renew their subscriptions. This discontinuance in use and failure to renew could harm our business, results of operations, financial condition.condition, and future prospects.
Our internal computer systems, cloud-based computing services, and those of our current and any future third-party service providers are vulnerable to interruption. Cyberattacks and other malicious internet-based activity, such as computer malware, hacking, and phishing attempts, continue to increase. In addition to traditional computer “hackers,” malicious code (such as viruses, worms and ransomware), social engineering, cyber extortion and personnel theft or misuse, sophisticated nation-state and nation-state supported actors now engage in similar attacks (including advanced persistent threat intrusions). Due to the COVID-19 pandemic, our employees are temporarily working remotely, which may pose additional data security risks. We may also be the subject of denial of service attacks, server malfunction, software or hardware failures, loss of data or other computer assets, adware or other similar issues. While we have security measures in place designed to protect customer information and prevent data loss and other security breaches, we cannot guarantee that our, or our third-party service providers’ security measures will be sufficient to protect against unauthorized access to, or other compromise of, personal information confidential or proprietary information. The techniques used to sabotage or to obtain unauthorized access to our platform, systems, networks and/or physical facilities in which data is stored or through which data is transmitted change frequently, and we have not always been able in the past and may be unable in the future to anticipate such techniques or implement adequate preventative measures or stop security breaches that may arise from such techniques. As a result, our safeguards and preventive measures may not be adequate to prevent current or future cyberattacks and security incidents, including security breaches that may remain undetected for extended periods of time, which can substantially increase the potential for a material adverse impact resulting from the breach.
We are required to comply with laws, rules and regulations that require us to maintain the security of personal information. We may have contractual and other legal obligations to notify relevant stakeholders of security breaches. We operate in an industry that is prone to cyberattacks. Failure to prevent or mitigate cyberattacks could result in the unauthorized access to such data, including personal information. Most jurisdictions have enacted laws requiring companies to notify individuals, regulatory authorities, and others of security breaches involving certain types of data. In addition, our agreements with certain customers and partners may require us to notify them in the event of a security breach. We have experienced and may in the future experience personal information security breaches as to which we are legally required to notify individuals, customers, regulators, the media and others. Such disclosures are costly, could lead to negative publicity, may cause our customers to lose confidence in the effectiveness of our security measures and not use our services, and require us to expend significant capital and other resources to respond to and/or alleviate problems caused by the
actual or perceived security breach. In addition, the costs to respond to a cybersecurity event or to mitigate any security vulnerabilities that may be identified could be significant, including costs for remediating the effects of such an event, paying a ransom, restoring data from backups, and conducting data analysis to determine what data may have been affected by the breach. In addition, our efforts to contain or remediate a security breach or any vulnerability exploited to cause a breach may be unsuccessful, and efforts and any related failures to contain or remediate them could result in interruptions, delays, loss in customer trust, harm to our reputation, and increases to our insurance coverage.
We may not have adequate insurance coverage for security incidents or breaches, including fines, judgments, settlements, penalties, costs, attorney fees and other impacts that arise out of incidents or breaches. Although we maintain cyber liability insurance, we cannot assure you that such insurance coverage will be adequate to cover liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse effect on our business. Our risks are likely to increase as we continue to expand, grow our customer base, and process, store, and transmit increasingly large amounts of confidential, proprietary and sensitive data.
We are subject to anti-corruption, anti-bribery, anti-money laundering, and similar laws, and non-compliance with such laws can subject us to criminal and/or civil liability and harm our business.
We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the U.K. Bribery Act, and other anti-bribery and anti-money laundering laws in the countries in which we conduct activities. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies and their employees and third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. In addition, we or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities.
While we have policies and procedures to address compliance with such anti-corruption laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.
Detecting, investigating and resolving actual or alleged violations of anti-corruption and anti-money laundering laws can require a significant diversion of time, resources, and attention from senior management. In addition, noncompliance with anti-corruption, anti-bribery, or anti-money-laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, suspension and/or debarment from contracting with certain persons, the loss of export privileges, reputational harm, adverse media coverage, and other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations, financial condition and future prospects could be materially harmed. In addition, responding to any action will likely result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees. Enforcement actions and sanctions could further harm our business, results of operations, financial condition and future prospects.
Risks Relating to Intellectual Property
Our use of open source software could negatively affect our proprietary technologies and our ability to offer and sell subscriptions to our products and could subject us to possible litigation.
Certain of the technologies we currently use incorporate open source software, or OSS, and we expect to continue to utilize OSS in the future. OSS is licensed by its authors under a variety of license types. Some of these licenses (often called “hereditary” or “viral” licenses) contain requirements that could cause us to make available the source code of the modifications or derivative works that we create based upon the licensed OSS, and that we license such modifications or derivative works under the terms of a particular open source license granting third parties certain rights of further use. By the terms of such open source licenses, we also could be required to release the source code of our proprietary (closed-source) software, and to make our proprietary software available under open source licenses, if we combine and/or distribute our proprietary software with such open source software in a manner that triggers the obligation of the license. Although we monitor our use of open source software in a manner designed to avoid such risks, we cannot be sure that all OSS and their associated licenses are reviewed prior to use in our proprietary software, that our programmers have not incorporated open source software into our proprietary software in a manner triggering such adverse licensing obligations, or that they will not do so in the future. Additionally, the terms of many open source licenses have not been interpreted by U.S. or other courts, and these licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our products. We may face claims from others claiming ownership of open source software or patents reading on that software, rights to our intellectual property or breach of open source license terms, including a demand for release of material portions of our source code or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation, which could be costly to defend, require us to purchase a costly license (such as a commercial version of an open source license), require us to establish additional specific open source compliance procedures, or require us to devote additional research and development resources to remove open source elements from or otherwise change our solutions, any of which would have a negative effect on our business, results of operations, financial condition and future prospects. Any of the foregoing could disrupt and harm our business, results of operations, financial condition and future prospects.
If we are unable to adequately protect our intellectual property to prevent unauthorized use or appropriation, the value of our brand and other intangible assets, as well as our business, results of operations, financial condition and future prospects may be adversely affected.
We rely and expect to continue to rely on confidentiality and license agreements with our employees, consultants and third parties, and on trademark, copyright, trade secret, and domain name protection laws, to protect our proprietary rights. In the United States and internationally, we have filed applications to protect elements of our intellectual property. We have no issued patents, orand have 17 U.S. trademark registrations and 17 pending patent applications.U.S. trademark applications, and additional trademark registrations outside of the United States. Third parties may knowingly or unknowingly infringe on or challenge our proprietary rights, and pending and future trademark or other intellectual property applications may not be approved. In addition, effective intellectual property protection may not be available in every country in which we operate or intend to operate our business. In these cases, we may expend significant time and expense to prevent infringement and enforce our rights. We cannot assure you that others will not offer services or concepts that are substantially similar to ours and compete with our business. If the protection of our proprietary rights is inadequate to prevent unauthorized use or appropriation, the value of our brand and other
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intangible assets may be diminished and competitors may be able to more effectively mimic our services, business practices or operations, which may have an adverse effect on our business, results of operations, financial condition and future prospects.
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and proprietary information.
We have devoted substantial resources to the development of our intellectual property and proprietary rights. In order to protect our intellectual property and proprietary rights, we rely in part on confidentiality agreements with our employees, licensees, independent contractors and other advisors. These agreements may
not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the future become partyevent of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to lawsuitsenforce and other intellectual propertydetermine the scope of our proprietary rights, claims that are expensive and time consuming, and, if resolved adversely,failure to obtain or maintain trade secret protection could adversely affect our competitive business results of operations and financial condition.position.
As we face increasing competition and gain an increasingly high profile, including in connection with our initial public offering, third parties may make intellectual property claims, file lawsuits or initiate other proceedings against us. In addition, we may introduce new services, including in areas where we currently do not compete, which could increase our exposure to intellectual property claims. Defending against lawsuits and other intellectual property claims is costly and can place a significant burden on management and employees. If claims are made against us, there can be no assurances that favorable final outcomes will be obtained and, if resolved adversely, may result in changes to or discontinuance of some of our services, potential liabilities or additional costs which could adversely affect our business, results of operations and financial condition.
We are subject to risks related to accepting credit and debit card payments that may harm our business or expose us to additional costs and liabilities.
We accept payments from our customers primarily through credit and debit card transactions. For credit and debit card payments, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on a third party to provide payment processing services, including the processing of our credit and debit card transactions, and it could interrupt our business if this third party becomes unwilling or unable to provide these services to us. If our processing vendor has problems with our billing software, or the billing software malfunctions, we could lose customers who subscribe to our legal plans, registered agent services and other subscription services, which could decrease our revenues. In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our subscribers' credit cards on a timely basis or at all, our revenues could be adversely affected.
We are also subject to payment card industry rules, certification requirements and rules governing electronic funds transfer, any of which could change or be reinterpreted to make it more difficult for us to comply. Our failure to comply fully with these rules or requirements may subject us to fines, higher transaction fees, penalties, damages, and civil liability and may result in the loss of our ability to accept credit and debit card payments, which could have a material adverse effect on our business, results of operations and financial condition.
As we expand our business to jurisdictions outside the United States, we may be required to explore and adopt new payment methods and processes. This may require the development of software or application for licenses for billing and collection purposes. Our failure to timely and efficiently adopt those new methods and implement new processes could adversely affect our business, results of operations, financial condition and future prospects.
We are an "emerging growth company," and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of
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holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common stock held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail our self of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may decline.
As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning with our 2013 annual report on Form 10-K to be filed in 2014, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly, and complicated. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K following the date on which we are no longer an "emerging growth company," which may be up to five full years following the date of this offering. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management resources.
The requirements of being a public company may strain our resources and divert management's attention.
As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the New York Stock Exchange, or the NYSE, and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an "emerging growth company." The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results.
As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our
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business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.
We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.
Risks Relating to Ownership of Our Common Stock and this Offering
The market price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price, if at all.
The initial public offering price for our common stock will be determined through negotiations between the underwriters and us and may vary from the market price of our common stock following our initial public offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price, if at all. We cannot assure you that the initial public offering price of our common stock, or the market price following this offering, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to this offering. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
•actual or anticipated fluctuations in our revenuesrevenue and results of operations;
•the operating and financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
•variance in our financial performance from expectations of securities analysts;
increase or loss of customers;
•fluctuations in product sales mix;
•changes in our pricing strategy or those of our competitors;
•developments in new legislation and pending lawsuits or regulatory actions, including interim or final rulings by judicial or regulatory bodies;
•lawsuits threatened or filed against us;
•our involvement in any litigation;
actual or anticipated changes in our growth rate relative to those of our competitors;
•announcements of technological innovations or new services offered by us or our competitors;
•announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments;
•additions or departures of key personnel;
•actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or investor expectations;
•fluctuations in the valuation of companies perceived by investors to be comparable to us;
•additional shares of our common stock or other securities being sold into the market by us or our existing stockholders or the anticipation of such sales, including if existing stockholders sell shares into the market when applicable "lock-up"“lock-up” periods end;
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•- price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
•
other events or factors, including those resulting from war or incidents of terrorism, or responses to these events; and
•general economic, political, regulatory and market conditions.
Furthermore, the stock markets recently have experienced extreme priceBroad market and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad marketindustry fluctuations, as well as general economic, political, regulatory and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management'smanagement’s attention from other business concerns, which could adversely affect our business, results of operations, financial condition and financial condition.future prospects.
Future salesA significant portion of our common stocktotal outstanding shares are restricted from immediate resale but may be sold into the market in the public marketnear future, which could cause the market price of our common stock to decline.drop significantly, even if our business is performing well.
Sales of a substantial number of shares of our common stock in the public market after our initial public offering, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our common stock. After this offering, we will have outstanding 40,328,846 shares of common stock, based on the number of shares of our common stock outstanding as of June 30, 2012.March 31, 2021, assuming no exercise by the underwriters’ option to purchase additional shares in this offering. This number includes 8,000,000 shares that we and the selling stockholders are selling in this offering, and assumes no additional exercise of outstanding options.
All of the shares of common stock sold in this offering willwhich may be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended or the Securities Act, except for any shares held by our affiliates pursuant to Rule 144 under the Securities Act. On the date of this prospectus, 733,311 shares will be available for saleresold in the public market immediately without restriction. Approximately 31,595,535 of therestriction, unless purchased by our affiliates. The remaining shares of our common stock outstanding after this offering, based on shares outstanding as of June 30, 2012, will beMarch 31, 2021, are currently restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers for at least 180 days after the date of this prospectus, subject to certain extensions.exceptions, but will generally be able to be sold after the offering as described in the sections titled “Shares Eligible for Future Sale” and “Underwriting.”
Morgan Stanley & Co. LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated may permit our executive officers, directors and stockholders who have executed lock-up agreements with the underwriters to sell shares prior to the expiration of the restrictive provisions contained in such lock-up agreements. In addition, we may permit our stockholders and option holders who are subject to lock-up agreements with us and who are not subject to a lock-up agreement with the underwriters to sell shares prior to the expiration of the restrictive provisions contained in such lock-up agreements with us.
After this offering, the holders of 11,725,759 shares of common stock, or 29.08%% of our total outstanding common stock, based on shares outstanding as of June 30, 2012March 31, 2021 and giving effect to the sale of shares by us, and the selling stockholders, will be entitled to rights with respect to registration of these shares under the Securities Act pursuant to an investors'investors’ rights agreement.agreement and related agreements, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If these holders of our common stock by exercising their registration rights, sell a large number of shares by exercising their registration rights, they could adversely affect the market price for our common stock. If we file a registration statement for the purposes of selling additional shares to raise capital and are required to include shares held by these holders pursuant to the exercise of
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their registration rights, our ability to raise capital may be impaired. We intend to file a registration statement on Form S-8 under the Securities Act to register up to approximately 8.0 millionall shares of our common stock for issuancethat we may issue under our 2000 Stock Option Plan, our 2010 Stock Incentive Plan and our 2012 Equity Incentive Plan.equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, and once vested, subject to a 180-day lock-up periodvolume limitations applicable to affiliates and other restrictions provided under the terms oflock-up agreements described in the applicable plan and/or the option agreements entered into with option holders.section titled “Underwriting.”
No public market for our common stock currently exists, and an active public trading market may not develop or be sustained following this offering.
Prior to this offering, there has been no public market for our common stock. Although we expect to applyhave applied to list our common stock on the NYSE,The Nasdaq Stock Market LLC, an active trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.
If you purchase shares of our common stock in our initial publicthis offering, you will experience substantial and immediate dilution.
IfThe initial public offering price of our common stock will be substantially higher than the pro forma as adjusted net tangible book value per share of our common stock as of March 31, 2021, immediately after this offering. Therefore, if you purchase shares of our common stock in our initial publicthis offering, you will experience substantial and immediate dilution in thepay a price per share that substantially exceeds our pro forma as adjusted net tangible book value per share of $10.14 per share as of June 30, 2012, basedimmediately after this offering. Based on an assumed initial public offering price of our common stock of $11.00$ per share, which is the midpoint of the estimated price range on the cover page of this prospectus, becauseyou will experience immediate dilution of $ per share, or $ per share if the price that you pay will be substantially greater thanunderwriters exercise their option to purchase additional shares in this offering in full, representing the difference between our pro forma as adjusted net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less thanafter this offering and the initial public offering price when they purchased their shares of our capital stock. Youper share. If outstanding options or RSUs are exercised or settled in the future, you will experience additional dilution upon exercise of options to purchase common stock under our equity incentive plans, if we issue restricted stock to our employees under our equity incentive plans, or if we otherwise issuedilution. See the section titled “Dilution” for additional shares of our common stock. See "Dilution."information.
We have broad discretion in the use of our cash and cash equivalents, including the net proceeds from our initial publicthis offering, and may not use them effectively.ineffectively, in ways with which you do not agree or in ways that do not increase the value of your investment.
We intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital and capital expenditures.expenditures, and to repay $ of the outstanding indebtedness under the 2018 Term Loan. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions, businesses or assets that complement our business or operations, although we have no present commitments or agreements to enter into any such acquisitions or investments.investments after this offering. However, we will have broad discretion over the uses of the net proceeds, as well as our cash and cash equivalents, and we may spend or invest them in ways that our stockholders disagree with, that cause the price of our common stock to decline or that could adversely affect our business, results of operations, financial condition and future prospects.
We do not intend to pay dividends for the foreseeable future, which could reduce the attractiveness of our stock to some investors.
Although we have paid cash dividends to our stockholders in the past, we currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. In addition, the Amended and Restated Credit Agreement contains restrictions on our ability to pay dividends. As a result, you must rely on sales of your common stock after price appreciation, which may never occur, as the only way to realize any future gains on your investments for the foreseeable future.
Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.
Based upon our shares of our common stock outstanding as of March 31, 2021, upon the completion of this offering, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock before this offering will, in the aggregate, beneficially own shares representing approximately % of our outstanding common stock. If our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock acted together, they may be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. The concentration of voting power and transfer restrictions could delay or prevent an acquisition of our company on terms that other stockholders may desire or result in the management of our company in ways with which other stockholders disagree.
In addition, pursuant to a director nomination agreement entered into between us and each of (i) LucasZoom, LLC (collectively with its affiliated investment entities, “Permira”) and (ii) FPLZ I, L.P. and FPLZ II, L.P. (together with FPLZ I, L.P. and their affiliated investment entities, “FP”, and together with Permira, the “Lead Sponsors”), we will have the obligation to support the nomination of, and to cause our board of directors to include in the slate of nominees recommended to our stockholders for election, a number of designees equal to at least: (i) two individuals for so long as each Lead Sponsor continuously from the time of the completion of this offering beneficially owns shares of common stock representing at least 50% of the shares of common stock owned by such Lead Sponsor immediately following the completion of this offering and (ii) one individual for so long as each Lead Sponsor continuously from the time of the completion of this offering beneficially owns shares of common stock representing at least 25% but less than 50% of the shares of common stock owned by such Lead Sponsor immediately following the completion of this offering. For more information regarding the director nomination agreement, see the section titled “Management—Board Composition.” Each of Permira and FP, and their respective affiliates, may therefore have influence over management and control over matters requiring stockholder approval, including the annual election of directors and significant corporate transactions following the completion of this offering.
Provisions in our corporate charter documents and provisions under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our corporate charter and our bylaws that will become effective upon the completion of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:
establish a classified board of directors such that not all members of the board are elected at one time;
allow the authorized number of our directors to be changed only by resolution of our board of directors;
limit the manner in which stockholders can remove directors from the board;
establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;
require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;
limit who may call stockholder meetings;
authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a stockholder rights plan, or so-called “poison pill,” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and
require the approval of the holders of at least 66 2/3% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns 15% or more of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired 15% or more of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stock, including transactions that may be in your best interests. These provisions may also prevent changes in our management or limit the price that investors are willing to pay for our stock.
Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated certificate of incorporation, as will be in effect upon the completion of this offering, will provide that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) and any appellate court thereof shall be the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:
any derivative claim or cause of action brought on our behalf;
any claim or cause of action asserting a breach of fiduciary duty owed by any of our current or former directors, officers or other employees to us or our stockholders;
any claim or cause of action against us or any of our current or former directors, officers or other employees arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation and amended and restated bylaws;
any claim or cause of action arising under or seeking to interpret our amended and restated certificate of incorporation or our amended and restated bylaws; and
any claim or cause of action against us or any of our current or former directors, officers or other employees that is governed by the internal affairs doctrine or otherwise related to our internal affairs.
The provisions would not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934, or the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation will further provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause or causes of action arising under the Securities Act, including all causes of action asserted against any defendant to such complaint. For the avoidance of doubt, this provision is intended to benefit and may be enforced by us, our officers and directors, the underwriters to any offering giving rise to such complaint, and any other professional entity whose profession gives authority to a statement made by that person or entity and who has prepared or certified any part of the documents underlying the offering.
While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.
These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business.
General Risk Factors
As a public company, we will be subject to more stringent federal and state law requirements.
As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, the listing requirements of The Nasdaq Stock Market LLC, and other applicable securities rules and regulations. Despite reforms made possible by the Jumpstart Our Business Startups Act of 2012 (the JOBS Act), compliance with these rules and regulations will nonetheless increase our legal and financial condition.compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results.
As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business, results of operations, financial condition and future prospects could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our brand and reputation, business, results of operations, financial condition and future prospects.
We may also be subject to more stringent state law requirements. For example, on September 30, 2018, California Governor Jerry Brown signed into law Senator Bill 826, or SB 826, which generally requires public companies with principal executive offices in California to have a minimum number of females on the company’s board of directors. By December 31, 2019, each public company with principal executive offices in California was required to have at least one female on its board of directors. By December 31, 2021, each public company is required to have at least two females on its board of directors if the company has at least five directors, and at least three females on its board of directors if the company has at least six directors. The new law does not provide a transition period for newly listed companies. Additionally, on September 30, 2020, California Governor Gavin Newsom signed into law Assembly Bill 979, or AB 979, which generally requires public companies with principal executive offices in California to include specified numbers of directors from “underrepresented communities.” A director from an “underrepresented community” means a director who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual or transgender. By December 31, 2021, each public company with principal executive offices in California is required to have at least one director from an underrepresented community. By December 31, 2022, a public company with more than four but fewer than nine directors will be required to have a minimum of two directors from underrepresented communities, and a public company with nine or more directors will need to have a minimum of three directors from underrepresented communities.
Similar to SB 826, AB 979 does not provide a transition period for newly listed companies. If we fail to comply with either SB 826 or AB 979, we could be fined by the California Secretary of State, with a $100,000 fine for the first violation and a $300,000 fine for each subsequent violation of either law, and our reputation may be adversely affected.
We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.
Our stock price and trading volume will be heavily influenced by the way analysts and investors interpret our financial information and other disclosures. If securities or industry analysts do not publish research or reports about our business, delay publishing reports about our business or publish negative reports about our business, regardless of accuracy, our stock price and trading volume could decline.
The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
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We do not intend to pay dividends for the foreseeable future, which could reduce the attractiveness of Even if our common stock to some investors.
We currently intend to retain any future earnings to finance the operation and expansion of our business, andis actively covered by analysts, we do not expecthave any control over the analysts or the measures that analysts or investors may rely upon to declareforecast our future results. Over-reliance by analysts or payinvestors on any dividendsparticular metric to forecast our future results may result in forecasts that differ significantly from our own.
Regardless of accuracy, unfavorable interpretations of our financial information and other public disclosures could have a negative impact on our stock price. If our financial performance fails to meet analyst estimates, for any of the foreseeable future. As a result, you may only receive a return on your investment inreasons discussed above or otherwise, or one or more of the analysts who cover us downgrade our common stock if the market priceor change their opinion of our common stock, increases. In addition, our credit facility contains restrictionsstock price would likely decline.
The COVID-19 pandemic could have an adverse effect on our abilitybusiness, financial condition, results of operations and prospects.
In connection with the COVID-19 pandemic, governments have implemented significant measures, including closures, quarantines, travel restrictions and other social distancing directives, intended to pay dividends.control the spread of the virus. Companies have also taken precautions, such as requiring employees to work remotely, imposing travel restrictions and temporarily closing businesses. To the extent that these restrictions remain in place, additional prevention and mitigation measures are implemented in the future, or there is uncertainty about the effectiveness of these or any other measures to contain or treat COVID-19, there has been and continues to be an adverse impact on global economic conditions and consumer confidence and spending, which could adversely affect our business as well as the demand for our products. The fluid nature of the COVID-19 pandemic and uncertainties regarding the related economic impact are likely to result in sustained market turmoil, which could also have an adverse effect on our business, financial condition, results of operations and prospects.
Further, the Delaware lawCOVID-19 pandemic may impact customer demand. Our customers may be impacted if governments continue to implement regional business closures, quarantines, travel restrictions and provisionsother social distancing directives to slow the spread of the virus. To the extent our customers’ operations are negatively impacted, our customers may reduce demand for or spending on our products, or customers may delay payments
to us or request payment or other concessions. There may also be significant reductions or volatility in demand for our amended and restated certificateservices, as well as the temporary inability of incorporation and bylaws that will becustomers to purchase our products due to illness, quarantine or financial hardship, shifts in effect at the closingdemand away from one or more of our initial public offering could make a merger, tender offer,products, decreased consumer confidence and spending or proxy contest difficult, thereby depressing the trading price of our common stock.
Following the closing of our initial public offering, our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and bylaws that will be in effect at the closing of our initial public offering will contain provisions that may make the acquisition of our company more difficult, including the following:
•our amended and restated certificate of incorporation will authorize undesignated preferred stock, the termspantry-loading activity, any of which may be established,negatively impact our results, including as a result of an increased difficulty in planning for operations. While, in 2020, we saw tailwinds in our business driven by the COVID-19 pandemic, as individuals and sharessmall businesses turned to online services given the relative inaccessibility of offline alternatives, and we believe these shifts represent an acceleration of existing trends toward greater adoption of online services, these tailwinds and trends could moderate or reverse over time.The extent of the COVID-19 pandemic’s effect on our operational and financial performance will depend on future developments, including the duration and intensity of the pandemic, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall impact of the COVID-19 pandemic on our business. However, if the pandemic continues to persist as a severe worldwide health crisis, the disease could have an adverse effect on our business, financial condition, results of operations and prospects, and may also have the effect of heightening many of the other risks described in this “Risk Factors” section.
We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to “emerging growth companies” will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be issued, without stockholder approval;
•require that any actiona less active trading market for our common stock and our stock price may be more volatile. We may take advantage of some or all of these reporting exemptions until we are no longer an “emerging growth company.” We will remain an “emerging growth company” until the earlier of (i) the last day of the fiscal year following the fifth anniversary of the completion of this offering, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (iii) the last day of the first fiscal year in which we are deemed to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
•specifylarge accelerated filer, which means in part that special meetings of our stockholders can be called only by our board of directors, the Chairman of our board of directors, or our Chief Executive Officer;
•establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;
•establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving three-year staggered terms;
•prohibit cumulative voting in the election of directors;
•provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and
•require the approval of our board of directors or the holders of a supermajority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.
These provisions could depress the trading pricemarket value of our common stock that is held by non-affiliates equals or reduceexceeds $700 million as of the abilityprior June 30th, and (iv) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
As an “emerging growth company,” the JOBS Act allows us to delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of someone to acquire the company at a premiumthis exemption from new or revised accounting standards and, therefore, we will not be subject to the trading pricesame new or revised accounting standards as other public companies that are not “emerging growth companies.”
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
U.S. generally accepted accounting principles, or GAAP, are subject to interpretation by the Financial Accounting Standards Board, or FASB, the U.S. Securities and Exchange Commission, or SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change. In February 2016, the FASB issued Accounting
Standards Update No. 2016-02,Leases, also known as ASC 842, which will require lessees to recognize a right-of-use assets and lease liabilities for operating leases, initially measured at the present value of the lease payments, on its balance sheet for operating leases. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis.
We are planning to adopt ASC 842 effective January 1, 2022. We are in the process of evaluating the impact ASC 842 will have on our consolidated financial statements and related disclosures. Our prior historical financial information for the year ended December 31, 2020 and three months ended March 31, 2021 and prior periods will continue to be reported in accordance with historical accounting standards. These or other changes to existing rules may harm our operating results and affect the comparability of our common stock.results from period to period.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectustitled “Prospectus Summary," "Risk” “Risk Factors," "Use” “Use of Proceeds," "Management's” “Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” and "Business,"“Business,” contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our strategy, future financial condition, future operations, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements. These statements may relate to, but are not limited to, expectations of future operating results or financial performance, capital expenditures, use of proceeds from this offering, introduction of new services and enhancements to our current platform, regulatory compliance, target ratio of lifetime value to customer acquisition costs, plans for growth and future operations, the size of our addressable market and market trends, as well as assumptions relating to the foregoing. In some cases you can identify theseforward-looking statements by forward-looking wordsterminology such as "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "could," "would," "project," "plan," "expect"“anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “aim,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will,” “would,” or the negative or plural of these words or similar expressions. TheseActual events or results may differ from those expressed in these forward-looking statements, include, butand these differences may be material and adverse.
We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, prospects, business strategy and financial needs. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions and other factors described in the section titled “Risk Factors” and elsewhere in this prospectus. These risks are not limited to, statements concerning the following:
•- exhaustive. Other sections of this prospectus include additional factors that could adversely affect our business and financial
performance, including our revenue, operating expenses and our ability to attain and sustain profitability;
•our ability to comply with and adapt to the dynamic legal and regulatory landscape applicable to our business;
•our ability to maintain, protect and enhance our brand;
•our ability to continue to develop, enhance and expand our online interactive legal document services;
•the success and development of our legal plans;
•our ability to timely and effectively scale and adapt our existing online legal platform;
•our ability to increase engagement of services by our customers;
•our ability to protect our customers' information and adequately address privacy concerns;
•our ability to maintain an adequate rate of revenue growth;
•the effects of increased competition in our market;
•our ability to effectively manage our growth;
•our ability to successfully enter new markets and manage our international expansion;
•costs associated with defending intellectual property infringement and other claims;
•the attraction and retention of our senior management team; and
•other risk factors included under "Risk Factors" in this prospectus.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors."performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time. Ittime and it is not possible for our managementus to predict all risks nor can we assess theand uncertainties that could have an impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, wecontained in this prospectus. We cannot guaranteeassure you that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracyoccur, and completeness ofactual results, events or circumstances could differ materially from those described in the forward-looking statements. We undertake no obligation
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to update publicly any forward-looking statements for any reason afterus as of the date of this prospectus, 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 conformindicate 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 to actual results or to changes in our expectations.statements.
You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations, except as required by law.
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MARKET, INDUSTRY AND OTHER DATA
Unless otherwise indicated,This prospectus contains estimates and information contained in this prospectus concerning our industry, including market size and growth of the marketmarkets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have madeparticipate, that are based on those dataindustry publications and other similarreports. In some cases, we do not expressly refer to the sources from which these estimates and on our knowledge of the markets for our services. These data involveinformation are derived. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to suchthese estimates. We have not independently verified any third-party information and cannot assure you of itsthe accuracy or completeness. While we believecompleteness of the market position, market opportunitydata contained in these industry publications and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of thereports. The industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in "Risk Factors" and elsewhere in this prospectus.the section titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in thethese publications and reports.
The sources of certain statistical data, estimates, made by the independent parties and by us.
Neither we, nor the selling stockholders, nor the underwriters, have authorized anyone to provide any information or to make any representations other than thoseforecasts contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as toare the reliability of, any other information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The informationfollowing independent industry sources:
| • | | Center for American Progress, Making Justice Equal, December 2016. |
| • | | Ernst & Young Global Limited, How COVID-19 has triggered a spring toward smarter health care, March 2021. |
| • | | IBISWorld, Online Legal Services, Cyber security: Persistent expansion in the total number of US businesses will likely increase the industry’s client base, November 2020. |
| • | | MBO Partners, The State of Independence in America 2020, December 2020. |
| • | | McKinsey & Company, Elevating Customer Experience Excellence in the Next Normal, May 2020. |
| • | | NSBA—National Small Business Association, or NSBA, 2017 NSBA Small Business Regulations Survey, January 2017. |
| • | | Themis Solutions Inc., Legal Trends Report Powered by Clio, 2018. |
| • | | Themis Solutions Inc., Legal Trends Report by Clio, 2019. |
In addition, statements in this prospectus referring to Dynata refer to the collection and analysis of aided and unaided brand awareness data that is accurate only asshared with us on a quarterly basis by Dynata LLC, a global online market research firm, based on surveys hosted by Dynata from the period of 2015-2020. “Aided brand awareness” means the percentage of survey respondents who expressed knowledge of a specific brand when asked about that brand by name and “unaided brand awareness” means the percentage of survey respondents who expressed knowledge of a specific brand without mentioning the name of that brand when asked about awareness of online legal services.
Statements in this prospectus referring to the Kantar study refer to an addressable market sizing study of small businesses under 50 employees and consumers aged 25-65 in the United States conducted with data provided by Kantar Consulting, a marketing and sales consultancy, in February 2019, which we commissioned.
Statements in this prospectus referring to the Magid study refer to a small and mid-sized business opportunities study based on panel data of business owners and LegalZoom customers conducted by Magid Consulting Inc. in March 2021, which we commissioned.
We monitor our estimated share of total business formations in the United States every year, which we estimate to be 4.4 million. There are many widely-cited sources of data on small business formation. The U.S. Census reports business formation statistics for new businesses with employees. This data relates to employer firms, and is based on new employer identification number, or EIN, applications with the IRS and statistical estimates of the datenumber of this prospectus, regardlessEIN applications that will result in a new employee. In 2020, there were 4.4 million EIN applications, with 1.5 million categorized as high propensity to turn into a business with payroll. The U.S. Census also reports the total number of sole proprietorships operating in the timeUnited States based on IRS filings. A small business is considered a sole proprietorship by default if it does not officially form. However, sole proprietorships that have formed as an LLC may file with the IRS as a sole proprietorship. There is no reliable data for the number of deliveryLLCs in operation or the number of this prospectus or any salenew sole proprietorships formed. We analyze employer firm data and secretary of sharesstate filings to derive our estimate of our common stock. Our business, financial condition, results of operations, and prospects may have changed since that date.small businesses formed each year.
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USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the shares of our common stock offered by us will be approximately $35.4$ million, based on an assumed initial public offering price of $11.00$ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters' over-allotmentunderwriters’ option to purchase additional shares from us in this offering is exercised in full, we estimate that our net proceeds will be approximately $41.4$ million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of common stock by the selling stockholders.
AEach $1.00 increase (decrease) in the assumed initial public offering price of $11.00$ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $3.5$ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one1.0 million shares in the number of shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $10.2$ million, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and thereby enablefacilitate our future access to the public equity markets by our employees and stockholders, obtain additional capital and increase our visibility in the marketplace.markets. We currently intend to use the net proceeds to us from this offering primarily (1) to repay $ of the outstanding indebtedness under our 2018 Credit Agreement, which matures on November 21, 2024, and which may carry, at our option, an interest rate equal to either (a) LIBOR (or a comparable successor rate approved by the administrative agent and us), plus a margin of 4.50% per annum, or (b) the base rate plus a margin of 3.50% per annum, which margin may decrease depending on our total net first lien leverage ratio, and with the base rate being the highest of (i) the federal funds rate plus 1/2 of 1%, (ii) the prime rate as publicly announced by JPMorgan Chase, (c) LIBOR plus 1.00%, and (d) 2%, which indebtedness is as further described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowings,” and (2) for general corporate purposes, including working capital, operating expenses and up to approximately $5.0 million for capital expenditures, approximately half of which would be for capitalized software expenditures and the other half of which would be for other capital expenditures associated with scaling our operations, technology and infrastructure to support our growth.expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions, businesses, products, services or other assets that complement our business or operations, although we have no present commitments or agreements to enter into any acquisitions or investments.
The expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. We cannot predict with certainty all of the particular uses for the proceeds of this offering or the amounts that we will actually spend on the uses set forth above. Our management will have broad discretion over the uses ofin applying the net proceeds inof this offering. Pending these uses,their use, we intend to invest the net proceeds fromof this offering in short-term,a variety of capital-preservation investments, including short- and intermediate-term investments, interest-bearing investments, investment-grade interest-bearing securities.securities and government securities and money market funds.
DIVIDEND POLICY
WeAlthough we have never declared or paid any cash dividends on our common stock. Wecapital stock in the past, we currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant. In addition, the terms of our credit facility containAmended and Restated Credit Agreement contains restrictions on our ability to pay dividends.
CAPITALIZATION
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CAPITALIZATION
The following table shows our cash and cash equivalents, restricted cash equivalent and our capitalization as of June 30, 2012:March 31, 2021 on:
•on a pro forma basis, giving effect to: (1) the automatic conversion of all 23,081,080 shares of our outstanding redeemable convertible preferred stock as of March 31, 2021 into an aggregate of 46,162,160 shares of our common stock upon the completion of this offering and the related reclassification of the carrying value of the redeemable convertible preferred stock to stockholders’ deficit upon the completion of this offering; (2) additional stock-based compensation expense of approximately $ million associated with certain options and RSUs for which the performance condition is satisfied upon the completion of this offering, assuming the offering occurred on March 31, 2021, recorded as an increase to additional paid-in capital and accumulated deficit; (3) the vesting and settlement of RSUs outstanding as of March 31, 2021, net of shares surrendered for withholding taxes (based on an assumed % tax withholding rate), that will vest upon the completion of this offering; (4) additional stock-based compensation expense of approximately $ associated with options for executive officers and employees that for retention purposes we intend to modify prior to, and contingent upon, the completion of this offering, assuming the offering and the modification of the options occurred on March 31, 2021, recorded as an increase to additional paid-in capital and accumulated deficit; (5) the lapse of the restriction on $25.0 million of our restricted cash equivalent in June 2021 upon the release of collateral related to a personal loan by a former executive; and (6) the filing and effectiveness of our amended and restated certificate of incorporation and the automatic conversion of all outstanding shares of Series A into an aggregate of 15,256,000 shares of common stock immediately prior toafter the completion of this offering as if such conversion had occurred on June 30, 2012;offering; and
•on a pro forma as adjusted basis, giving effect to the pro forma adjustments described in the immediately preceding bullet,discussed above, and giving further effect to: (1) the sale by us of 3,800,000 shares of common stock in this offering by us at an assumed initial public offering price of $11.00$ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and (2) the repayment of $ million of outstanding indebtedness under the 2018 Term Loan after the completion of this offering.
You should read this table together with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.
| | | | | | | | | | | | |
| | | As of March 31, 2021 | |
| | | (Unaudited) | |
| | | Actual | | | Pro Forma | | | Pro Forma, As
Adjusted(1) | |
| | | (in thousands, except share and par value data) | |
Cash and cash equivalents | | $ | 141,175 | | | $ | | | | $ | | |
| | | | | | | | | | | | |
Restricted cash equivalent | | $ | 25,000 | | | $ | | | | $ | | |
| | | | | | | | | | | | |
Principal amount of 2018 Term Loan(2) | | $ | 522,963 | | | $ | | | | $ | | |
| | | | | | | | | | | | |
Redeemable convertible preferred stock, $0.001 par value: 30,512,000 shares authorized, 23,081,080 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted | | | 70,906 | | | | | | | | | |
| | | |
Stockholders’ deficit: | | | | | | | | | | | | |
Preferred stock, $0.001 par value: no shares authorized, issued and outstanding, actual; 100,000,000 shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted | | | — | | | | | | | | | |
Common stock, $0.001 par value: 264,720,000 shares authorized, 125,299,386 shares issued outstanding, actual; and 1,000,000,000 shares authorized, and shares issued and outstanding, pro forma and pro forma as adjusted, respectively | | | 126 | | | | | | | | | |
Additional paid-in capital | | | 106,288 | | | | | | | | | |
Accumulated other comprehensive loss | | | (10,863 | ) | | | | | | | | |
Accumulated deficit | | | (649,171 | ) | | | | | | | | |
| | | | | | | | | | | | |
Total stockholders’ deficit | | | (553,620 | ) | | | | | | | | |
| | | | | | | | | | | | |
Total capitalization | | $ | 40,249 | | | $ | | | | $ | | |
| | | | | | | | | | | | |
| (1) | Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ deficit and total capitalization by approximately $ million, assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of common stock offered by us would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ deficit and total capitalization by approximately $ million, assuming the assumed initial public offering price of $ per share remains the same, and after deducting estimated underwriting discounts and commissions payable by us. |
| (2) | Excludes debt issuance costs of $8.9 million. |
If the underwriters exercise by a selling stockholder of antheir option to purchase 40,000additional shares of common stock at a weighted average exercise price of $2.245 for total proceeds tofrom us of $89,800,in full, pro forma as if this offering had occurred on June 30, 2012.
| | | | | | | | | | |
| | As of June 30, 2012 | |
|---|
| | Actual | | Pro Forma | | Pro Forma,
As Adjusted(1) | |
|---|
| | (in thousands, except share and par value data)
| |
|---|
Cash and cash equivalents | | $ | 31,374 | | $ | 31,374 | | $ | 68,709 | |
| | | | | | | | |
Series A redeemable convertible preferred stock, $0.001 par value: 7,628,000 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted | | $ | 64,708 | | $ | — | | $ | — | |
Stockholders' equity (deficit): | | | | | | | | | | |
Preferred stock, $0.001 par value: no shares authorized, issued and outstanding, actual; 50,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted | | | — | | | — | | | — | |
Common stock, $0.001 par value: 66,180,000 shares authorized, 21,412,846 shares issued and 21,232,846 shares outstanding, actual; 66,180,000 shares authorized, 36,668,846 shares issued and 36,488,846 outstanding, pro forma; and 150,000,000 shares authorized, 40,508,846 shares issued and 40,328,846 shares outstanding, pro forma as adjusted | | | 22 | | | 37 | | | 41 | |
Additional paid-in capital | | | — | | | 64,693 | | | 100,227 | |
Treasury stock, at cost, 180,000 shares | | | (519 | ) | | (519 | ) | | (519 | ) |
Accumulated deficit | | | (58,995 | ) | | (58,995 | ) | | (58,995 | ) |
| | | | | | | | |
Total stockholders' equity (deficit) | | | (59,492 | ) | | 5,216 | | | 40,754 | |
| | | | | | | | |
Total capitalization | | $ | 5,216 | | $ | 5,216 | | $ | 40,754 | |
| | | | | | | | |
(1)A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) the amount ofadjusted cash and cash equivalents, additional paid-in capital, total stockholders' equity andstockholders’ deficit, total capitalization, by approximately $3.5 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by usoutstanding as of March 31, 2021 would increase (decrease) cashbe $ , $ , $ , $ , and cash equivalents, and additional paid-in capital, total stockholders' equity and total capitalization by
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approximately $10.2 million, assuming the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us., respectively. The pro forma as adjusted information discussedset forth above is illustrative only and will be adjustedchange based on the actual initial public offering price and other terms of this offering determined at pricing.
The total number of shares of our common stock reflectedissued and outstanding, pro forma and pro forma as adjusted, in the discussion and table above is based on 36,488,846 shares of common stock (including preferred stock on anoutstanding as converted basis) outstanding on aof March 31, 2021, which gives effect to the pro forma basis, as of June 30, 2012,transactions described above and excludes, as of June 30, 2012:excludes:
•616,38314,952,784 shares of common stock issuable upon the exercise of outstanding options as of March 31, 2021, granted pursuant to our 20002016 Stock OptionIncentive Plan, or 2016 Plan, at a weighted-average exercise price of $0.93$8.93 per share, 4,337,270share;
shares of common stock issuable upon the exercisesettlement of optionsRSUs outstanding as of March 31, 2021, granted pursuant to our 2010 Stock Incentive2016 Plan at a weighted-average exercise pricethat would not have satisfied the market vesting conditions or service-based vesting condition as of $3.40 per shareMarch 31, 2021, which excludes 55,358 shares of common stock issuable pursuant to RSUs that would have satisfied the service-based vesting condition as of March 31, 2021;
504,487 shares of common stock issuable upon the settlement of RSUs granted subsequent to March 31, 2021, and 50,000 restrictedshares of common stock unitsissuable upon the settlement of RSUs and options to be settled intopurchase shares of our common stock to be granted to certain of our executive officers immediately prior to the effectiveness of the registration statement of which this prospectus forms a part, all granted pursuant to our 2010 Stock Incentive2016 Plan;
•217,799 shares of our common stock available for future issuance under our 2010 Stock Incentive Plan; and
•2,700,000 shares of common stock, subject to increase on an annual basis, reserved for future issuance under our 20122021 Equity Incentive Plan, or 2021 Plan, which will become effective immediately prior to the execution of the underwriting agreement related to this offering, as well as any future automatic annual increases in connection withthe number of shares of common stock reserved for issuance under our 2021 Plan; and shares of our common stock reserved for future issuance under our 2021 Employee Stock Purchase Plan, or ESPP, which will become effective immediately prior to the execution of the underwriting agreement related to this offering.offering, as well as any future automatic annual increases in the number of shares of common stock reserved for issuance under our ESPP.
DILUTION
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DILUTION
If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. The historical net tangible book value as of March 31, 2021 was $ million, or $ per share. Historical net tangible book value per share is our historical net tangible book value divided by the number of shares of our common stock outstanding as of June 30, 2012March 31, 2021.
Our pro forma net tangible book value as of March 31, 2021 was a deficit of $3.9$ million, or $(0.19)$ per share. Historicalshare of our common stock, based on the total number of shares of our common stock outstanding as of that date. Pro forma net tangible book value per share represents our total tangible assets excluding deferred tax assets and deferred costs of this offering, less our total liabilities, divided by the number of outstanding shares of outstanding common stock.
Afterstock, after giving effect toto: (1) the (i) automatic conversion of all outstanding23,081,080 shares of Series Aour outstanding redeemable convertible preferred stock as of March 31, 2021 into an aggregate of 46,162,160 shares of our common stock immediately priorupon the completion of this offering and the related reclassification of the carrying value of the redeemable convertible preferred stock to stockholders’ deficit upon the completion of this offering; (ii) receipt(2) additional stock-based compensation expense of approximately $ million associated with certain options and RSUs for which the performance condition is satisfied upon the completion of this offering, assuming the offering occurred on March 31, 2021, recorded as an increase to additional paid-in capital and accumulated deficit; (3) the vesting and settlement of RSUs outstanding as of March 31, 2021, net of shares surrendered for withholding taxes (based on an assumed % tax withholding rate), that will vest upon the completion of this offering; (4) additional stock-based compensation expense of approximately $ associated with options for executive officers and employees that for retention purposes we intend to modify prior to, and contingent upon, the completion of this offering, assuming the offering and the modification of the net proceeds fromoptions occurred on March 31, 2021, recorded as an increase to additional paid-in capital and accumulated deficit; and (5) the lapse of the restriction on $25.0 million of our restricted cash equivalent in June 2021 upon the release of collateral related to a personal loan by a former executive.
After giving effect to (1) the sale of 3,800,000 shares of common stock in this offering at an assumed initial public offering price of $11.00$ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and (iii)(2) the exercise by a selling stockholderrepayment of an option to purchase 40,000 shares$ million of common stock at a weighted average exercise priceour outstanding indebtedness under the 2018 Term Loan after the completion of $2.245, for total proceeds of $89,800,this offering, our pro forma as adjusted net tangible book value as of June 30, 2012 wouldMarch 31, 2021would have been $34.6$ million, or $0.86$ per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $0.97$ per share to our existing stockholders and an immediate dilution of $10.14$ per share to new investors purchasing common stock in this offering.
The following table illustrates this dilution on a per share basis to new investors:
| | | | | | | | |
Assumed initial public offering price per share | | | | | | $ | | |
Historical net tangible book value per share as of March 31, 2021 | | $ | | | | | | |
Pro forma increase in net tangible book value per share as of March 31, 2021 attributable to the pro forma transactions described above | | | | | | | | |
| | | | | | | | |
Pro forma net tangible book value per share as of March 31, 2021 | | | | | | | | |
Increase in pro forma net tangible book value per share attributable to new investors participating in this offering | | | | | | | | |
| | | | | | | | |
Pro forma as adjusted net tangible book value per share, as adjusted to give effect to this offering | | | | | | | | |
| | | | | | | | |
Dilution per share to new investors participating in this offering | | | | | | $ | | |
| | | | | | | | |
| | | | | | | |
Assumed initial public offering price per share | | | | | $ | 11.00 | |
| | | | | | | |
Net tangible book value (deficit) per share as of June 30, 2012 | | | (0.19 | ) | | | |
Increase per share attributable to conversion of Series A | | | 0.08 | | | | |
| | | | | | | |
Pro forma net tangible book value (deficit) per share as of June 30, 2012 | | | (0.11 | ) | | | |
Increase per share attributable to this offering | | | 0.97 | | | | |
Pro forma net tangible book value per share, as adjusted to give effect to this offering | | | | | | 0.86 | |
| | | | | | | |
Dilution in pro forma net tangible book value per share to new investors in this offering | | | | | $ | 10.14 | |
| | | | | | | |
AEach $1.00 increase (decrease) in the assumed initial public offering price of $11.00$ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) theour pro forma as adjusted net tangible book value as adjusted to give effect toper share after this offering by $0.09$ per share and the dilution per share to new investors participating in this offering by $0.91$ per share, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated expenses payable by us. Similarly, eachan increase (decrease) of one million shares in the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value as adjusted to give effect toper share after this offering by $0.23$ and decrease the dilution per share and the dilution to new investors participating in this offering by $0.23$ per share, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us. If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share of our common stock, as adjusted to give effect to this offering, would be $0.99 per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $10.01 per share of common stock.
The table below summarizes as of June 30, 2012, on a pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share, after giving effect to the conversion of all outstanding shares of preferred stock into common stock and exercise of a stock option by a selling stockholder, (i) paid to us by existing stockholders and (ii) to be paid by new investors purchasing our common stock in this offering at an assumed initial public offering price of $11.00
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$ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, beforeremains the same and after deducting estimated underwriting discounts and commissions payable by us. A decrease of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma as adjusted net tangible book value per share after this offering by $ per share and increase the dilution per share to new investors participating in this offering by $ per share, assuming the assumed initial public offering price of $ per share, the midpoint of the estimated offering expenses.
| | | | | | | | | | | | | | | | |
| | Shares Purchased | | Total Consideration | |
| |
|---|
| | Average Price
Per Share | |
|---|
| | Number | | Percent | | Amount | | Percent | |
|---|
Existing stockholders(1) | | | 36,528,846 | | | 90.6 | % | $ | 54,396,605 | | | 56.5 | % | $ | 1.49 | |
New investors | | | 3,800,000 | | | 9.4 | % | $ | 41,800,000 | | | 43.5 | % | $ | 11.00 | |
| | | | | | | | | | | | | |
Total | | | 40,328,846 | | | 100.0 | % | $ | 96,196,605 | | | 100.0 | % | | | |
| | | | | | | | | | | | | |
(1)Includesprice range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us.If the underwriters exercise by a selling stockholder of anin full their option to purchase 40,000 shares of common stock.
The total number ofan additional shares of our common stock reflected infrom us, the discussion and table above is based on 36,528,846 shares of common stock (including preferred stock on anpro forma as converted basis) outstanding, as of June 30, 2012, and excludes, as of June 30, 2012:
•616,383 shares of common stock issuable upon the exercise of outstanding options granted pursuant to our 2000 Stock Option Plan at a weighted-average exercise price of $0.93adjusted net tangible book value per share 4,297,270 shares of common stock issuable upon the exercise of options granted pursuant to our 2010 Stock Incentive Plan at a weighted-average exercise price of $3.40 per share and 50,000 restricted stock units to be settled into shares of our common stock granted pursuantafter giving effect to our 2010 Stock Incentive Plan which will remain outstanding after this offering unless earlier exercised;
•217,799 shareswould be $ per share, representing an immediate increase in the pro forma net tangible book value per share to existing stockholders of common stock available for future issuance under our 2010 Stock Incentive Plan;$ per share, and
•2,700,000 shares immediate dilution of common stock, subject$ per share to increase on an annual basis, reserved for future issuance under our 2012 Equity Incentive Plan, which will become effectivenew investors participating in connection with this offering.
Sales by
| | | | | | | | | | | | | | | | | | | | |
| | | Shares Purchased | | | | | | Total Consideration | | | | | | Average Price
Per Share | |
| | | Number | | | Percent | | | Amount | | | Percent | |
Existing stockholders | | | | | | | | % | | $ | | | | | | % | | $ | | |
New investors | | | | | | | | | | $ | | | | | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
Totals | | | | | | | 100.0 | % | | $ | | | | | 100.0 | % | | | | |
| | | | | | | | | | | | | | | | | | | | |
After giving effect to the selling stockholderssale of shares in this offering will causeby us, if the underwriters exercise in full their option to purchase additional shares from us, the number of shares held by existing stockholders towill be reduced to 32,328,846 shares, or 80.2%% of the total number of shares of our common stock outstanding afterfollowing the completion of this offering, and will increase the number of shares held by new investors to 8,000,000 shares, or 19.8%% of the total number of shares of our common stock outstanding afterfollowing the completing of this offering. In addition, if
Each $1.00 increase (decrease) in the underwriters' over-allotment option is exercised in full,assumed initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors and total consideration paid by all stockholders by approximately $ million, assuming that the number of shares heldof common stock offered by us, as set forth on the existing stockholderscover page of this prospectus, remains the same and after thisdeducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The foregoing table and calculations (other than the historical net tangible book value calculation) are based on shares common stock outstanding as of March 31, 2021, which gives effect to the pro forma transactions described above and excludes:
14,952,784 shares of common stock issuable upon the exercise of outstanding options as of March 31, 2021, granted pursuant to our 2016 Stock Incentive Plan, or 2016 Plan, at a weighted-average exercise price of $8.93 per share;
shares of common stock issuable upon the settlement of RSUs outstanding as of March 31, 2021, granted pursuant to our 2016 Plan that would be reducednot have satisfied the market vesting conditions or service-based vesting condition as of March 31, 2021, which excludes 55,358 shares of common stock issuable pursuant to 77.5%RSUs that would have satisfied the service-based vesting condition as of March 31, 2021;
504,487 shares of common stock issuable upon the total numbersettlement of RSUs granted subsequent to March 31, 2021, and shares of common stock issuable upon the settlement of RSUs and options to purchase shares of our common stock outstanding after this offering, andto be granted to certain of our executive officers immediately prior to the number of shares held by new investors would increase to 9,200,000 shares, or 22.5%effectiveness of the total numberregistration statement of which this prospectus forms a part, all granted pursuant to our 2016 Plan;
shares of our common stock outstanding afterreserved for future issuance under our 2021 Plan, which will become effective immediately prior to the execution of the underwriting agreement related to this offering.
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SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected historical consolidated financial data below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, related notes and other financial information included in this prospectus. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.
The consolidated statements of operations data for the years ended December 31, 2009, 2010 and 2011 and the consolidated balance sheet dataoffering, as of December 31, 2010 and 2011 are derived from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary unaudited interim consolidated balance sheet datawell as of June 30, 2012 and statements of operations data for the six months ended June 30, 2011 and 2012 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include,any future automatic annual increases in the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the financial information contained in those statements. Our historical results are not necessarily indicative of the results to be expected in the future.
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months Ended
June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| | (in thousands, except per share data)
| |
|---|
Consolidated Statements of Operations Data: | | | | | | | | | | | | | | | | |
Revenues(1) | | $ | 103,299 | | $ | 120,771 | | $ | 156,066 | | $ | 78,959 | | $ | 96,459 | |
Costs and operating expenses(2): | | | | | | | | | | | | | | | | |
Cost of services | | | 53,082 | | | 60,643 | | | 80,437 | | | 41,805 | | | 46,571 | |
Sales and marketing | | | 32,673 | | | 36,322 | | | 41,891 | | | 22,189 | | | 31,198 | |
Technology and development | | | 4,686 | | | 7,509 | | | 8,117 | | | 3,961 | | | 4,474 | |
General and administrative(1) | | | 13,154 | | | 20,024 | | | 19,343 | | | 9,447 | | | 11,717 | |
| | | | | | | | | | | | |
Total costs and operating expenses | | | 103,595 | | | 124,498 | | | 149,788 | | | 77,402 | | | 93,960 | |
| | | | | | | | | | | | |
Income (loss) from operations | | | (296 | ) | | (3,727 | ) | | 6,278 | | | 1,557 | | | 2,499 | |
Interest and other expense, net | | |
(33 |
) | |
(15 |
) | |
(153 |
) | |
(74 |
) | |
(76 |
) |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | (329 | ) | | (3,742 | ) | | 6,125 | | | 1,483 | | | 2,423 | |
Income tax (provision) benefit | | |
(311 |
) | |
(282 |
) | |
5,998 | | |
(143 |
) | |
(1,166 |
) |
| | | | | | | | | | | | |
Net income (loss) | | $ | (640 | ) | $ | (4,024 | ) | $ | 12,123 | | $ | 1,340 | | $ | 1,257 | |
| | | | | | | | | | | | |
Accretion of Series A redeemable convertible preferred stock | | | (4,035 | ) | | (4,038 | ) | | (4,042 | ) | | (2,005 | ) | | (2,017 | ) |
Net income attributable to participating securities | | | — | | | — | | | (3,407 | ) | | — | | | — | |
| | | | | | | | | | | | |
Net income (loss) attributable to common stockholders | | $ | (4,675 | ) | $ | (8,062 | ) | $ | 4,674 | | $ | (665 | ) | $ | (760 | ) |
| | | | | | | | | | | | |
Net income (loss) per share attributable to common stockholders(3)(5): | | | | | | | | | | | | | | | | |
Basic | | $ | (0.25 | ) | $ | (0.42 | ) | $ | 0.22 | | $ | (0.03 | ) | $ | (0.04 | ) |
| | | | | | | | | | | | |
Diluted | | $ | (0.25 | ) | $ | (0.42 | ) | $ | 0.19 | | $ | (0.03 | ) | $ | (0.04 | ) |
| | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months Ended
June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| | (in thousands, except per share data)
| |
|---|
Weighted-average shares used to compute net income (loss) per share attributable to common stockholders(3)(5): | | | | | | | | | | | | | | | | |
Basic | | | 18,700 | | | 19,360 | | | 20,925 | | | 20,878 | | | 21,136 | |
| | | | | | | | | | | | |
Diluted | | | 18,700 | | | 19,360 | | | 24,195 | | | 20,878 | | | 21,136 | |
| | | | | | | | | | | | |
Pro forma net income per share(4)(5): | | | | | | | | | | | | | | | | |
Basic | | | | | | | | $ | 0.34 | | | | | $ | 0.03 | |
| | | | | | | | | | | | | | | |
Diluted | | | | | | | | $ | 0.31 | | | | | $ | 0.03 | |
| | | | | | | | | | | | | | | |
Weighted average number of shares used in computing pro forma net income per share(4)(5): | | | | | | | | | | | | | | | | |
Basic | | | | | | | | | 36,181 | | | | | | 36,392 | |
| | | | | | | | | | | | | | | |
Diluted | | | | | | | | | 39,451 | | | | | | 40,598 | |
| | | | | | | | | | | | | | | |
(1)We recorded an estimated charge of $5.4 million during the year ended December 31, 2010 related to legal settlements, of which $4.6 million was included as part of general and administrative expenses and $0.8 million was recorded as a reduction of revenues. During the six months ended June 30, 2012, we recorded an additional $0.2 million charge related to a change in estimate of the settlement costs of these legal matters, which was recorded as a reduction of revenues. The ultimate costs of resolving these matters are dependent on a number of factors, including the resolution of any appeals of the approved settlements, actual claims made by, participation rates of, and the resulting payments, if any, to the class members. Any difference between the amount accrued and the ultimate costs of these matters will be recognized as an additional or lower expense in the period in which the matters are resolved. If the actual costs of these matters are higher than the amount we estimated, this difference could have a material adverse effect on our business, operating results, cash flows and financial condition. See Note 6 to our consolidated financial statements included elsewhere in this prospectus for a full discussion of this legal settlement accrual.
(2)Stock-based compensation expense included in the above line items:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months Ended
June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| | (in thousands)
| |
|---|
Cost of services | | $ | 200 | | $ | 178 | | $ | 155 | | $ | 82 | | $ | 67 | |
Sales and marketing | | | 124 | | | 46 | | | 56 | | | 21 | | | 135 | |
Technology and development | | | 114 | | | 155 | | | 133 | | | 64 | | | 75 | |
General and administrative | | | 699 | | | 929 | | | 600 | | | 288 | | | 402 | |
| | | | | | | | | | | | |
Total stock-based compensation expense | | $ | 1,137 | | $ | 1,308 | | $ | 944 | | $ | 455 | | $ | 679 | |
| | | | | | | | | | | | |
(3)See Note 2 to our consolidated financial statements included elsewhere in this prospectus for a description of the method to compute basic and diluted net income (loss) per share attributable to common stockholders.
(4)Unaudited basic and diluted pro forma net income per share has been calculated assuming the conversion of all outstanding shares of common stock reserved for issuance under our redeemable convertible preferred stock (using the if-converted method) into 15,256,0002021 Plan; and
shares of our common stock as thoughreserved for future issuance under our ESPP, which will become effective immediately prior to the conversion had occurred on January 1, 2011. See Note 2 to our consolidated financial statements included elsewhere in this prospectus.
(5)All share, per-share and related information presented have been retroactively adjusted, where applicable, to reflect the impactexecution of the 2-for-3 reverse stock split, including an adjustmentunderwriting agreement related to the preferred stock conversion ratio, which was effected on July 31, 2012.
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| | | | | | | | | | |
| | As of December 31, | |
| |
|---|
| | As of June 30,
2012 | |
|---|
| | 2010 | | 2011 | |
|---|
| | (in thousands)
| |
|---|
Consolidated Balance Sheet Data: | | | | | | | | | | |
Cash and cash equivalents | | $ | 19,169 | | $ | 27,108 | | $ | 31,374 | |
Working capital (deficit) | | | (5,905 | ) | | (2,316 | ) | | (4,451 | ) |
Total assets | | | 35,629 | | | 53,501 | | | 61,895 | |
Total liabilities | | | 46,488 | | | 50,620 | | | 56,679 | |
Redeemable convertible preferred stock | | | 58,649 | | | 62,691 | | | 64,708 | |
Total stockholders' deficit | | | (69,508 | ) | | (59,810 | ) | | (59,492 | ) |
Non-GAAP Adjusted EBITDA
To provide investors and others with additional information regarding our financial results, we have disclosedthis offering, as well as any future automatic annual increases in the table below and within this prospectus non-GAAP Adjusted EBITDA, a non-GAAP financial measure. We define non-GAAP Adjusted EBITDA as net income (loss) plus interest andnumber of shares of common stock reserved for issuance under our ESPP.
To the extent that any outstanding options are exercised, new options or other expense, net; income tax provision (benefit); certain non-cash charges, including depreciation, amortization and stock-based compensation; and loss from legal settlements. Our non-GAAP Adjusted EBITDA financial measure differs from GAAP in that it excludes certain items of income and expense. Non-GAAP Adjusted EBITDAequity awards are issued under our equity incentive plans, or the equivalent is frequently used by securities analysts, investors and others as a common financial measure of operating performance.
Non-GAAP Adjusted EBITDA is one of the primary measures used by our management and board of directors to understand and evaluate our financial performance and operating trends, including period to period comparisons, to prepare and approve our annual budget and to develop short and long term operational plans. Additionally, non-GAAP Adjusted EBITDA is one of the key measures used by the compensation committee of our board of directors to establish the target for and ultimately pay our annual employee bonus pool for virtually all bonus eligible employees. We also frequently use non-GAAP Adjusted EBITDA in our discussions with investors, commercial bankers and other users of our financial statements.
Management believes non-GAAP Adjusted EBITDA reflects our ongoing business in a manner that allows for meaningful period to period comparisons and analysis of trends. In particular, in calculating non-GAAP Adjusted EBITDA, we exclude certain income and expense items that we believe are not directly attributable to the underlying performance of our business, or are the result of long-term investment decisions in previous periods rather than day-to-day operating decisions, and may be used in future decisions for expansion and acquisition opportunities.
Our use of non-GAAP Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replacedissue additional shares in the future, non-GAAP Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or forthere will be further dilution to new capital expenditure requirements;
•non-GAAP Adjusted EBITDA does not reflect changesinvestors participating in or cash requirements for, our working capital needs;
•non-GAAP Adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;
•non-GAAP Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
this offering.
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•non-GAAP Adjusted EBITDA does not include losses associated with, or reflect the cash requirements for, legal settlements; and
•other companies, including companies in our industry, may calculate non-GAAP Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider non-GAAP Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.
The following table presents a reconciliation of net income (loss) to non-GAAP Adjusted EBITDA for each of the periods indicated:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months Ended
June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| | (in thousands)
| |
|---|
Net income (loss) | | $ | (640 | ) | $ | (4,024 | ) | $ | 12,123 | | $ | 1,340 | | $ | 1,257 | |
Interest and other expense, net | | | 33 | | | 15 | | | 153 | | | 74 | | | 76 | |
Income tax provision (benefit) | | |
311 | | |
282 | | |
(5,998 |
) | |
143 | | |
1,166 | |
Depreciation and amortization | | | 2,937 | | | 3,509 | | | 4,562 | | | 2,058 | | | 2,537 | |
Stock-based compensation | | | 1,137 | | | 1,308 | | | 944 | | | 455 | | | 679 | |
Loss from legal settlements | | | 293 | | | 5,359 | | | — | | | — | | | 200 | |
| | | | | | | | | | | | |
Non-GAAP Adjusted EBITDA | | $ | 4,071 | | $ | 6,449 | | $ | 11,784 | | $ | 4,070 | | $ | 5,915 | |
| | | | | | | | | | | | |
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MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with "Prospectusthe section titled “Prospectus Summary—Summary Consolidated Financial and Other Data," "Selected Consolidated Financial Data"” and our consolidated financial statements and accompanying notes included elsewhere within this prospectus. This discussion includes both historical information and forward-looking information that involves risks, uncertainties and assumptions. Our actual results may differ materially from management'smanagement’s expectations as a result of various factors, including but not limited to those discussed in the sections entitled "Risk Factors"titled “Risk Factors” and "Special“Special Note Regarding Forward-Looking Statements."” The objective of this section is to provide investors an understanding of the financial drivers and levers in our business and describe the financial performance of the business.
Overview
LegalZoom is a leading online platform for legal and compliance solutions in the United States. In 2020, 10% of new limited liability companies, or LLCs, and 5% of new corporations in the United States were formed via LegalZoom. Our unique position at business inception allows us to become a trusted business advisor, supporting the evolving needs of a new business across its lifecycle. Along with formation, LegalZoom offerings 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 United States, and have more than 20 years of experience navigating complex regulation and simplifying the legal and compliance process for our customers.
The U.S. legal and regulatory landscape is broad and varied, complex, opaque, and constantly evolving, in particular with respect to the following:
| • | | Multiple third-party interactions. The simple act of forming an LLC or incorporating a corporation may require specific federal, state, county and city interactions, each with their own idiosyncrasies. For instance, in Louisiana, the state registration portal asks the not yet formed business for its EIN before completing a formation. For many consumers, this would require that they stop their filing and secure an EIN with the |
| IRS before returning to the Louisiana registration portal, where they would need to restart the formation process again. In South Carolina, in order to incorporate, a small business must engage an attorney licensed in that state to certify its application for formation. |
| • | | Compliance requirements are complex. At formation, basic compliance requirements are not anticipated or understood. More advanced requirements are dictated by industry, geography, and employer type. For instance, a restaurant in Miami with even a single employee would be required to file for formation, have a registered agent, adopt an operating agreement, get an EIN, register for sales tax, receive nine business licenses and have business insurance, among other things. |
| • | | Regulations change constantly. The myriad of regulatory bodies and potential compliance requirements are daunting on their own, and this dynamic is amplified by the fact that they are constantly changing and evolving. According to a 2017 NSBA Small Business Regulations Survey, 44% of small firms in the United States reported spending 40 hours or more each year dealing with new and existing federal regulations, and 30% spend 40 hours or more each year navigating state and local regulations. |
Many small businesses operate without forming a legal entity, unintentionally introducing financial risk to the owners’ personal assets. The businesses that recognize that risk upfront often struggle to address it. Once they understand the need to be protected, they often do not know what to do, where to turn or how much it will cost to get help. Even when formed properly, small businesses often fail to comply with ongoing compliance requirements, thereby reintroducing personal liability or facing significant financial and operational risk. Furthermore, these difficulties are becoming more acute as the number of U.S. business formations increase, driven by various macroeconomic factors such as the rise of the gig economy and remote work, accentuating the need for a trusted, cost-effective, digital-first and simple legal and compliance solution.
LegalZoom commenced operations in 2000 so more people could access legal help. Initially, we focused on business formation, intellectual property, and estate planning. Over the years, we have expanded our offerings to cover a broader set of legal, compliance, tax and business services for small businesses. In 2020, we helped form 10% of all new LLCs and helped incorporate 5% of all new corporations in the United States. In addition, 25,000 trademark applications, or 6% of all trademark registration applications in the United States in 2020, were made through LegalZoom. At December 31, 2020, we had over 1.0 million subscription units outstanding and were one of the largest registered agent providers for small businesses in the United States. As a result of this success, we have become the leading brand in online providerlegal services, with 70% aided brand awareness as of December 2020 according to a 2020 study hosted by Dynata.
As a result of our traction with our customers, we have achieved economies of scale that we expect to continue to leverage as we accelerate the growth of our business. We generated revenue of $408.4 million in 2019 and $470.6 million in 2020, representing a year-over-year increase of 15.2%, and $105.8 million and $134.6 million for the three months ended March 31, 2020 and 2021, respectively, representing a period-over-period increase of 27.3%. We had net income (loss) of $7.4 million, $9.9 million, $(4.9) million and $(9.8) million in 2019, 2020, and the three months ended March 31, 2020 and 2021, respectively. The increase in net income between 2019 and 2020 was driven by higher revenue, which was partially offset by our investments in marketing spend to expand our customer base and build on our digital brand leadership. The increase in net loss between March 31, 2020 and 2021 largely resulted from increased investment in marketing spend, which nearly offset the increase in revenue. Adjusted EBITDA decreased from $97.2 million in 2019 to $88.0 million in 2020 and from $13.4 million to $3.6 million in the three months ended March 31, 2020 and 2021, as we invested further in marketing spend to expand our customer base and build on our digital brand leadership. Cash flows from operating activities increased from $52.7 million in 2019 to $93.0 million in 2020 and increased from $21.9 million in the three months ended March 31, 2020 to $31.4 million in the three months ended March 31, 2021. Free cash flow increased from $34.3 million in 2019 to $82.5 million in 2020, primarily as a result of growing deferred revenue, driven by an increase in subscription units, an increase in accounts payable due to the timing of our payments and lower capital expenditures for the purchase of property and equipment, including capitalization of internal-use software. Free cash flow increased from $19.9 million in the three months ended March 31, 2020 to $28.5 million in the three months ended March 31, 2021, primarily as a result of growth in deferred revenue
driven by an increase in the number of transactions and subscription units. For 2019, 2020, and the three months ended March 31, 2020 and 2021, our free cash flow included cash payments for interest of $37.3 million, $27.9 million, $8.3 million and $6.1 million, respectively. Adjusted EBITDA and free cash flow are not financial measures calculated in accordance with GAAP. For further information about Adjusted EBITDA and free cash flow, see the section titled “—Non-GAAP Financial Measures.”
Our Business Model
Our business model is to attract customers to LegalZoom at the time of business formation, and then continue to serve their legal and compliance needs for life with our mix of transaction and subscription services. Given this dynamic, growth in overall U.S. business formations is a key driver of our business. Overall, growth of U.S. business formations has proven to be consistent over time, while also being highly resilient to market downturns, growing 28 out of the past 30 years. Furthermore, our growth in business formations has outpaced overall business formation trends each year since we began tracking the data in 2006.
We processed 378,000 business formations in 2020. Alongside this initial business formation transaction, we offer subscription services and third-party partner offerings to help our small business customers with additional legal and business needs. Given the trust that meet the legal needs ofwe establish with small businesses at the time of formation, during 2020 and consumersthe three months ended March 31, 2021, over 60% of our small business customers purchased one year of one of our subscription services at the time of their initial formation purchase, and over half of our small business customers purchased at least one third-party solution at time of business formation. We consider our ability to attach additional products and services to a business formation as indicative of the value we are driving for small businesses.
We generate traffic through a combination of organic content, search and media spend across a diverse set of channels. Our first interaction with potential customers is often through our free, proprietary educational content, through which we earn trust and drive significant organic traffic. Additionally, our inside sales team utilizes inbound and outbound customer interactions to establish themselves as trusted advisors by helping our potential customers through the formation process, including by explaining the products and services they may need, generally resulting in higher AOV and a greater proportion of our small business customers purchasing a subscription service at the time of their initial formation purchase.
We continue to engage our customers after their initial purchase. Subscription revenue accounts for approximately half of our total revenue, and is indicative of the ongoing relationship we have with our customers. We measure the effectiveness of this ongoing relationship through our annual retention rate. For the three months ended March 31, 2021, our annual retention rate was 68%, an improvement of nine percentage points as compared to the three months ended March 31, 2020. This improvement was a result of adjustments to our pricing strategy, combined with product and lifecycle marketing improvements. Our annual retention rate reflects all customer attrition, including as a result of actual business failures of certain of our customers. According to the Bureau of Labor Statistics, approximately 20% of new businesses fail within one year of forming. We define our annual retention rate as the percentage of annual subscription units related to business formations, acquired in the quarter one year ago that were still active subscriptions 13 months after their subscription start, excluding subscriptions from our U.K. business and from our employer group legal plan and small business concierge, for which we ceased acquiring new subscribers in October 2020. Business formation subscriptions are those purchased in conjunction with an underlying LLC, incorporation, not-for-profit, or other formation transaction on our platform and all subscriptions purchased through our business-to-business offering, such as our registered agent service. This measure typically only includes subscriptions that have aged at least 60 days in order to account for our customer satisfaction guarantee. Additionally, there are many reasons our customers come to us for another transactional purchase, including forming another business, satisfying annual compliance requirements, protecting their intellectual property with a trademark, patent or copyright or purchasing an estate plan to protect themselves personally. The primary reason customers come to us for another transactional purchase is to form another business. For each year since 2017, an average of 28% of our U.S. customers who purchased a transaction in such year had also purchased a transaction product in a prior year.
We primarily serve small business customers with our transaction and subscription offerings. We also offer transaction products and subscriptions to consumers. The majority of our revenue is from our small business customers. Transaction offerings 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 offerings include compliance solutions and credentialed professional subscription services, including legal and tax advisory services. Approximately 60% of our subscription units as of December 31, 2020 and March 31, 2021 were for our registered agent service, a subscription service that most states require for businesses to receive legal notices and critical mail. 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 business, such as business license services, bookkeeping services, banking services, productivity tools and business insurance, among others.
Growing Lifetime Value per Business Formation Customer
Our unit economic model is characterized by expanding customer lifetime value and efficient customer acquisition. We define lifetime value as bookings, net of estimated refunds and related cost of revenue, over the life of a business formation customer, excluding bookings from our business-to-business offering and UK business. Bookings include cash receipts for transactions and subscriptions, including payments due to us under the terms of contractual agreements for which we may not have yet received a payment. We measure lifetime value on an annual cohort basis. In the chart below each line shows the cumulative lifetime value generated by the annual cohort of customers acquired in that year, divided by the beginning number of customers in that cohort, indexed to one hundred percent based on month one of the 2011 cohort. Since 2011, we have grown both the initial lifetime value per acquired customer and the rate of lifetime value growth over time per acquired customer. Lifetime value is not calculated or derived from GAAP amounts. Bookings differs from revenue as bookings includes cash bookings for a transaction or subscription irrespective of when revenue is recognized under GAAP. Related costs of revenue include an estimate of related cost of revenue specific to business formation customers.
We deploy a disciplined customer acquisition strategy that has allowed us to generate lifetime value in excess of customer acquisition costs within the first 90 days of establishing a customer relationship in the United States. We believe that we are transformingdefine customer acquisition costs as customer acquisition media costs and sales costs, both for the small businessinitial acquisition and consumer legal services market by leveraging the power of technology and people. Our online legal platform enables us to deliver services at scale with a compelling combination of quality, customer care and value. Our services include a portfolio of interactive legal documents that are personalized by our customers through our dynamic online processes, as well as subscription legal plans and registered agent services.
We developed our easy-to-use, online legal platform to make the law more accessible to small businesses and consumers. Our scalable technology platform enables the efficient creation of personalized legal documents, automates our supply chain and fulfillment workflow management, and provides customer analytics to help us improve our services. For small businesses and consumers who want legal advice, we offer subscription legal plans that connect our customers with experienced attorneys who participate in our legal plan network.
We have served approximately two million customers over the last 10 years. In 2011, nine out of ten of the approximately 34,000 customers who responded to a survey we provided said they would recommend LegalZoom to their friends and family. Customers that completed orders for certain of our services are invited to take an email survey. Our customers placed approximately 490,000 orders and more than 20 percent of new California limited liability companies were formed using our online legal platform in 2011. We believe the volume of transactions processed through our online legal platform creates a scale advantage that deepens our knowledge and enables us to improve the quality and depth of the services we provide to our customers.
Our revenuesrenewal related costs. Customer acquisition media costs consist primarily of transaction revenuessearch engine marketing, television, over-the-top, digital video and radio costs. We intend to continue to invest in customer acquisition given the large market opportunity, and may strategically increase our target payback period to accelerate our growth.
As we continue to invest in customer acquisition costs to grow our business, we look to do so efficiently. We aim to achieve a ratio of lifetime value to customer acquisition costs of approximately 3x within 25 months of customer acquisition, and approximately 5x within 96 months of customer acquisition.
Our Evolution
LegalZoom started with a narrow focus on business formation, intellectual property and estate planning, and has since expanded into a broad platform, with professional expertise and expanded services, both legal and non-legal, to better meet the needs of small businesses.
We have created a powerful financial model that is characterized by:
Accelerating growth. We have seen accelerating revenue growth in our business, increasing from 4% year-over-year growth in the three months ended March 31, 2020 to 27% in the three months ended March 31, 2021. This growth has been driven by accelerating business formations, coupled with efficient customer acquisition. Business formation growth accelerated from a decline of (3%) for the three months ended March 31, 2020 to an increase of 51% for the three months ended March 31, 2021, as compared to the comparable period in the prior year. In addition, we have leveraged our leading brand, significant organic traffic, disciplined customer acquisition strategy and strong competitive position to acquire new customers efficiently. Over the past several years, we have generated a lifetime value in excess of customer acquisition costs within the first 90 days of establishing a customer relationship in the United States.
Attractive subscription revenues. We generate transaction revenues whenmodel. The sizeable and growing subscription portion of our business gives us highly recurring revenue. At March 31, 2021, over 85% of our subscription units were on annual terms billed at the start of the term. Additionally, in 2020 and the three months ended March 31, 2021, our average revenue per subscription unit, or ARPU, was $223 and $226, respectively.
Ability to drive additional purchases and cross-sell customers. Given the trusted relationship we fulfill customer orders. We generate subscription revenues fromestablish with customers who subscribeat time of business formation, we are able to our legal plans, registered agent services and unlimited accessdevelop ongoing relationships which allows us to our forms library. We also generate other revenues from fees we earn when our customers purchasesell them additional products and services offered by certain third parties.over time. During 2020 and the three months ended March 31, 2021, over 60% of our small business customers purchased one year of one of our subscription services at the time of their initial formation purchase, and over half of our small business customers purchased at least one third-party solution at time of business formation. In addition, our ongoing customer engagement drives repeat purchase behavior. For example, in 2020, 27% of our transaction customers had also transacted with us in a prior year.
Strong margins. Our business is evolvingtechnology-enabled platform with a largely variable cost structure yields efficient unit economics. In addition, our subscription services have a higher gross margin than our transaction products, and as they have become an increasing percentage of our revenue mix over the years, overall gross margin has increased. Given these dynamics, we have been able to drive consistently high Adjusted EBITDA margins. Our net income (loss) was $7.4 million, $9.9 million, $(4.9) million and $(9.8) million for 2019, 2020, and for the three months ended March 31, 2020 and 2021, respectively. Our net income (loss) margin was 1.8%, 2.1%, (4.6)% and (7.3)% for 2019, 2020, and for the three months ended March 31, 2020 and 2021, respectively. While our Adjusted EBITDA decreased from primarily$97.2 million in 2019 to $88.0 million in 2020, and from $13.4 million to $3.6 million in the three months ended March 31, 2020 and 2021, respectively, as we invested further in
marketing spend to expand our customer base and build on our digital brand leadership, we generated Adjusted EBITDA margins of 23.8%, 18.7%, 12.6% and 2.7%, respectively.
High cash flow generation. As a transaction modelresult of our operating efficiencies, we have been able to a combinedgenerate significant cash flow. In addition to our profitability, we generally receive customer payments for our transaction and subscription model.services prior to rendering services, driving favorable working capital dynamics. Coupled with our cash generation, we are not highly capital intensive. For the year ended December 31, 2020 and for the three months ended March 31, 2020 and 2021, our capital expenditures for the purchase of property and equipment, including capitalization of internal-use software, averaged approximately 3.4% and 2.0% of total revenue, respectively. As a result of these dynamics, we expect that subscription revenues as a percentagegenerated net cash from operating activities of $52.7 million, $93.0 million, $21.9 million and $31.4 million in 2019, 2020 and the three months ended March 31, 2020 and 2021, respectively, and free cash flow of $34.3 million, $82.5 million, $19.9 million and $28.5 million in 2019, 2020 and the three months ended March 31, 2020 and 2021, respectively.
Key Business Metrics
In addition to the measures presented in our total revenues will continue to grow forconsolidated financial statements, we regularly monitor the foreseeable future. We evaluate how we market and sell transaction services to optimize our subscription business, with the ultimate objective of increasing revenues from customers through additional orders and subscriptions, which we refer to as customer lifetime value.
We have consistently invested in building and growing our business. Other than $8.5 million of outside capital and cash provided by exercises of stock options, we have funded our operations and capital expenditures since inception from cash flows provided by operating activities.
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Key Metrics
Our management uses a number offollowing financial and businessoperating metrics to evaluate and monitor the performancegrowth of our business, measure the effectiveness of our marketing efforts, identify trends, affecting our business, determine the allocation of resourcesformulate financial forecasts and make decisions regardingstrategic 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 strategies. We believe these metrics are usefulformations to investors to understandbe an important metric considering that it is typically the underlying trends infirst product or service small business customers purchase on our business.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 following charts set forth our revenues, non-GAAP Adjusted EBITDA and net income (loss) for each of the ten quarters ended June 30, 2012.
(1)Non-GAAP Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of non-GAAP Adjusted EBITDA to net income (loss), the most comparable GAAP item, see "Unaudited Quarterly Results of Operations Data, Other Financial Data and Seasonality."
The following charts setbelow table sets forth the number of orders placed,business formations for the years ended December 31, 2019 and 2020, and the three months ended March 31, 2020 and 2021:
| | | | | | | | | | | | | | | | |
| | | Year
Ended December 31, | | | Three Months
Ended March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
| | | (in thousands) | |
Number of business formations | | | 292 | | | | 378 | | | | 81 | | | | 122 | |
The growth in number of business formations on our platform during 2020 was primarily due to improved growth in overall U.S. business formations. Additionally, our market share of business formations increased and we expect to continue to grow our market share of new business formations.
Number of transactions
We define the number of subscribers (as oftransactions in a given period end) and subscription revenues as a percentage of total revenues for each of the ten quarters ended June 30, 2012.
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•Number of Orders Placed. This metric represents total customer orders placedgross transaction order volume, prior to refunds, on our platform during such period, excluding transactions from our subsidiary, Beaumont ABS Limited, which was divested in the period, whichApril 2020. Transactions may include one or more services purchased at the same time. AsFor 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 years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021:
| | | | | | | | | | | | | | | | |
| | | Year
Ended December 31, | | | Three Months
Ended March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
| | | (in thousands) | |
Number of transactions | | | 691 | | | | 892 | | | | 210 | | | | 276 | |
We achieved 29.1% growth in transactions from 2019 to 2020, and 31.4% from the three months ended March 31, 2020 to the three months ended March 31, 2021. Our growth in number of transactions in 2020 was driven by improved growth in U.S. business formations such as LLCs and incorporations, as well as increased growth in estate planning transactions, in part due to the impact of the order,COVID-19 pandemic, which drove tailwinds in our customers can enrollbusiness, as individuals and small businesses turned to online services given the relative inaccessibility of offline alternatives. In the three months ended March 31, 2021, transaction unit growth was driven by improved growth in a free, 30-day trialU.S. business formations. We expect to continue to grow transactions, however the growth may fluctuate period over period based on the variability of oneoverall business formations and estate planning transactions. In both 2019 and 2020, consumer transactions comprised approximately 30% of total transactions. While we cannot quantify the impact of the COVID-19 pandemic and whether our growth rate may moderate if trends toward greater adoption of online services, moderate or reverse over time, we expect the proportion of consumer transactions to decrease over time as we focus more of our subscription-based services,investment in small business formations, which does not constitutehave a separatesignificantly higher order but does createvalue.
Average order value
We define AOV for a subscriber,given period as defined below.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 use thisconsider average order value to be an important metric asgiven it indicates how much customers are spending on our platform. Estate planning transactions are generally at a key indicatorlower 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 years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021:
| | | | | | | | | | | | | | | | |
| | | Year
Ended December 31, | | | Three Months
Ended March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
Average order value | | $ | 230 | | | $ | 236 | | | $ | 210 | | | $ | 223 | |
Average order value increased by 2.6% from 2019 to measure2020 and by 6.2% from the performancethree months ended March 31, 2020 to the three months ended March 31, 2021. Growth in average order value was primarily driven by increased customer adoption of our transaction“Attorney Led Trademark” product in 2020 and by an increase in the proportion of small business fromformations (which have a significantly higher order value compared to other transactions) relative to total transactions for the three months ended March 31, 2021. Our goal is to grow AOV as we increase the average number of transactional products purchased in a single order and the mix of higher-value credentialed professional-assisted products. Growth may fluctuate period over period based on estate planning transactions and our ability to period.
•introduce and sell higher-value products.Number of Subscribers.subscription units
ThisWe 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, 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 includes total paidsince 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 free subscribersthe 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 subscription services consist primarilyregistered agent offering comprised approximately 60% of our legal plans,subscription units as of December 31, 2020 and March 31, 2021.
The below table sets forth the number of subscription units as of December 31, 2019 and 2020 and March 31, 2020 and 2021:
| | | | | | | | | | | | | | | | |
| | | As of
December 31, | | | As of
March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
| | | (in thousands) | |
Number of subscription units | | | 921 | | | | 1,085 | | | | 936 | | | | 1,146 | |
We achieved 17.8% growth in our number of subscription units in 2020 as compared to 2019, and 22.4% growth in the three months ended March 31, 2021 as compared to the same period in 2020, reflecting strong growth from our registered agent services and unlimited accessattorney advice subscriptions primarily due to increased business formations and improved retention, partially offset by the result of our forms library, and can range in duration from 30 daysstrategic decision to two years. Free trial subscriptions are only offeredincrease the initial price of our registered agent subscription. We aim to continue to grow subscription units by increasing the proportion of our small business customers that purchase certaina 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, 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 in 2020, ARPU increased 0.9% from 2019, and in the three months ended March 31, 2021, ARPU remained stable as compared to the three months ended March 31, 2020.
The below table sets forth ARPU for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021:
| | | | | | | | | | | | | | | | |
| | | Year
Ended December 31, | | | Three Months
Ended March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
| | | (in thousands) | |
Average revenue per subscription unit | | $ | 221 | | | $ | 223 | | | $ | 226 | | | $ | 226 | |
We expect ARPU to remain relatively stable over time, as we plan to focus more of our transaction-based services and, accordingly, we allocate revenues to allefforts on increasing the deliverables in these bundled transactions, including the free trial subscriptions. We believe including bundled free trial subscribers in the total number of subscribers provides a meaningful comparison to subscription revenues which include the value allocated to bundled free trials for ourunits rather than increasing pricing on existing subscription services. We use this metric to measure the growth of our subscription business. See "—Unaudited Quarterly Results of Operations Data, Other Financial Data and Seasonality—Seasonality" for more information regarding bundled free trial subscribers and subscriber attrition.
•Subscription Revenues as a Percentage of Total Revenues. This metric measures the evolution of our business model from primarily a transaction model to a combined transaction and subscription model. We have experienced rapid growth in our subscription revenues, and we expect that our subscription revenues as a percentage of total revenues will continue to increase.plans.Key Factors Affecting Our Performance
Investment in Our Subscription Legal Plan Business. While we have a large transaction business for online interactive legal document services, we have invested, and will continue to invest, in expandingWe believe that our subscription revenues from legal plans. This includes developing technology and infrastructure to support our legal plans and attorney network and expanding our sales and marketing efforts, particularly to promote legal plans and our brand. These investments will occur in advance of realizing any benefit from such investments, and therefore it may be difficult for us to determine if we are effectively allocating resources in these areas.
Investment in Customer Acquisition and Retention. We have invested, and expect that we will continue to invest, in the promotion of our services through our various customer acquisition channels, including search engine marketing, television and radio to acquire new customers and grow our business. We also invest in attracting and retaining customers with an objective of increasing overall customer lifetime value through product development and customer care initiatives. We continuously evaluate how we market and sell transaction services in order to optimize our subscription business.
Continued Adoption of Online Legal Services. Growth in number of orders placed, number of subscribers and total revenuesfuture performance will depend on continued customer adoption of online interactive legal documents and legal plans. Our business depends on our ability to build and maintain customer trust inmany factors, including the online legal services market and on our ability to broaden the market for small business and consumer legal services. The rate of adoption of online legal services will impact our ability to acquire new customers, increase our subscribers and grow our revenues.
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| • | | Our share ofbusiness 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 2019 and 2020 as well as the three months ended March 31, 2020 and 2021, business formations represented the largest share of our total transaction orders. In addition, business formations act as an entrance 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 being protected. Our business depends on the continuation of new business formation in the United States, which may be seasonal in nature and dependent on macroeconomic factors, and even more so, 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 experts 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. |
| • | | 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 (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, however our growth rate may moderate if these trends moderate or reverse over time. |
Key Components of our Results of Operations
We generate revenuesrevenue from the following sources:sources identified below.
Transaction Revenues.revenue. Transaction revenues arerevenue is primarily generated from our customized legal document preparation services upon fulfillment of these services, as well as certain legal document preparation services that were bundled with one-services. Transaction revenue includes filing fees and five-year document revision and vaulting services. Prior to the change in accounting guidance on how revenue recognition is applied to multiple deliverable arrangements that we adopted on January 1, 2010, the full value of these bundled services were required to be recognized as revenues ratably on a straight-line basis over the service period. Revenues are recognized upon fulfillment of services, predominantly when a completed set of documents is shipped to the customer. Transaction revenues are net of refunds, cancellations, promotional discounts, sales allowances and credit reservesreserves. Until April 2020, when we ceased providing such services, we also generated transaction revenue from our residential and commercial conveyancing business in the value allocatedUnited Kingdom, and revenue for these services was recognized when delivered to bundled free-trials for our subscription services.the customer. Until July 2019, when we ceased providing such services, we also generated revenue from litigation services in the United Kingdom, and we recognized this revenue based on the time incurred by the attorneys at their market billing rates. In 2020, we commenced providing tax advice and filing services in the United States which are recognized at the point in time when the customer’s tax return is filed and accepted by the applicable government authority.
Subscription Revenues.revenue. Subscription revenues arerevenue is generated primarily when customers enroll infrom subscriptions to our legal plans, registered agent services, compliance packages, attorney advice, and legal forms services, in addition to software-as-a-service,or unlimited access to our forms library.SaaS, subscriptions in the United Kingdom. In the fourth quarter of 2020, we commenced providing tax, bookkeeping and payroll subscription services. We recognize revenuesrevenue from our subscriptions ratably on a straight-line basis over the subscription term as such services are rendered.term. Subscription terms generally range from a period of 30thirty days to two years.one year. Subscription revenues includerevenue includes the value allocated to bundled free-trials for our subscription services and areis net of promotional discounts, cancellations, sales allowances and credit reserves and payments to third-party service providers such as legal plan attorneys.law firms and tax service providers.
Other Revenues. Other revenues consist primarily of fees earned from third-party providers for services provided to or leads generated for such providers through our online legal platform. We typically earn these revenues on a cost-per-click or cost-per-action basis.
WeFor transaction and subscription revenue, we generally collect payments and fees at the time orders are placed.placed and prior to services being rendered. We record amounts collected for services that have not been performed as deferred revenuesrevenue 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.
See "—the section titled “—Critical Accounting Policies—Policies and Estimates—Revenue Recognition"Recognition” for a description of the accounting policies related to revenue recognition, including arrangements that contain multiple deliverables.
Our costCost of services includerevenue includes all costs of providing and fulfilling our services. Cost of servicesrevenue primarily includeincludes government filing fees; costs of fulfillment, customer care and inbound sales personnelcredentialed professionals, and related benefits, including stock-based compensation, and costs of independent contractors for document preparation; telecommunications and data center costs, includingamortization of acquired developed technology, depreciation and amortization of network computers, equipment and internal useinternal-use software; printing, shipping and courier handling
charges; credit and debit card fees; allocated overhead; legal document kit expenses; and sales and use taxes. We defer direct and incremental costs primarily related to government filing fees incurred prior to the associated service meeting the criteria for revenue recognition. These contract assets are recognized as cost of revenue in the same period the related revenue is recognized.
We expect our cost of revenue to increase in absolute dollars as we continue to invest in enhancing our customer experience and in new product development, including expert-assisted offerings for our Tax and Attorney-Assisted services.
Gross profit and gross margin
Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, have been and will continue to be affected by various factors, primarily the mix between transaction, subscription and partner revenue. Our gross margin on subscription and partner revenue is higher than our gross margin on transaction revenue. Our gross margin expansion is also driven by automation improvements and digitization efforts. Further, our acquisitions of other companies have negatively impacted our gross margin in the short term, and any such future acquisitions could have a similar effect.
We expect our gross profit to increase in absolute dollars and our gross margin to increase modestly over the long term as we continue to focus on growing higher-margin subscription revenue and invest in fulfillment automation technologies. However, our gross margin could fluctuate from period to period due to fulfillment rates and seasonality.
Operating expenses
Our operating expenses consist primarily of sales and marketing, technology and development, general and administrative expenses, and to a lesser extent, impairments of goodwill, long-lived assets and other assets, in addition to a loss on sale of a business in 2020.
Sales and Marketingmarketing
Our salesSales and marketing expenses are comprisedconsist of customer acquisition media consisting primarily of search engine marketing, television and radio;costs; compensation and related benefits, including stock-based compensation for marketing and outbound 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 products and 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. Upon the closing of this offering, we are expected to incur significant stock-based compensation expense for certain options and restricted stock units, or RSUs, that may vest upon this offering. See the section titled “Prospectus Summary—Summary Consolidated Financial and Other Data” for additional information.
Technology and Developmentdevelopment
Technology and development expenses consist primarily of personnel costs and related benefits, including stock-based compensation, and expenses for outside consultants.consultants, an allocation of depreciation and amortization and allocated overhead. These expenses also include
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allocated overhead and costs incurred in the development and implementation amortization and maintenance of internal use software, including our website,websites, mobile applications, online legal platform, research and development and related infrastructure.
Technology and development costsexpenses are expensed as incurred, except to the extent that such costs are associated with internal useinternal-use software or website development 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. Upon the closing of this offering, we are capitalized.expected to incur significant stock-based compensation expense for certain options and RSUs that may vest upon this offering. See the section titled “Prospectus Summary—Summary Consolidated Financial and Other Data” for additional information.
Our general and administrative expenses relate primarily to employee compensation and related benefits, including stock-based compensation, for executive and corporate personnel;personnel, professional and consulting fees;fees, an allocation of depreciation and amortization, allocated overhead;overhead and legal loss contingencies.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 become a public company.
We expect our general and administrative expenses to decrease as a percentage of our revenue over the long 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. Upon the closing of this offering, we are expected to incur significant stock-based compensation expense for certain options and RSUs that may vest upon this offering. See the section titled “Prospectus Summary—Summary Consolidated Financial and Other Data” for additional information.
Interest and Other Expense, Netexpense, net
Interest and other expense, net, consists primarily of interest expense on our 2018 Credit Facility, hedging instruments, capital lease obligations, amortization of deferred financing feesdebt issuance costs and annual commitment fees on our revolving line2018 Revolving Facility. Interest and other expense, net, decreased in 2020 primarily due to a decrease in interest rates on our 2018 Term Loan.
We expect interest expense, net, to decrease in the near term following our repayment of credit.$ million of our outstanding indebtedness under our 2018 Term Loan with a portion of the net proceeds of this offering.
Our provision for income tax (provision) benefit is comprisedtaxes consists of current and deferred federal, state and foreign income taxes. See the section titled “—Critical Accounting Policies and Estimates—Income Taxes.”
In 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. In 2020, 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 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 income taxes. Our current incomeNOLs 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 as a result of this offering 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 provision is primarily relatedyears beginning after December 31, 2020, the Tax Act limits a taxpayer’s ability to state income taxes in jurisdictions where we generateutilize federal NOL carryforwards to 80% of taxable income. In 2011, our deferredaddition, 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 state income tax benefit was generated from the release2020 may be carried back to each of the valuation allowance pertainingfive 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 federal and state net deferred income tax assets. In 2009 and 2010, we did not record any deferred income tax benefit or provision as we maintained a full valuation allowance against our federal and state net deferred income tax assets. See "—Critical Accounting Policies—Income Taxes."taxes owed.
Segments
We operate in one operating segment, providing legal document preparation and related subscription services. Our chief operating decision maker is our Chief Executive Officer, who manages our operations on a consolidated basis for purposes of evaluating financial performance and allocating resources. Our Chief Executive Officer reviews separate revenue information for our transaction and subscription services. All other financial information is reviewed by him on a consolidated basis. All of our principal operations, decision-making functions and assets are located in the United States. Assets and revenues generated outside of the United States are not material for any of the periods presented.
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Results of Operations
The following table sets forth our consolidated statementsstatement 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.
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Three Months Ended March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
| | | (in thousands) | |
Revenue | | $ | 408,380 | | | $ | 470,636 | | | $ | 105,795 | | | $ | 134,632 | |
Cost of revenue(1)(2) | | | 136,915 | | | | 154,563 | | | | 35,112 | | | | 43,960 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 271,465 | | | | 316,073 | | | | 70,683 | | | | 90,672 | |
Operating expenses: | | | | | | | | | | | | | | | | |
Sales and marketing(1)(2) | | | 115,913 | | | | 171,390 | | | | 43,481 | | | | 71,361 | |
Technology and development(1)(2) | | | 37,204 | | | | 41,863 | | | | 10,543 | | | | 10,499 | |
General and administrative(1)(2) | | | 57,762 | | | | 51,017 | | | | 12,661 | | | | 13,165 | |
Impairment of goodwill, long-lived and other assets | | | 14,321 | | | | 1,105 | | | | 555 | | | | — | |
Loss on sale of business | | | — | | | | 1,764 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total operating expenses | | | 225,200 | | | | 267,139 | | | | 67,240 | | | | 95,025 | |
| | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 46,265 | | | | 48,934 | | | | 3,443 | | | | (4,353 | ) |
Interest expense, net | | | (38,559 | ) | | | (35,504 | ) | | | (9,270 | ) | | | (8,654 | ) |
Other income (expense), net | | | 2,577 | | | | 3,713 | | | | (1,106 | ) | | | 248 | |
Impairment of available-for-sale debt securities | | | — | | | | (4,818 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes and income from equity method investment | | | 10,283 | | | | 12,325 | | | | (6,933 | ) | | | (12,759 | ) |
Provision for (benefit from) income taxes | | | 3,161 | | | | 2,429 | | | | (2,055 | ) | | | (2,936 | ) |
| | | | | | | | | | | | | | | | |
Income (loss) before income from equity method investment | | | 7,122 | | | | 9,896 | | | | (4,878 | ) | | | (9,823 | ) |
Income from equity method investment | | | 321 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 7,443 | | | $ | 9,896 | | | $ | (4,878 | ) | | $ | (9,823 | ) |
| | | | | | | | | | | | | | | | |
| (1) | Includes stock-based compensation expense as follows: |
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months Ended
June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| | (in thousands)
| |
|---|
Consolidated Statements of Operations Data: | | | | | | | | | | | | | | | | |
Revenues(1) | | $ | 103,299 | | $ | 120,771 | | $ | 156,066 | | $ | 78,959 | | $ | 96,459 | |
Costs and operating expenses(2): | | | | | | | | | | | | | | | | |
Cost of services | | | 53,082 | | | 60,643 | | | 80,437 | | | 41,805 | | | 46,571 | |
Sales and marketing | | | 32,673 | | | 36,322 | | | 41,891 | | | 22,189 | | | 31,198 | |
Technology and development | | | 4,686 | | | 7,509 | | | 8,117 | | | 3,961 | | | 4,474 | |
General and administrative(1) | | | 13,154 | | | 20,024 | | | 19,343 | | | 9,447 | | | 11,717 | |
| | | | | | | | | | | | |
Total costs and operating expenses | | | 103,595 | | | 124,498 | | | 149,788 | | | 77,402 | | | 93,960 | |
| | | | | | | | | | | | |
Income (loss) from operations | | | (296 | ) | | (3,727 | ) | | 6,278 | | | 1,557 | | | 2,499 | |
Interest and other expense, net | | | (33 | ) | | (15 | ) | | (153 | ) | | (74 | ) | | (76 | ) |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | (329 | ) | | (3,742 | ) | | 6,125 | | | 1,483 | | | 2,423 | |
Income tax (provision) benefit | | | (311 | ) | | (282 | ) | | 5,998 | | | (143 | ) | | (1,166 | ) |
| | | | | | | | | | | | |
Net income (loss) | | $ | (640 | ) | $ | (4,024 | ) | $ | 12,123 | | $ | 1,340 | | $ | 1,257 | |
| | | | | | | | | | | | |
(1)We recorded an estimated charge of $5.4 million during the year ended December 31, 2010 related to legal settlements, of which $4.6 million was included as part of general and administrative expenses and $0.8 million was recorded as a reduction of revenues. During the six months ended June 30, 2012, we recorded an additional $0.2 million charge related to a change in estimate of the settlement costs of these legal matters, which was recorded as a reduction of revenues. The ultimate costs of resolving these matters are dependent on a number of factors, including the resolution of any appeals of the approved settlements, actual claims made by, participation rates of, and the resulting payments, if any, to the class members. Any difference between the amount accrued and the ultimate costs of these matters will be recognized as an additional or lower expense in the period in which the matters are resolved. If the actual costs of these matters are higher than the amount we estimated, this difference could have a material adverse effect on our business, operating results, cash flows and financial condition. See Note 6 to our consolidated financial statements included elsewhere in this prospectus for a full discussion of this legal settlement accrual.
(2) | | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | | Three Months
Ended March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
| | | (in thousands) | |
Cost of revenue | | $ | 205 | | | $ | 177 | | | $ | 37 | | | $ | 59 | |
Sales and marketing | | | 1,020 | | | | 1,122 | | | | 643 | | | | 207 | |
Technology and development | | | 1,314 | | | | 2,703 | | | | 950 | | | | 526 | |
General and administrative | | | 4,170 | | | | 9,719 | | | | 2,697 | | | | 3,150 | |
| | | | | | | | | | | | | | | | |
Total stock-based compensation expense | | $ | 6,709 | | | $ | 13,721 | | | $ | 4,327 | | | $ | 3,942 | |
| | | | | | | | | | | | | | | | |
Stock-based compensation expense includedincrease in the above line items:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months Ended
June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| | (in thousands)
| |
|---|
Cost of services | | $ | 200 | | $ | 178 | | $ | 155 | | $ | 82 | | $ | 67 | |
Sales and marketing | | | 124 | | | 46 | | | 56 | | | 21 | | | 135 | |
Technology and development | | | 114 | | | 155 | | | 133 | | | 64 | | | 75 | |
General and administrative | | | 699 | | | 929 | | | 600 | | | 288 | | | 402 | |
| | | | | | | | | | | | |
Total stock-based compensation expense | | $ | 1,137 | | $ | 1,308 | | $ | 944 | | $ | 455 | | $ | 679 | |
| | | | | | | | | | | | |
Table of Contents2020 primarily relates to recent equity grants to new executive officers.
| (2) | Includes depreciation and amortization expense for our property and equipment, including capitalized internal-use software and intangible assets as follows: |
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Three Months Ended March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
| | | (in thousands) | |
Cost of revenue | | $ | 6,773 | | | $ | 8,324 | | | $ | 1,958 | | | $ | 1,678 | |
Sales and marketing | | | 6,469 | | | | 6,913 | | | | 1,849 | | | | 1,475 | |
Technology and development | | | 1,055 | | | | 2,800 | | | | 650 | | | | 587 | |
General and administrative | | | 2,093 | | | | 2,060 | | | | 463 | | | | 426 | |
| | | | | | | | | | | | | | | | |
Total depreciation and amortization expense | | $ | 16,390 | | | $ | 20,097 | | | $ | 4,920 | | | $ | 4,166 | |
| | | | | | | | | | | | | | | | |
The following table sets forth our consolidated statementsstatement of operations data as a percentage of revenuesrevenue for each of the periods indicated. The period-to-period comparison
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Three Months Ended March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
Revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Cost of revenue | | | 33.5 | | | | 32.8 | | | | 33.2 | | | | 32.7 | |
| | | | | | | | | | | | | | | | |
Gross margin | | | 66.5 | | | | 67.2 | | | | 66.8 | | | | 67.3 | |
Operating expenses: | | | | | | | | | | | | | | | | |
Sales and marketing | | | 28.4 | | | | 36.4 | | | | 41.1 | | | | 53.0 | |
Technology and development | | | 9.1 | | | | 8.9 | | | | 10.0 | | | | 7.8 | |
General and administrative | | | 14.2 | | | | 10.9 | | | | 12.1 | | | | 9.8 | |
Impairment of goodwill, long-lived and other assets | | | 3.5 | | | | 0.2 | | | | 0.5 | | | | — | |
Loss on sale of business | | | — | | | | 0.4 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total operating expenses | | | 55.2 | | | | 56.8 | | | | 63.7 | | | | 70.6 | |
| | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 11.3 | | | | 10.4 | | | | 3.1 | | | | (3.3 | ) |
Interest expense, net | | | (9.4 | ) | | | (7.5 | ) | | | (8.7 | ) | | | (6.4 | ) |
Other income (expense), net | | | 0.6 | | | | 0.7 | | | | (0.9 | ) | | | 0.2 | |
Impairment of available-for-sale debt securities | | | — | | | | (1.0 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes and income from equity method investment | | | 2.5 | | | | 2.6 | | | | (6.5 | ) | | | (9.5 | ) |
Provision for (benefit from) income taxes | | | 0.8 | | | | 0.5 | | | | (2.0 | ) | | | (2.2 | ) |
| | | | | | | | | | | | | | | | |
Income (loss) before income from equity method investment | | | 1.7 | | | | 2.1 | | | | (4.6 | ) | | | (7.3 | ) |
Income from equity method investment | | | 0.1 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Net income (loss) | | | 1.8 | % | | | 2.1 | % | | | (4.6 | )% | | | (7.3 | )% |
| | | | | | | | | | | | | | | | |
Comparison of financial results should not be considered as a prediction or indicative of our future results.
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months Ended
June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
Consolidated Statements of Operations Data: | | | | | | | | | | | | | | | | |
Revenues | | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Costs and operating expenses: | | | | | | | | | | | | | | | | |
Cost of services | | | 51 | | | 50 | | | 52 | | | 53 | | | 48 | |
Sales and marketing | | | 32 | | | 30 | | | 27 | | | 28 | | | 32 | |
Technology and development | | | 5 | | | 6 | | | 5 | | | 5 | | | 5 | |
General and administrative | | | 13 | | | 17 | | | 12 | | | 12 | | | 12 | |
| | | | | | | | | | | | |
Total costs and operating expenses | | | 101 | | | 103 | | | 96 | | | 98 | | | 97 | |
| | | | | | | | | | | | |
Income (loss) from operations | | | (1 | ) | | (3 | ) | | 4 | | | 2 | | | 3 | |
Interest and other expense, net | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | (1 | ) | | (3 | ) | | 4 | | | 2 | | | 3 | |
Income tax (provision) benefit | | | — | | | — | | | 4 | | | — | | | (1 | ) |
| | | | | | | | | | | | |
Net income (loss) | | | (1 | )% | | (3 | )% | | 8 | % | | 2 | % | | 2 | % |
| | | | | | | | | | | | |
Sixthe Three Months Ended June 30, 2011March 31, 2020 and 20122021
| | | | | | | | | | |
| | Six Months Ended June 30, | |
|---|
| | 2011 | | 2012 | | % Change | |
|---|
| | (in thousands)
| |
|---|
Revenues by type: | | | | | | | | | | |
Transaction revenues | | $ | 64,055 | | $ | 69,905 | | | 9 | % |
Subscription revenues | | | 11,430 | | | 21,359 | | | 87 | % |
Other | | | 3,474 | | | 5,195 | | | 50 | % |
| | | | | | | | |
Total revenues | | $ | 78,959 | | $ | 96,459 | | | 22 | % |
| | | | | | | | |
Total revenues increased $17.5 million for the six months ended June 30, 2012 primarily as a result of increases in both transaction and subscription revenues. Transaction revenues increased $5.8 million for the six months ended June 30, 2012 primarily due to a 10% increase in the number of orders placed. The increase in the number of orders placed was largely driven by an increase in business formation services.
Subscription revenues increased $9.9 million
| | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | | | | | | |
| | | 2020 | | | 2021 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Revenue by type | | | | | | | | | | | | | | | | |
Transaction | | $ | 45,586 | | | $ | 61,388 | | | $ | 15,802 | | | | 34.7 | % |
Subscription | | | 54,235 | | | | 65,493 | | | | 11,258 | | | | 20.8 | % |
Partner | | | 5,974 | | | | 7,751 | | | | 1,777 | | | | 29.7 | % |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 105,795 | | | $ | 134,632 | | | $ | 28,837 | | | | 27.3 | % |
| | | | | | | | | | | | | | | | |
Total revenue for the six months ended June 30, 2012, benefitting from a 60% increase in the number of subscribers across all of our subscription services combined with price increases for our legal plans that we implemented in first quarter of 2011. We expect our subscription revenues to grow as a percentage of total revenues as we continue to transition our business from a transaction model to a combined transaction and subscription model.
Other revenues increased $1.7 million for the six months ended June 30, 2012 primarily due to increased revenues from third-party products and services purchased by our customers.
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| | | | | | | | | | |
| | Six Months Ended June 30, | |
|---|
| | 2011 | | 2012 | | % Change | |
|---|
Cost of services | | $ | 41,805 | | $ | 46,571 | | | 11 | % |
Percentage of total revenues | | | 53 | % | | 48 | % | | | |
Cost of services increased $4.8 million for the six months ended June 30, 2012 primarily due to the growth in orders placed. The decrease in cost of services as a percentage of total revenues was largely attributable to the increase in subscription revenues, which have lower associated costs of services.
We plan to continue efforts to manage cost of services but expect total cost of services to increase as we fulfill greater volumes. However, with our business model evolving from primarily a transaction model to a combined transaction and subscription model, we expect the total cost of services as a percentage of total revenues to decrease over time as subscription services require less fulfillment labor and related costs.
| | | | | | | | | | |
| | Six Months Ended June 30, | |
|---|
| | 2011 | | 2012 | | % Change | |
|---|
Sales and marketing | | $ | 22,189 | | $ | 31,198 | | | 41 | % |
Percentage of total revenues | | | 28 | % | | 32 | % | | | |
Sales and marketing expenses increased $9.0 million for the six months ended June 30, 2012, $5.7 million of which was attributable to increased spend on customer acquisition media, including search engine marketing, television and radio. The remaining increase was primarily attributable to increases in personnel and related costs and allocated overhead.
We have invested, and expect that we will continue to invest, in sales and marketing. Sales and marketing expenses as a percentage of total revenues are expected to increase in the near term, as we continue to invest in building our brand, particularly to promote our legal plans. Additionally, we plan to add marketing, sales and business development personnel, develop new campaigns and continue to invest in various forms of media. However, as we continue to grow and transform our business into a combined transaction and subscription model and achieve a higher scale for our services, we expect sales and marketing expenses as a percentage of total revenues to decrease over the long-term.
| | | | | | | | | | |
| | Six Months Ended June 30, | |
|---|
| | 2011 | | 2012 | | % Change | |
|---|
Technology and development | | $ | 3,961 | | $ | 4,474 | | | 13 | % |
Percentage of total revenues | | | 5 | % | | 5 | % | | | |
Technology and development expenses increased $0.5 million for the six months ended June 30, 2012. The increase was primarily attributable to increased compensation expense for additional technology hires, partially offset by the impact of capitalizing more software costs in the current period.
We have focused our technology and development efforts on improving and maintaining our internally-developed online technology platform, efficiency in operations and expanded infrastructure. As we grow our business, we expect to increase the cost of investment in technology and development in these areas and develop new services while enhancing the quality of customer experience for existing services, but we expect that technology and development expenses as a percentage of total revenues will remain relatively consistent over the long term.
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| | | | | | | | | | |
| | Six Months Ended June 30, | |
|---|
| | 2011 | | 2012 | | % Change | |
|---|
General and administrative | | $ | 9,447 | | $ | 11,717 | | | 24 | % |
Percentage of total revenues | | | 12 | % | | 12 | % | | | |
General and administrative expenses increased $2.3 million for the six months ended June 30, 2012 due to approximately $0.2 million in higher compensation expense for additional executive and corporate hires and $0.8 million in increased professional fees, including legal and audit fees. We also experienced $0.6 million in increased rent and travel due to the expansion of our operations and $0.7 million in increased other general and administrative costs.
We expect our general and administrative expenses to increase as we continue to expand our operations, hire additional personnel, grant additional stock-based awards and transition from a private to a public company. Public company costs we incur will include quarterly and annual reporting and compliance costs, including ongoing evaluation and maintenance of our internal control over financial reporting, professional fees, exchange listing fees, shareholder and other investor communications, institution of an internal audit function and increased costs for directors' and officers' insurance and other support services. However, as we continue to grow and transform our business into a combined transaction and subscription model and achieve a higher scale for our services, we expect general and administrative expenses as a percentage of total revenues to decrease slightly over the long-term.
Interest and Other Expenses, net
| | | | | | | | | | |
| | Six Months Ended June 30, | |
|---|
| | 2011 | | 2012 | | % Change | |
|---|
Interest and other expenses, net | | $ | (74 | ) | $ | (76 | ) | | 3 | % |
Percentage of total revenues | | | — | % | | — | % | | | |
Interest and other expenses, net increased for the six months ended June 30, 2012 primarily due to interest expense on amortization of deferred financing fees. We have no amounts outstanding under our line of credit and do not expect to draw on the line in 2012. We may also generate additional interest income on our investment of the proceeds from this offering.
| | | | | | | | |
| | Six Months Ended June 30, |
|---|
| | 2011 | | 2012 | | % Change |
|---|
Income tax provision | | $ | 143 | | $ | 1,166 | | NM |
Percentage of total revenues | | | — | % | | 1 | % | |
We recorded an income tax provision of $1.2 million for the six months ended June 30, 2012, which included $0.8 million of change in deferred income taxes and $0.4 million of current state income taxes. We recorded an income tax provision of $0.1 million for the six months ended June 30, 2011.
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Years Ended December 31, 2009, 2010 and 2011
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| |
| |
|---|
| | 2009 to 2010
% Change | | 2010 to 2011
% Change | |
|---|
| | 2009 | | 2010 | | 2011 | |
|---|
| | (in thousands)
| |
| |
| |
|---|
Revenues by type: | | | | | | | | | | | | | | | | |
Transaction revenues | | $ | 92,561 | | $ | 105,491 | | $ | 121,856 | | | 14 | % | | 16 | % |
Subscription revenues | | | 4,966 | | | 10,889 | | | 27,878 | | | 119 | % | | 156 | % |
Other | | | 5,772 | | | 4,391 | | | 6,332 | | | (24 | )% | | 44 | % |
| | | | | | | | | | | | | | |
Total revenues | | $ | 103,299 | | $ | 120,771 | | $ | 156,066 | | | 17 | % | | 29 | % |
| | | | | | | | | | | | | | |
2011 Compared to 2010. Total revenues increased $35.3 million in 2011 as a result of increases in transaction revenues and subscription revenues. Transaction revenues increased $16.4 million in 2011 due to a 12% increase in the number of orders placed. We implemented a number of new initiatives in the fourth quarter of 2010 that we believe contributed to the overall growth in orders in 2011, including lowered pricing for certain business formation services, the introduction of flexible customer payment options for certain of our services and website enhancements that we believe improved customer experience and conversion. The increase in the number of orders placed was largely in business formation services, which tend to have a higher average order value. In addition, our revenues in 2010 also included a reduction of revenues of $0.8 million related to legal settlements described in "—Critical Accounting Policies and Estimates—Loss Contingencies" and Note 6 to our consolidated financial statements included elsewhere in this prospectus. No similar reduction to revenues was recorded in 2011.
Subscription revenues increased $17.0 million in 2011 with a 97% increase in the number of subscribers across all of our subscription services as a result of an expansion of our services. Our registered agent services benefited from a full year of expanded in-house operations in 2011, compared to only 10 months in 2010. Additionally, our legal plan services benefitted from an increase in legal plan prices and a full year of operations in 2011, compared to a partial year in 2010.
Other revenues increased $1.9 million due primarily to increased revenues from third-party products and services purchased by our customers.
2010 Compared to 2009. Total revenues increased $17.5 million in 2010. Transaction revenues increased $12.9 million primarily as a result of an increase in the number of orders placed and the recognition of $4.7 million of revenue from certain document preparation services due to the adoption of new revenue recognition rules as of January 1, 2010. See "Critical Accounting Policies and Estimates—Revenue Recognition." The 2010 revenue growth was partially offset by the $0.8 million reduction of revenue related to legal settlements as further described in "—Critical Accounting Policies and Estimates—Loss Contingencies" and Note 6 to our consolidated financial statements included elsewhere in this prospectus.
Subscription revenues increased $5.9 million in 2010 primarily as a result of a 147% increase in the number of subscribers. The increase in the number of subscribers and subscription revenues was driven primarily by two factors. First, prior to 2010, we performed our registered agent services in only six states, with the remainder of the states serviced by third parties. In March 2010, we began to expand our in-house operations to perform our registered agent services in an additional 43 states and the District of Columbia. For registered agent services we perform, we recognize as revenues the full amount we charge the customer and record the related costs incurred in fulfilling those services in cost of services. For registered agent customers serviced by a third party, we recognize revenues net of the fees paid to the third party. Second, we launched both our legal plan and our forms subscriptions in 2010, with the initial offering in California in April and a further expansion to other states in August.
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| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| |
| |
|---|
| | 2009 to 2010
% Change | | 2010 to 2011
% Change | |
|---|
| | 2009 | | 2010 | | 2011 | |
|---|
| | (dollars in thousands)
| |
| |
| |
|---|
Cost of services | | $ | 53,082 | | $ | 60,643 | | $ | 80,437 | | | 14 | % | | 33 | % |
Percentage of total revenues | | | 51 | % | | 50 | % | | 52 | % | | | | | | |
2011 Compared to 2010. Cost of services increased $19.8 million in 2011 primarily due to the growth in orders placed. The increase in cost of services as a percentage of total revenues was largely attributable to the strategic decision to reduce pricing of certain business formation services in the fourth quarter of 2010. This resulted in a shift in service mix toward business formation services, which have higher associated costs of services.
2010 Compared to 2009. Cost of services increased $7.6 million in 2010 due to the increase in number of orders placed and expansion of operations. During March 2010, we opened a new customer service and production center in Austin, Texas, increasing both direct and allocated overhead costs by $0.7 million in 2010 as compared to 2009. We also experienced increased fulfillment costs associated with the expansion of our registered agent services business beginning in March 2010.
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| |
| |
|---|
| | 2009 to 2010
% Change | | 2010 to 2011
% Change | |
|---|
| | 2009 | | 2010 | | 2011 | |
|---|
| | (dollars in thousands)
| |
| |
| |
|---|
Sales and marketing | | $ | 32,673 | | $ | 36,322 | | $ | 41,891 | | | 11 | % | | 15 | % |
Percentage of total revenues | | | 32 | % | | 30 | % | | 27 | % | | | | | | |
2011 Compared to 2010. Sales and marketing expenses increased $5.6 million in 2011, $4.0 million of which was attributable to increased spend on customer acquisition media, including search engine marketing, television and radio. The remaining increase was primarily attributable to increases in personnel and related costs, and allocated overhead.
2010 Compared to 2009. Sales and marketing expenses increased $3.6 million in 2010, $3.4 million of which was attributable to increased spend on customer acquisition media.
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| |
| |
|---|
| | 2009 to 2010
% Change | | 2010 to 2011
% Change | |
|---|
| | 2009 | | 2010 | | 2011 | |
|---|
| | (dollars in thousands)
| |
| |
| |
|---|
Technology and development | | $ | 4,686 | | $ | 7,509 | | $ | 8,117 | | | 60 | % | | 8 | % |
Percentage of total revenues | | | 5 | % | | 6 | % | | 5 | % | | | | | | |
2011 Compared to 2010. Technology and development expenses increased $0.6 million in 2011. The increase was primarily attributable to increased technology hiring and resulting compensation.
2010 Compared to 2009. Technology and development expenses increased $2.8 million in 2010. The increase was primarily attributable to the expansion of technology personnel and consultants for the development of our legal plan services, investments to improve operating efficiencies and to maintain and expand our infrastructure.
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| |
| |
|---|
| | 2009 to 2010
% Change | | 2010 to 2011
% Change | |
|---|
| | 2009 | | 2010 | | 2011 | |
|---|
| | (dollars in thousands)
| |
| |
| |
|---|
General and administrative | | $ | 13,154 | | $ | 20,024 | | $ | 19,343 | | | 52 | % | | (3 | )% |
Percentage of total revenues | | | 13 | % | | 17 | % | | 12 | % | | | | | | |
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2011 Compared to 2010. General and administrative expenses decreased $0.7 million in 2011 because 2010 included a $4.6 million charge for estimated legal settlements with no similar charges in 2011. Excluding the legal settlements charge, further described in "—Critical Accounting Policies and Estimates—Loss Contingencies" and Note 6 to our consolidated financial statements included elsewhere in this prospectus, general and administrative expenses increased by $3.9 million in 2011, approximately $1.8 million of which was attributable to bonuses awarded for company performance. No bonuses for company performance were awarded in 2010. The remaining $2.1 million increase was comprised primarily of $1.3 million in higher compensation for and additional new hires of executive and corporate personnel and $0.8 million in increased legal and audit fees.
2010 Compared to 2009. General and administrative expenses increased $6.9 million in 2010, including a $4.6 million charge related to legal settlements. See "—Critical Accounting Policies and Estimates—Loss Contingencies" and Note 6 to our consolidated financial statements included elsewhere in this prospectus. The remaining $2.3 million in increased general administrative expenses came primarily as a result of a $2.1 million increase in personnel costs and related benefits, including stock-based compensation, due to higher compensation and hiring, but was partially offset by lower bonus accruals and a $0.3 million legal settlement in 2009. In 2010, we did not award any bonuses based on company performance compared to $1.1 million in 2009. The remaining $1.3 million is attributable to other expenses including costs associated with relocating our headquarters from Los Angeles to Glendale, California and opening our facility in Austin, Texas.
Interest and Other Expenses, Net
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| |
| |
|---|
| | 2009 to 2010
% Change | | 2010 to 2011
% Change | |
|---|
| | 2009 | | 2010 | | 2011 | |
|---|
| | (dollars in thousands)
| |
| |
| |
|---|
Interest and other expenses, net | | $ | (33 | ) | $ | (15 | ) | $ | (153 | ) | | (55 | )% | | NM | |
Percentage of total revenues | | | — | % | | — | % | | — | % | | | | | | |
Interest and other expenses, net, increased $0.1 million in 2011 primarily due to increased interest expenses on capital lease obligations and amortization of deferred financing fees. Interest and other expenses, net, was immaterial in 2009 and 2010.
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| |
| |
|---|
| | 2009 to 2010
% Change | | 2010 to 2011
% Change | |
|---|
| | 2009 | | 2010 | | 2011 | |
|---|
| | (dollars in thousands)
| |
| |
| |
|---|
Income tax (provision) benefit | | $ | (311 | ) | $ | (282 | ) | $ | 5,998 | | | (9 | )% | | NM | |
Percentage of total revenues | | | — | % | | — | % | | 4 | % | | | | | | |
Our income tax provision in 2009 and 2010 consisted of state taxes in states where we generated taxable income. Our income tax benefit in 2011 consisted of the release of a valuation allowance of $6.9 million, partially offset by a provision for state and federal income taxes of $0.6 million and $0.3 million, respectively. Prior to 2011, we generated losses and federal net operating loss carryforwards and we were not subject to federal income taxes but provided for a full valuation allowance against our net deferred tax assets. In 2011, we became profitable and achieved a three-year cumulative income before income taxes during the second half of 2011. We also generated sufficient taxable income to begin to utilize a significant portion our previously recorded federal net operating loss carryforwards. Therefore, based on the weight of positive evidence that our deferred tax assets are more likely than not realizable, we released the valuation allowance against our remaining net deferred tax assets during the fourth quarter of 2011, except for capital loss carryforwards, which we do not expect to utilize prior to expiration in 2012. See "—Critical Accounting Policies and Estimates—Income Taxes."
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We currently expect that we will continue to generate sufficient federal taxable income and be able to utilize our remaining net deferred tax assets available as of December 31, 2011. We also expect to continue to generate taxable income and pay income taxes in federal and state jurisdictions where we operate.
Unaudited Quarterly Results of Operations Data, Other Financial Data and Seasonality
The tables below set forth our unaudited quarterly consolidated statements of operations data and other financial data for each of the ten quarters ended June 30, 2012. We have prepared the quarterly consolidated statements of operations data on a basis consistent with the audited consolidated financial statements included in this prospectus. In the opinion of management, the financial information reflects all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | |
|---|
| | Mar. 31,
2010 | | June 30,
2010 | | Sept. 30,
2010 | | Dec. 31,
2010 | | Mar. 31,
2011 | | June 30,
2011 | | Sept. 30,
2011 | | Dec. 31,
2011 | | Mar. 31,
2012 | | June 30,
2012 | |
|---|
| | (in thousands)
| |
|---|
Consolidated Statements of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues(1) | | $ | 30,146 | | $ | 31,206 | | $ | 30,734 | | $ | 28,685 | | $ | 38,288 | | $ | 40,671 | | $ | 40,507 | | $ | 36,600 | | $ | 46,988 | | $ | 49,471 | |
Costs and operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of services | | | 14,756 | | | 15,345 | | | 14,864 | | | 15,678 | | | 20,459 | | | 21,346 | | | 20,088 | | | 18,544 | | | 22,847 | | | 23,724 | |
Sales and marketing | | | 10,524 | | | 9,044 | | | 9,189 | | | 7,565 | | | 12,388 | | | 9,801 | | | 11,747 | | | 7,955 | | | 15,651 | | | 15,547 | |
Technology and development | | | 2,012 | | | 1,702 | | | 1,711 | | | 2,084 | | | 1,869 | | | 2,092 | | | 2,113 | | | 2,043 | | | 2,071 | | | 2,403 | |
General and administrative(1) | | | 8,313 | | | 3,178 | | | 3,620 | | | 4,913 | | | 4,596 | | | 4,851 | | | 5,195 | | | 4,701 | | | 6,167 | | | 5,550 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total costs and operating expenses | | | 35,605 | | | 29,269 | | | 29,384 | | | 30,240 | | | 39,312 | | | 38,090 | | | 39,143 | | | 33,243 | | | 46,736 | | | 47,224 | |
| | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | (5,459 | ) | | 1,937 | | | 1,350 | | | (1,555 | ) | | (1,024 | ) | | 2,581 | | | 1,364 | | | 3,357 | | | 252 | | | 2,247 | |
Interest and other income (expense), net | | | (12 | ) | | (14 | ) | | 16 | | | (5 | ) | | (51 | ) | | (23 | ) | | (40 | ) | | (39 | ) | | (27 | ) | | (49 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (5,471 | ) | | 1,923 | | | 1,366 | | | (1,560 | ) | | (1,075 | ) | | 2,558 | | | 1,324 | | | 3,318 | | | 225 | | | 2,198 | |
Income tax (provision) benefit | | | (435 | ) | | 153 | | | 174 | | | (174 | ) | | 103 | | | (246 | ) | | (127 | ) | | 6,268 | | | (280 | ) | | (886 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (5,906 | ) | $ | 2,076 | | $ | 1,540 | | $ | (1,734 | ) | $ | (972 | ) | $ | 2,312 | | $ | 1,197 | | $ | 9,586 | | $ | (55 | ) | $ | 1,312 | |
| | | | | | | | | | | | | | | | | | | | | | |
Other Financial Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (5,906 | ) | $ | 2,076 | | $ | 1,540 | | $ | (1,734 | ) | $ | (972 | ) | $ | 2,312 | | $ | 1,197 | | $ | 9,586 | | $ | (55 | ) | $ | 1,312 | |
Interest and other expense (income), net | | | 12 | | | 14 | | | (16 | ) | | 5 | | | 51 | | | 23 | | | 40 | | | 39 | | | 27 | | | 49 | |
Income tax provision (benefit) | | | 435 | | | (153 | ) | | (174 | ) | | 174 | | | (103 | ) | | 246 | | | 127 | | | (6,268 | ) | | 280 | | | 886 | |
Depreciation and amortization | | | 888 | | | 866 | | | 879 | | | 876 | | | 1,002 | | | 1,056 | | | 1,206 | | | 1,298 | | | 1,244 | | | 1,293 | |
Stock-based compensation | | | 318 | | | 292 | | | 305 | | | 393 | | | 266 | | | 189 | | | 193 | | | 296 | | | 332 | | | 347 | |
Loss from legal settlements | | | 5,359 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 200 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | |
Non-GAAP Adjusted EBITDA(2) | | $ | 1,106 | | $ | 3,095 | | $ | 2,534 | | $ | (286 | ) | $ | 244 | | $ | 3,826 | | $ | 2,763 | | $ | 4,951 | | $ | 2,028 | | $ | 3,887 | |
| | | | | | | | | | | | | | | | | | | | | | |
(1)We recorded an estimated charge of $5.4 million during the three months ended March 31, 2010 related2021 increased $28.8 million, or 27.3%, compared to legal settlements, of which $4.6 million was included as part of general and administrative expenses and $0.8 million was recorded as a reduction of revenues. During the three months ended March 31, 2012, we recorded an additional $0.2 million charge related to a change in estimate of the settlement costs of these legal matters, which2020. The increase was recorded as a reduction of revenues. See Note 6 to our consolidated financial statements included elsewhere in this prospectus for a full discussion of this legal settlement accrual.
(2)For a definition of non-GAAP Adjusted EBITDA and a discussion of the limitations of using non-GAAP Adjusted EBITDA, see "Selected Consolidated Financial Data—Non-GAAP Adjusted EBITDA."
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We have experienced, and expect that we will continue to experience, seasonality in the number of orders placed. Customers tend to place a higher number of orders in the first quarter of the year as we believe the demand for forming businesses is the highest at the beginning of the year. Further seasonality is reflected in the timing of our revenue recognition in the second quarter, as we typically recognize in the second quarter a high amount of revenues from orders placed in the first quarter that are fulfilled in the second quarter. Also, we generally see demand for our services decline around the beginning of the third quarter with summer vacations and in the last two months of the fourth quarter around the winter holidays. We expect this seasonality to continue into the future, which may cause period to period fluctuations in certain of our operating results and financial metrics and thus limit our ability to predict our future results. At the end of each of our last ten fiscal quarters, bundled free trial subscribers constituted less than 20% of the total number of subscribers and in seven of those quarters bundled free trial subscribers constituted 10% or less of the total number of subscribers. As the size of our subscription business grows as a percentage of our total revenues, we expect that the number of bundled free trial subscribers as a percentage of the total number of subscribers will generally decline, with potential seasonalprimarily driven by increases in transaction revenue and subscription revenue. Transaction revenue was 43.1% and 45.6% of total revenue for the first quarterthree months ended March 31, 2020 and 2021, respectively, and subscription revenue was 51.3% and 48.6% of each year relatedtotal revenue for the three months ended March 31, 2020 and 2021, respectively.
Transaction revenue for the three months ended March 31, 2021 increased $15.8 million, or 34.7%, compared to the seasonality of our transactional service business. During each of the twelve calendarthree months ended June 30, 2012, we estimate that the number of monthly subscriber cancellations dividedMarch 31, 2020, driven by the sum of beginning subscribers and subscriber additions ranged from approximately five to eight percent. We believe that month-over-month attrition across our subscription plans generally decreases among subscribers that have been paying subscribers for at least 90 days.
Cost of services follow similar seasonal patterns of orders placed and revenues recognized, with higher levels of spending for customer care during periods in which our revenues are higher. Costs of services, including government filing fees, printing and shipping, credit and debit card fees and sales and use taxes, tend to be variable costs and are generally aligned with the number of orders placed. We use temporary personnel and outsourced independent contractors to provide flexibility in hiring and to manage costs. The fourth quarter cost of services as a percent of revenue tends to increase slightly over the third quarter due to increased full-time and temporary customer care and fulfillment personnel hired 45 to 60 days prior to the anticipated seasonally higher volumes in the first quarter in order to allow for appropriate training and development of such personnel. We expect the trend of hiring new customer care representatives and fulfillment personnel 45 to 60 days before the calendar year-end to continue.
Media spend is generally at its highest in the first quarter and in line with the seasonal first quarter31.4% increase in the number of orders placed. Media spend generally reaches its second highest level of spendtransactions and a 6.2% improvement in average order value.
Subscription revenue for the three months ended March 31, 2021 increased $11.3 million, or 20.8%, compared to the three months ended March 31, 2020. The increase was primarily due to a 22.4% increase in the third quarter. Fourth quarter media spend is generallynumber of subscription units. The increase in subscription units was driven in part by strong growth in the lowestnumber of transactions in the second half of 2020. Strong performance from our registered agent subscription services drove the largest contribution of growth to the number of subscription units.
Partner revenue for the yearthree months ended March 31, 2021 increased $1.8 million, or 29.7%, compared to the three months ended March 31, 2020. The increase was primarily due to higher transaction volumes.
Cost of revenue
| | | | | | | | | | | | | | | | |
| | | Three Months
Ended March 31, | | | | | | | |
| | | 2020 | | | 2021 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Cost of revenue | | $ | 35,112 | | | $ | 43,960 | | | $ | 8,848 | | | | 25.2 | % |
Cost of revenue for the three months ended March 31, 2021 increased $8.8 million, or 25.2%, compared to the three months ended March 31, 2020. The increase was primarily due to higher filing fees and costs associated with customer care as a result of the increase in linetransaction volume.
Gross margin
| | | | | | | | |
| | | Three Months
Ended March 31, | |
| | | 2020 | | | 2021 | |
Gross margin | | | 66.8 | % | | | 67.3 | % |
Gross margin for the three months ended March 31, 2021 increased 0.5% to 67.3%. The increase was primarily due to the April 2020 sale of our subsidiary, Beaumont, which negatively impacted gross margin for the three months ended March 31, 2020.
Sales and marketing
| | | | | | | | | | | | | | | | |
| | | Three Months
Ended March 31, | | | | | | | |
| | | 2020 | | | 2021 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Sales and marketing | | $ | 43,481 | | | $ | 71,361 | | | $ | 27,880 | | | | 64.1 | % |
Sales and marketing expenses for the three months ended March 31, 2021 increased $27.9 million, or 64.1%, compared to the three months ended March 31, 2020. The increase was primarily due to an increase in customer acquisition marketing spend of $23.6 million and media production spend of $3.0 million. Customer acquisition marketing spend was $30.1 million and $53.7 million for the three months ended March 31, 2020 and March 31, 2021, respectively, as we invested to expand our customer base and build our digital brand leadership and awareness.
Technology and development
| | | | | | | | | | | | | | | | |
| | | Three Months
Ended March 31, | | | | | | | |
| | | 2020 | | | 2021 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Technology and development | | $ | 10,543 | | | $ | 10,499 | | | $ | (44 | ) | | | (0.4 | )% |
Technology and development expenses for the three months ended March 31, 2021 remained consistent compared to the three months ended March 31, 2020.
General and administrative
| | | | | | | | | | | | | | | | |
| | | Three Months
Ended March 31, | | | | | | | |
| | | 2020 | | | 2021 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
General and administrative | | $ | 12,661 | | | $ | 13,165 | | | $ | 504 | | | | 4.0 | % |
General and administrative expenses for the three months ended March 31, 2021 increased $0.5 million, or 4.0%, compared to the three months ended March 31, 2020. The increase was primarily due to higher professional services costs for recruiting and legal fees offset by lower travel and entertainment spend due to the impact of COVID-19 beginning March 2020.
Impairment of long-lived and other assets
| | | | | | | | | | | | | | | | |
| | | Three Months
Ended March 31, | | | | | | | |
| | | 2020 | | | 2021 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Impairment of long-lived and other assets | | $ | 555 | | | $ | — | | | $ | (555 | ) | | | (100 | )% |
In March 2020, prior to the disposition of Beaumont, we recorded an impairment charge of $0.6 million related to its property and equipment.
Interest expense, net
| | | | | | | | | | | | | | | | |
| | | Three Months
Ended March 31, | | | | | | | |
| | | 2020 | | | 2021 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Interest expense, net | | $ | (9,270 | ) | | $ | (8,654 | ) | | $ | 616 | | | | (6.6 | )% |
Interest expense, net, for the three months ended March 31, 2021 decreased $0.6 million, or 6.6%, compared to the three months ended March 31, 2020. 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 (expense) income, net
| | | | | | | | | | | | | | | | |
| | | Three Months
Ended March 31, | | | | | | | |
| | | 2020 | | | 2021 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Other (expense) income, net | | $ | (1,106 | ) | | $ | 248 | | | $ | 1,354 | | | | 122.4 | % |
Other (expense) income, net for the three months ended March 31, 2021 increased $1.4 million, or 122.4%, compared to the three months ended March 31, 2020. The increase was primarily due to changes in foreign currency movements related to our intercompany loans which are denominated in GBP.
Benefit from income taxes
| | | | | | | | | | | | | | | | |
| | | Three Months
Ended March 31, | | | | | | | |
| | | 2020 | | | 2021 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Benefit from income taxes | | $ | (2,055 | ) | | $ | (2,936 | ) | | $ | 881 | | | | 42.9 | % |
Effective tax rate | | | 30 | % | | | 23 | % | | | | | | | | |
The benefit from income taxes increased by $0.9 million primarily due to the tax impact from the decrease in U.S income compared to the three months ended March 31, 2020.
Comparison of the Years Ended December 31, 2019 and 2020
Revenue
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | | | | |
| | | 2019 | | | 2020 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Revenue by type | | | | | | | | | | | | | | | | |
Transaction | | $ | 168,305 | | | $ | 212,114 | | | $ | 43,809 | | | | 26.0 | % |
Subscription | | | 206,447 | | | | 229,840 | | | | 23,393 | | | | 11.3 | |
Partner | | | 33,628 | | | | 28,682 | | | | (4,946 | ) | | | (14.7 | ) |
| | | | | | | | | | | | | | | | |
Total revenue | | $ | 408,380 | | | $ | 470,636 | | | $ | 62,256 | | | | 15.2 | % |
| | | | | | | | | | | | | | | | |
Total revenue increased $62.3 million, or 15.2%, to $470.6 million in 2020. The increase was primarily driven by increases in transaction revenue and subscription revenue. Transaction revenue was 41.2% and 45.1% of total revenue in 2019 and 2020, respectively, and subscription revenue was 50.6% and 48.8% of total revenue in 2019 and 2020, respectively.
Transaction revenue increased $43.8 million, or 26.0%, to $212.1 million in 2020 driven by a 29.1% increase in the number of transactions.
Subscription revenue increased $23.4 million, or 11.3%, to $229.8 million in 2020. The increase was primarily driven by a 17.8% increase in the number of subscription units coupled with a 0.9% increase in ARPU. Strong performance from our registered agent subscription services drove the largest contribution of growth to both the number of subscription units and ARPU.
Partner revenue decreased $4.9 million, or 14.7%, to $28.7 million in 2020. The decrease was primarily due to cessation of certain partnership arrangements that were not aligned with our expectationsgo-forward strategy.
Cost of revenue
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | | | | |
| | | 2019 | | | 2020 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Cost of revenue | | $ | 136,915 | | | $ | 154,563 | | | $ | 17,648 | | | | 12.9 | % |
Cost of revenue increased $17.6 million, or 12.9%, to $154.6 million in 2020. The increase was primarily due to higher filing fees and costs associated with customer care as a result of the increase in transaction volume.
Gross margin
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Gross margin | | | 66.5 | % | | | 67.2 | % |
Gross margin increased 0.7% in 2020 to 67.2%. The increase was primarily due to the April 2020 sale of our subsidiary, Beaumont, which had lower gross margins.
Sales and marketing
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | | | | |
| | | 2019 | | | 2020 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Sales and marketing | | $ | 115,913 | | | $ | 171,390 | | | $ | 55,477 | | | | 47.9 | % |
Sales and marketing expenses increased $55.5 million, or 47.9%, to $171.4 million in 2020. The increase was primarily due to our strategy to increase customer acquisition marketing costs by $52.0 million, predominantly in the search engine marketing channel, as we invested to expand our customer base and build on our digital brand leadership and awareness. We increased our customer acquisition marketing costs beginning
in the second quarter of 2020 in anticipation of growing demand. Customer acquisition marketing spend was $67.2 million and $119.2 million for 2019 and 2020, respectively.
Technology and development
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | | | | |
| | | 2019 | | | 2020 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Technology and development | | $ | 37,204 | | | $ | 41,863 | | | $ | 4,659 | | | | 12.5 | % |
Technology and development expenses increased $4.7 million, or 12.5%, to $41.9 million in 2020. The increase was primarily due to lower capitalization of personnel costs for internal-use software development.
General and administrative
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | | | | |
| | | 2019 | | | 2020 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
General and administrative | | $ | 57,762 | | | $ | 51,017 | | | $ | (6,745 | ) | | | (11.7 | )% |
General and administrative expenses decreased $6.7 million, or 11.7%, to $51.0 million in 2020. The decrease was primarily due to lower business strategy consulting and outside legal expenses coupled with lower travel and entertainment spend due to the impact of COVID-19 in 2020.
Impairment of goodwill, long-lived and other assets
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | | | | |
| | | 2019 | | | 2020 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Impairment of goodwill, long-lived and other assets | | $ | 14,321 | | | $ | 1,105 | | | $ | (13,216 | ) | | | (92.3 | )% |
In 2019, we recorded a goodwill impairment charge of $10.6 million related to our U.K. reporting unit. In 2019 and 2020, we impaired $3.7 million and $1.1 million, respectively, related to internal-use software projects that were no longer considered part of our strategic business plans.
Loss on sale of business
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | | | | |
| | | 2019 | | | 2020 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Loss on sale of business | | $ | — | | | $ | 1,764 | | | $ | 1,764 | | | | 100.0 | % |
In 2020, we sold our subsidiary, Beaumont and we incurred a loss of $1.8 million upon disposal.
Interest expense, net
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | | | | |
| | | 2019 | | | 2020 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Interest expense, net | | $ | 38,559 | | | $ | 35,504 | | | $ | (3,055 | ) | | | (7.9 | )% |
Interest expense, net, decreased by $3.1 million to $35.5 million in 2020. The decrease was primarily a result of a lower number of orders placed at that time.
We also expect that the investments in our subscription legal plan business, customer acquisition and retention, and potential international expansion will reduce non-GAAP Adjusted EBITDAdecrease in the next few quarters.London Interbank Offered Rate, or LIBOR, on our 2018 Term Loan partially offset by costs related to our interest rate swaps and amortization of debt issuance costs.
Other income, net
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | | | | |
| | | 2019 | | | 2020 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Other income, net | | $ | 2,577 | | | $ | 3,713 | | | $ | 1,136 | | | | 44.1 | % |
The change in other income, net between 2019 and 2020 was primarily due to a gain from the change in the fair value of our financial guarantee of $1.8 million, partially offset by changes in foreign currency movements related to our intercompany loans which are denominated in British Pound Sterling, or GBP.
Impairment of available-for-sale debt securities
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | | | | |
| | | 2019 | | | 2020 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Impairment of available-for-sale debt securities | | $ | — | | | $ | 4,818 | | | $ | 4,818 | | | | 100.0 | % |
In 2020, we fully impaired our investment in Firma.de Firmenbaukasten AG, a German limited liability company, 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.
Provision for income taxes
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | | | | |
| | | 2019 | | | 2020 | | | $ change | | | % change | |
| | | (in thousands, except percentages) | |
Provision for income taxes | | $ | 3,161 | | | $ | 2,429 | | | $ | (732 | ) | | | (23.2 | )% |
Provision for income taxes decreased $0.7 million, or 23.2%, to $2.4 million in 2020. The decrease was primarily due to increased benefits from the exercise of non-qualified stock options in 2020 over 2019, increased interest deductions under Section 163(j) due to the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, and reduced nondeductible expenses in 2020 over 2019.
Liquidity and Capital Resources
AsAt March 31, 2021, our principal sources of June 30, 2012, we hadliquidity were cash and cash equivalents of $31.4$141.2 million, which consisted entirely of cash on deposit with banks. Other than $8.5banks and money market funds, of which $1.9 million of outside capitalrelated to our foreign subsidiaries. Our cash and cash providedequivalents increased in June 2021 by exercises$25.0 million upon the lapse of stock options,our restricted cash equivalent upon the release of collateral related to a personal loan by a former executive. See the section titled “Certain Relationships and Related Persons Transactions—John Suh Line of Credit.” Since inception, we have funded our operations and capital expenditures since inceptionprimarily from private sales of equity securities, cash flows provided by operating activities.activities and debt financing arrangements.
We expect cash provided by operating activities to make capital expenditures of approximately $22.0 million in 2021, the majority of which would be our primary sourcefor capitalized software expenditures and the remainder of funds in future periods and towhich would be driven by our anticipated growth in our transaction and subscription revenues, partially offset by increases in working capital requirements andfor other capital expenditures associated with scaling our operations, technology and infrastructure to support our growthgrowth. We currently anticipate that our available cash and cash payments madeequivalents and cash provided by operating activities will be sufficient to meet our operational cash needs for legal settlements.at least the next twelve months. We expect to make capital expenditures of approximately $5.0 million in 2012, approximately half of which would be for capitalized software expenditures and the other half of which would be for other capital
Table of Contents
expenditures associatedmay supplement our liquidity needs with scalingborrowings under our operations, technology and infrastructure to support our growth.New Credit Facility. Our future capital requirements may vary from those now planned and will depend on many factors, including:
•the development, launch and success of new services;
•the levels of marketing required to attract new customers and retain existing customers;
•the continuous development of our online legal platform to accommodate actual and anticipated technology changes;
•defending and settling potential regulatory investigations, claims, suits and prosecutions;
•the expansion of our business into international markets;in the United States through additional merger and
•- acquisition activity; and
the timing and extent to which we scale our operations, technology and infrastructure to support future growth.
BasedWe may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, this could reduce our ability to compete successfully and harm our results of operations.
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 United States 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
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 includes a subfacility that provides for the issuance of letters of credit in an amount of up to $8.0 million at any time outstanding.
The 2018 Credit Facility is subject to customary fees for loan facilities of this type, including a commitment fee on the 2018 Revolving Facility that decreases if our total net first lien leverage ratio falls beneath certain levels.
The interest rate applicable to the 2018 Term Loan under the 2018 Credit Facility is, at our option, either (a) the LIBOR (or a comparable successor rate approved by the administrative agent and us) plus a margin of 4.50% per annum or (b) the base rate plus a margin of 3.50% per annum. The interest rate applicable to loans under our 2018 Revolving Facility is, at our option, either (a) LIBOR (or a comparable successor rate approved by the administrative agent and us) plus a margin of 4.00% per annum or (b) the base rate plus a margin of 3.00% per annum. Each such margin may decrease depending on our current leveltotal net first lien leverage ratio. The base rate is the highest of operations(a) the federal funds rate plus 1/2 of 1.00%, (b) the prime rate as publicly announced by JPMorgan Chase, (c) LIBOR plus 1.00% and anticipated growth,(d) 2.00%.
Since 2019, we believehave been repaying the 2018 Term Loan in quarterly installments of 0.25% of the initial principal, or $1.3 million, with the remaining outstanding principal due on maturity in November 2024. Accrued interest must be paid at the end of each LIBOR period we elect or, if we choose the base rate option, together with each quarterly amortization payment. Upon the occurrence of certain asset sales and certain debt issuances, we are required to repay the 2018 Term Loan with the proceeds from such sales and issuances. The 2018 Term Loan must also be repaid from a portion of our excess cash flow ranging from 0.0% to 50.0%, depending on our net first lien leverage ratio. In 2019 and 2020 we had no excess cash flow under our 2018 Term Loan. The 2018 Revolving Facility terminates and borrowings thereunder, if any, are due in full in November 2023.
Debt under the 2018 Credit Facility is guaranteed by certain of our material wholly owned domestic restricted subsidiaries and is secured by substantially all of our and such subsidiaries’ assets. Pursuant to the 2018 Credit Facility, there is a 1.00% prepayment premium on any prepayments made in connection with certain transactions deemed to be repricing events under the 2018 Credit Facility. This offering is not a repricing event under the 2018 Credit Facility. The 2018 Credit Facility contains affirmative and negative covenants, indemnification provisions and events of default. Affirmative covenants include administrative, reporting and legal covenants, in each case subject to certain exceptions. The negative covenants restrict our ability, subject to customary exceptions, to, among other things: make restricted payments including dividends and distributions on, redemptions of, repurchases or retirement of our capital stock; restrict certain of our subsidiaries’ ability to engage in certain intercompany transactions with other subsidiaries that do not guarantee obligations under the 2018 Credit Facility; restrict our ability to incur additional indebtedness and issue certain types of equity; sell assets, including capital stock of subsidiaries; enter into certain transactions with affiliates; incur liens; enter into
fundamental changes including mergers and consolidations; make investments, acquisitions, loans or advances; create negative pledges or restrictions on the payment of dividends or payment of other amounts owed from subsidiaries; make prepayments or modify documents governing material debt that is subordinated with respect to right of payment; engage in certain sale leaseback transactions; change our fiscal year; and change our lines of business. The 2018 Credit Facility also contains a financial covenant with respect to the 2018 Revolving Facility that requires us to maintain a maximum total net first lien leverage ratio of 7.90:1.00 on the last day of any fiscal quarter during which our 2018 Revolving Facility usage exceeds 35.0% of the 2018 Revolving Facility capacity. The total net first lien leverage ratio is calculated as the ratio of first lien secured debt less cash and cash equivalents to consolidated Cash EBITDA, which is defined in the 2018 Credit Facility. We were in compliance with our covenants in the 2018 Credit Facility as of March 31, 2021. The 2018 Credit Facility also includes customary events of default, including failure to pay principal, interest or certain other amounts when due, material inaccuracy of representations and warranties, violation of covenants, specified cross-default and cross-acceleration to other material indebtedness, certain bankruptcy and insolvency events, certain events relating to the Employee Retirement Income Security Act of 1974, certain undischarged judgments, material invalidity of guarantees or grant of security interest, and change of control, in certain cases subject to certain thresholds and grace periods. If an event of default occurs and is continuing, lenders holding a majority of the commitments and outstanding 2018 Term Loan under the 2018 Credit Facility have the right to, among other things, (i) terminate the commitments under the 2018 Credit Facility, (ii) accelerate and require us to repay all the outstanding amounts owed under the 2018 Credit Facility and (iii) require us to cash collateralize any outstanding letters of credit. In addition, if we fail to sell at least 15% of our issued and outstanding common stock in connection with this offering, and certain of our stockholders do not maintain voting control over the election of directors, we could be deemed to have undergone a change of control, which would constitute an event of default under the 2018 Credit Facility. At March 31, 2021, we had approximately $523.0 million of outstanding indebtedness that we would have to repay immediately if this provision were triggered.
At December 31, 2020 and March 31, 2021, we had no amounts drawn on the 2018 Revolving Facility.
At December 31, 2020 and March 31, 2021, we had $524.3 million and $523.0 million, respectively, of principal outstanding under the 2018 Term Loan.
New Credit Facility
We expect to enter into the New Credit Facility (as defined below) concurrently with the consummation of this offering. Despite our expectations, the entering into the New Credit Facility and the terms of such credit facility are subject to a number of factors, and we cannot assure you that we will enter into a credit facility on such terms or at all.
LegalZoom.com, Inc. will be the borrower under the New Credit Facility. The New Credit Facility will be set forth in an amendment and restatement of our 2018 Credit Agreement, and is expected to permit revolving borrowings of up to $150.0 million.
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, 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. The New Credit Facility is expected to provide 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.
Borrowings under the New Credit Facility are generally expected to bear interest at a rate equal to, at our option, either (a) a base 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 plus 1.0% (subject to a 1.00% floor), plus 1.00% or (b) LIBOR (subject to a 0.00% floor) plus 2.00%. The interest rate margins under the New Credit Facility are subject to one reduction of 0.25% and a further reduction of 0.25%, in each case, upon achieving certain total net first lien leverage ratios forth in the documentation in respect of the New Credit Facility.
We will be required to pay a commitment fee in respect of unutilized commitments under the New Credit Facility. The commitment fee will be, initially, 0.35% per annum. The commitment fee is subject to one reduction of 0.10% upon achieving certain total net first lien leverage ratios set forth in the documentation in respect of the New Credit Facility. We will also be required to pay customary letter of credit fees and agency fees.
We will 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 will be no scheduled amortization under the New Credit Facility. The principal amount outstanding will be due and payable in full at maturity, five years from the closing date of the New Credit Facility.
Obligations under the New Credit Facility will be guaranteed by our existing and future direct and indirect material wholly-owned domestic subsidiaries, subject to certain exceptions. The New Credit Facility will be secured by a first-priority security interest in substantially all of the assets of the borrower and the guarantors, subject to certain exceptions.
The New Credit Facility will contain 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;
pay dividends and distributions or repurchase capital stock;
merge, liquidate and make asset sales;
change lines of business;
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 New Credit Facility will require 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 New Credit Facility on the last day of such fiscal quarter.
The New Credit Facility will also contain certain customary affirmative covenants and events of default for facilities of this type, including relating to a change of control. If an event of default occurs, the lenders under the New Credit Facility will be entitled to take various actions, including the acceleration of amounts due under the New Credit Facility and all actions permitted to be taken by secured creditors under applicable law.
Cash flows
The following table sets forth a summary of our cash together withflows for the periods indicated:
| | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | | Three Months Ended
March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
| | | (in thousands) | | | (in thousands) | |
Net cash provided by operating activities | | $ | 52,695 | | | $ | 93,049 | | | $ | 21,889 | | | $ | 31,415 | |
Net cash used in investing activities | | | (20,717 | ) | | | (12,727 | ) | | | (1,988 | ) | | | (2,911 | ) |
Net cash (used in) provided by financing activities | | | (12,852 | ) | | | (15,089 | ) | | | 36,589 | | | | (1,834 | ) |
Effect of exchange rates on cash, cash equivalents and restricted cash equivalent | | | (495 | ) | | | 57 | | | | (185 | ) | | | 35 | |
| | | | | | | | | | | | | | | | |
Net increase in cash, cash equivalents and restricted cash equivalent | | | 18,631 | | | | 65,290 | | | $ | 56,305 | | | $ | 26,705 | |
| | | | | | | | | | | | | | | | |
Net cash provided by operating activities
Our largest source of operating cash is cash collections from our customers for our transaction and the proceeds from this offering, will be sufficient to fundsubscription services. Our primary uses of cash in operating activities are for our operationsfulfillment, production and capital expenditures for at least the next 12 months. We may supplement our liquidity needs with borrowings under our $10 million revolving line of credit facility, if available. See "—Line of Credit Facility."
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months Ended June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| | (in thousands)
| |
|---|
Consolidated Statement of Cash Flows Data: | | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | 14,679 | | $ | 1,488 | | $ | 13,722 | | $ | 7,812 | | $ | 8,261 | |
Net cash used in investing activities | | | (4,484 | ) | | (4,673 | ) | | (6,060 | ) | | (3,840 | ) | | (2,396 | ) |
Net cash provided by (used in) financing activities | | | 247 | | | 3,386 | | | 277 | | | 150 | | | (1,599 | ) |
customer care costs, employee salaries and benefits, sales and marketing expenses and third-party consulting expenses. Net cash provided by operating activities duringis impacted by our net income adjusted for certain non-cash items, including depreciation and amortization expense, stock-based compensation and impairments of long-lived assets, as well as the six months ended June 30, 2012 resulted primarilyeffect of changes in operating assets and liabilities.
In 2020, cash provided by operating activities was $93.0 million resulting from a net decreaseincome of $9.9 million, adjusted for non-cash expenses of $44.8 million and net cash flow provided by changes in operating assets and liabilities of $38.4 million. The $38.4 million of net cash flows provided from changes in our operating assets and liabilities of $3.0included a $23.2 million and our net income of $1.3 million adjusted for non-cash expenses of $4.0 million. The net decrease in operating assets and liabilities was primarily due to an increase in deferred revenues, accounts payable and accrued expenses and other current liabilities. Deferred revenues increasedrevenue primarily as a result of the growth of our subscription units, which are predominantly billed in the numberadvance of orders placedour revenue recognition, and mix of services, as well as the timing of the completion of those services. Thea $12.4 million increase in accounts payable was primarily due to the timing of paymentsour payments.
In 2019, cash provided by operating activities was $52.7 million resulting from net income of $7.4 million, adjusted for non-cash expenses of $39.9 million and net cash flow provided by changes in operating assets and liabilities of $5.4 million. The $5.4 million of net cash flows provided from changes in our operating assets and liabilities included a $5.6 million increase in deferred revenue primarily as a result of the growth of our subscription units, and a $3.9 million increase in accounts payable, partially offset by a $1.6 million decrease in accrued expenses and other liabilities due to the timing of our vendors,payments.
For the three months ended March 31, 2021, cash provided by operating activities was $31.4 million resulting from a net loss of $9.8 million, adjusted for non-cash expenses of $6.5 million and net cash flow provided by changes in operating assets and liabilities of $34.7 million. The $34.7 million of net cash flows provided from changes in our operating assets and liabilities included a $18.4 million increase in deferred revenue primarily as a result of the growth of our subscription units, which are predominantly billed in advance of our revenue recognition, and a $14.1 million increase in accrued expenses and other current liabilities was primarilyand $6.0 million in accounts payable, due to anthe timing of our payments.
For the three months ended March 31, 2020, cash provided by operating activities was $21.9 million resulting from a net loss of $4.9 million, adjusted for non-cash expenses of $9.2 million and net cash flow provided by changes in operating assets and liabilities of $17.6 million. The $17.6 million of net cash flows provided from changes in our operating assets and liabilities included a $9.6 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 $7.5 million increase in accrued advertisingexpenses and accrued professional fees, offset by a decrease in accrued payroll and related expenses mainlyother current liabilities due to the year-end accrued bonus payments made duringtiming of our payments.
Net cash used in investing activities
Our primary investing activities have consisted of capital expenditures to purchase property and equipment necessary to support our customer contact center, network and operations, the sixcapitalization of internal-use software necessary to develop and maintain our platform and deliver new products and features, which provide value to our customers, business acquisitions and investments in other companies. As our business grows, we expect our capital expenditures to continue to increase.
In 2020, net cash used in investing activities was $12.7 million resulting primarily from $10.6 million in purchases of property and equipment, including capitalized internal-use software.
In 2019, net cash used in investing activities was $20.7 million resulting primarily from $18.3 million in purchases of property and equipment and capitalized internal-use software, and $2.7 million in investments in available-for-sale debt securities and other equity securities.
For the three months ended June 30, 2012March 31, 2021 and 2020, net cash used in investing activities was $2.9 million and $2.0 million, respectively, resulting primarily from purchases of property and equipment, including capitalized internal-use software.
Net cash (used in) provided by financing activities
Our primary uses of cash in financing activities are for our servicing and refinancing our long-term debt, repurchases of common stock and settlements of stock options and RSUs. Net cash provided by financing activities is primarily impacted by exercises of stock options by our employees and issuance of common stock.
In 2020, net cash used in financing activities was $15.1 million resulting primarily from repayments on our 2018 Term Loan totaling $5.4 million, repurchases of common stock of $4.8 million and repurchases of common stock for tax withholding obligations of $3.6 million. In March 2020, we drew down the full $40.0 million available from our 2018 Revolving Facility in response to macroeconomic concerns with regards to COVID-19. The 2018 Revolving Facility was paid in full by May 2020.
In 2019, net cash used in financing activities was $12.9 million resulting primarily from repayments on our 2018 Term Loan totaling $5.4 million, repurchases of common stock for tax withholding obligations of $3.8 million and the June 2012 paymentrepurchase of $1.9common stock of $1.5 million.
For the three months ended March 31, 2021, net cash used in financing activities was $1.8 million, resulting primarily from repayments on our 2018 Term Loan of $1.3 million.
For the three months ended March 31, 2020, net cash provided by financing activities was $36.6 million, resulting primarily from the drawdown of the full $40.0 million from our 2018 Revolving Facility in response to the plaintiffs' attorneysmacroeconomic concerns with regards to COVID-19, offset in part by repurchases of common stock for feestax withholding obligations of $2.0 million.
Contractual obligations and expenses in connection with the Missouri legal settlement as further described incommitments
We have contractual commitments for our 2018 Term Loan, operating leases, marketing and technology expenditures. For additional information, see Note 611 and Note 13 to our consolidated financial statements included elsewhere in this prospectus. Non-cash expenses during the six months ended June 30, 2012 were comprised primarily of depreciation and amortization of property and equipment totaling $2.5 million, stock-based compensation of $0.7 million and deferred income taxes of $0.8 million.
Net cash provided by operating activities during the six months ended June 30, 2011 resulted primarily from a net decrease in our operating assets and liabilities of $4.0 million and our net income of $1.3 million adjusted for non-cash expenses of $2.5 million. The net decrease in operating assets and liabilities was primarily due to an increase in accounts payable and accrued expenses and other current liabilities. The increase in accounts payable was primarily due to the timing ofInterest payments to our vendors, and the increase in accrued expenses and other current liabilities was primarily due to an increase in accrued advertising and payroll and related costs with increased headcount. Non-cash expenses during the six months ended
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June 30, 2011 were comprised primarily of depreciation and amortization of property and equipment totaling $2.0 million and stock-based compensation of $0.5 million.
Net cash provided by operating activities in 2011 resulted primarily from net income of $12.1 million and a net decrease in our operating assets and liabilities of $3.2 million, offset in part by non-cash items of $1.6 million. The net decrease in operating assets and liabilities was primarily due to an increase in accrued expenses and other current liabilities of $4.7 million primarily attributable to accrued incentive bonuses, partially offset by an increase in accounts receivable of $1.4 million primarily attributable to our customers selecting the three-pay plan, which allows them to pay for an order in three equal payments. Non-cash items in 2011 included a $6.9 million income tax benefit on the release of2018 Term Loan are based upon the valuation allowance related to our deferred tax assets, offset in part by non-cash expenses, including depreciation, amortization and disposals totaling $4.7 million and stock-based compensation of approximately $1.0 million.
Net cash provided by operating activities in 2010 resulted from our net loss of $4.0 million adjusted for non-cash expenses of $5.2 million and a net decrease in our operating assets and liabilities of $0.3 million. Our net loss and the net decrease in operating assets and liabilities was primarily due to the accrual of $5.4 million for the legal settlements described in "—Critical Accounting Policies—Loss Contingencies" and Note 6 to our consolidated financial statements included elsewhere in this prospectus. Non-cash expenses in 2010 were comprised primarily of depreciation, amortization and a loss on disposal of property and equipment totaling $3.8 million and stock-based compensation of $1.3 million.
Net cash provided by operating activities in 2009 resulted from a net decrease in our operating assets and liabilities of $11.2 million and our net loss of $0.6 million, adjusted for non-cash expenses of $4.1 million. The net decrease in operating assets and liabilities was primarily due to an increase in deferred revenues and accrued expenses and other current liabilities. Deferred revenues increased primarily as a result of the growth in the number of orders placed and mix of services, as well as the timing of the completion of those services. The increase in accrued expenses and other current liabilities was primarily due to an increase in payroll and related costs with increased headcount and related compensation. Non-cash expenses in 2009 were comprised primarily of depreciation, amortization and loss on disposal of property and equipment totaling $3.0 million, including impairment of capitalized software of $0.1 million and stock-based compensation of $1.1 million.
Net cash used in investing activities during the six months ended June 30, 2011 and 2012 primarily resulted from continued investment in internally developed capitalized software and the purchase of property and equipment. For the six months ended June 30, 2011, restricted cash decreased as a financial institution removed the requirement to maintain collateral against the available credit limit on procurement credit cards.
Net cash used in investing activities in 2011 primarily resulted from continued investment in internally developed capitalized software and the purchase of property and equipment, including approximately $2.5 million for data center server and computer equipment upgrades to support our operations and online legal platform, offset in part by a decrease in restricted cash held by a financial institution for banking and credit card merchant services.
Net cash used in investing activities in 2010 primarily resulted from the continued investment in internally developed capitalized software and the purchase of property and equipment to build out our facilities in Glendale, California and Austin, Texas, offset in part by proceeds received for disposal of property and equipment.
Net cash used in investing activities in 2009 primarily resulted from the purchase of property and equipment and investment in internally developed capitalized software associated with the development of a new order management system together with an increase in restricted cash held by a financial institution for banking and credit card merchant services.
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Net cash provided by financing activities during the six months ended June 30, 2011 resulted from proceeds from exercises of stock options, partially offset by the payment of capital lease obligations. Net cash used in financing activities during the six months ended June 30, 2012 resulted primarily from payment of deferred offering costs related to this offering and payment of capital lease obligations, offset by proceeds from exercises of stock options.
Net cash provided by financing activities in 2011 resulted primarily from the payment of capital lease obligations, largely offset by proceeds from exercises of stock options and excess windfall tax benefits related to stock-based compensation.
Net cash provided by financing activities in 2010 resulted primarily from proceeds from exercises of stock options and repayment of notes receivable from stockholders.
Net cash provided by financing activities in 2009 primarily resulted from proceeds from exercises of stock options.
On October 31, 2008, we entered into a revolving line of credit facility with Comerica Bank, which was amended on October 29, 2010 that allows us to borrow up to $10 million for up to 180 days from the date of borrowing. We are obligated to pay an unused line fee equal to 0.20% per annum of the average unused portion of the line of credit, payable in quarterly installments on the last day of each quarter. Borrowings under the line of credit bearapplicable interest at the London Interbank Offered Rate (LIBOR) or prime rate, which we can select at the time of borrowing, plus an applicable margin, and are collateralized by substantially all of our assets. The line of credit expires on October 31, 2012 and limits our ability to declare and pay dividends and to incur additional credit obligations or indebtedness. The line of credit requires immediate repayment of amounts outstanding upon an event of default, as defined in the agreement, which includes events such as a payment default, a covenant detail or the occurrence of a material adverse change. At December 31, 2010, December 31, 2011 and June 30, 2012, we had no amounts outstanding or any letters of credit backed by the line of credit.
The following table sets forth our contractual obligationsrates as of December 31, 2011:
| | | | | | | | | | | | | | | | |
| |
| | Payment due by Period | |
|---|
| | Total | | Less than
1 year | | 1 - 3 years | | 4 - 5 years | | More than
5 years | |
|---|
| | (in thousands)
| |
|---|
Operating lease commitments | | $ | 17,256 | | $ | 2,572 | | $ | 6,108 | | $ | 1,828 | | $ | 6,748 | |
Purchase commitments | | | 19,559 | | | 18,380 | | | 1,179 | | | — | | | — | |
Capital lease obligations | | | 205 | | | 205 | | | — | | | — | | | — | |
| | | | | | | | | | | | |
Total | | $ | 37,020 | | $ | 21,157 | | $ | 7,287 | | $ | 1,828 | | $ | 6,748 | |
| | | | | | | | | | | | |
Operating2020. We currently intend to use a portion of the net proceeds to us from this offering to repay the outstanding indebtedness under the 2018 Credit Facility. We have operating lease commitments primarily relaterelated to
minimum lease payments under the operating leases we entered into for facility spacespaces in Glendale, California, Austin and Frisco, Texas and San Francisco, California. PurchaseLondon, United Kingdom. Our purchase commitments relate primarily to minimum purchase commitments for advertising, media, and media. As of December 31, 2011 and June 30, 2012, we did not have any debt. technology.
We believe our current cash and cash equivalents, as well as cash expected to be generated by future operating activities, will be sufficient to meet our contractual obligations for the next twelve months.
Our commitments are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the actions under the contracts. Our disclosure does not include obligations under agreements that we can cancel without a significant penalty.
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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 would have beenwere established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such,
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles, or GAAP, we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We believe that these non-GAAP financial measures provide useful information about our financial performance, enhance the overall understanding of our past performance and future prospects and allow for greater transparency with respect to important measures used by our management for financial and operational decision-making. We are presenting these non-GAAP measures to assist investors in seeing our financial performance using a management view and because we believe that these measures provide an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net income (loss) adjusted to exclude interest expense, net, provision for income taxes, depreciation and amortization, other income, net, stock-based compensation, losses from impairments of goodwill, long-lived and other assets, impairments of available-for-sale debt securities, acquisition related expenses, restructuring expenses, legal reserves and settlements, 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 income (loss) margin as net income (loss) as a percentage of revenue.
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 exposedcomparable period over period. Adjusted EBITDA should not be considered in isolation of, or as an alternative to, any financing, liquidity, market or credit risk that could arise if we had engagedmeasures prepared in those typesaccordance with GAAP. There are a number of relationships. We enter into guarantees in the ordinary course of businesslimitations related to the guaranteeuse 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 owncompensation 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; and
does not reflect certain other non-recurring expenses that are not considered representative of our underlying performance, which reduce cash available to us.
The following table presents a reconciliation of net income (loss), the most directly comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated:
| | | | | | | | | | | | | | | | |
| | | Year
Ended December 31, | | | Three Months Ended
March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
| | | (in thousands) | | | (in thousands) | |
Reconciliation of Net Income (loss) to Adjusted EBITDA | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 7,443 | | | $ | 9,896 | | | $ | (4,878 | ) | | $ | (9,823 | ) |
Interest expense, net | | | 38,559 | | | | 35,504 | | | | 9,270 | | | | 8,654 | |
Provision for (benefit from) income taxes | | | 3,161 | | | | 2,429 | | | | (2,055 | ) | | | (2,936 | ) |
Depreciation and amortization | | | 16,390 | | | | 20,097 | | | | 4,920 | | | | 4,166 | |
Other (income) expense, net | | | (2,577 | ) | | | (3,713 | ) | | | 1,106 | | | | (248 | ) |
Stock-based compensation(1) | | | 5,181 | | | | 12,894 | | | | 4,088 | | | | 3,786 | |
Impairment of goodwill, long-lived and other assets | | | 14,321 | | | | 1,105 | | | | 555 | | | | — | |
Impairment of available-for-sale debt securities | | | — | | | | 4,818 | | | | — | | | | — | |
Acquisition related expenses | | | 5,433 | | | | 132 | | | | — | | | | — | |
Restructuring expenses(2) | | | 1,600 | | | | 2,524 | | | | 348 | | | | — | |
Legal reserves and settlements(3) | | | 735 | | | | 525 | | | | — | | | | — | |
Certain other non-recurring expenses(4) | | | 6,911 | | | | 1,764 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Adjusted EBITDA | | $ | 97,157 | | | $ | 87,975 | | | $ | 13,354 | | | $ | 3,599 | |
| | | | | | | | | | | | | | | | |
Net income (loss) margin | | | 1.8 | % | | | 2.1 | % | | | (4.6 | )% | | | (7.3 | )% |
Adjusted EBITDA margin | | | 23.8 | % | | | 18.7 | % | | | 12.6 | % | | | 2.7 | % |
| | | | | | | | | | | | | | | | |
| (1) | Stock-based compensation expense excludes amounts paid in cash to certain employees as part of a buyback program as further described in Note 15 to our consolidated financial statements included elsewhere in this prospectus. |
| (2) | Restructuring expenses relate to certain one-time severance events for different components of our business, which was part of our overall reset of business strategy during 2019 and 2020. See Note 17 to our consolidated financial statements included elsewhere in this prospectus. |
| (3) | Legal reserves and settlements include costs accrued or paid for potential litigation settlements, and are net of insurance recoveries, if any. |
| (4) | In 2019, we incurred certain expenses for strategic transactions that were not consummated, including $4.6 million of costs associated with our filing of a registration statement, $1.9 million of compensation expense recorded in general and administrative expenses related the establishment of a financial guarantee for a former executive officer, and $0.4 million for other transaction related expenses. 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 decreased from $97.2 million in 2019 to $88.0 million in 2020. The decrease of $9.2 million primarily reflects an investment in customer acquisition media spend, which increased by $52.0 million in 2020 as we invested to expand our customer base and build on our digital brand leadership and awareness, as well as an increase in cost of revenue of $17.7 million driven by increases in customer care and fulfillment costs, partially offset by an increase in revenue of $62.2 million. Adjusted EBITDA decreased $9.8 million from $13.4 million for the three months ended March 31, 2020 to $3.6 million for the three months ended March 31, 2021. The decrease primarily reflects an investment in customer acquisition media spend, which increased by $23.6 million, filing fee expense which increased by $6.2 million in cost of revenue, media production spend which increased by $3.0 million and salaries and benefits which increased by $3.6 million from our investment in headcount, which was partially offset by a $28.8 million increase in revenue. We expect our Adjusted EBITDA to increase in absolute dollars in the longer term, although the rate at which our Adjusted EBITDA may grow could vary based upon the interplay of the foregoing factors.
Free cash flow
Free cash flow is a liquidity measure used by management in evaluating the cash generated by our operations after purchases of property and equipment including capitalized internal-use software. We consider free cash flow to be an important metric because it provides useful information to management and investors about the amount of cash generated by our business that can be used for strategic opportunities, including investing in our business and strengthening our balance sheet. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth. The usefulness of free cash flow as an analytical tool has limitations because it excludes certain items, 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:
| | | | | | | | | | | | | | | | |
| | | Year
Ended December 31, | | | Three Months
Ended March 31, | |
| | | 2019 | | | 2020 | | | 2020 | | | 2021 | |
| | | (in thousands) | |
Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow | | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | 52,695 | | | $ | 93,049 | | | $ | 21,889 | | | $ | 31,415 | |
Purchase of property and equipment | | | (18,349 | ) | | | (10,587 | ) | | | (1,988 | ) | | | (2,911 | ) |
| | | | | | | | | | | | | | | | |
Free cash flow | | $ | 34,346 | | | $ | 82,462 | | | $ | 19,901 | | | $ | 28,504 | |
| | | | | | | | | | | | | | | | |
We experienced an increase in our free cash flow from 2019 to 2020 as a result of an increase in net cash provided by operating activities, which was primarily due to an increase of $17.6 million in deferred revenue driven by an increase in subscription units as well as a $8.5 million increase in accounts payable due to the timing of our payments. We experienced an increase in our free cash flow for the three months ended March 31, 2020 as compared to the three months ended March 31, 2021 as a result of an increase of $8.8 million 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 $6.6 million increase in accrued expenses and other current liabilities and $2.7 million in accounts payable, due to the timing of our payments. Additionally, in the year ended 2020 as compared to 2019, we recorded a decrease in purchase of property and equipment related to less capitalization of internal-use software projects. In the three months ended March 31, 2021, we recorded an increase in purchase of property and equipment related to additional capitalization of internal-use software projects, associated with scaling our operations, technology and infrastructure to support our growth. We expect our free cash flow to increase in absolute dollars in the near term, although the rate at which our free cash flow may grow could vary based upon the interplay of the factors discussed above.
For 2019, 2020 and the performancethree months ended March 31, 2020 and 2021, our free cash flow included cash payments for interest related to our 2018 Credit Facility of $37.3 million, $27.9 million, $8.3 million and $6.1 million, respectively.
Quarterly Results of Operations
The following table sets forth our subsidiaries.
Recent Accounting Pronouncements
In 2011,unaudited quarterly consolidated results of operations by quarter from the Financial Accounting Standards Board, or FASB, issued new accounting guidance that amends some fair value measurement principlesfirst quarter of 2019 to the first quarter of 2021. The unaudited quarterly consolidated results of operations set forth below have been prepared on the same basis as our audited consolidated financial statements and disclosure requirements. The new guidance states that the conceptsin our opinion contain all adjustments, consisting only of highestnormal and best use and valuation premise are only relevant when measuringrecurring adjustments, necessary for the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. The adoptionstatement of this accounting guidance duringfinancial information. The following information should be read in conjunction with the six months ended June 30, 2012 did not have any impact onsection titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements.statements and the accompanying notes thereto included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results for any future period, and the results for any quarter are not necessarily indicative of results to be expected for a full year or any other period.
Quarterly Consolidated Statement of Operations Data
In 2011,
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | March 31,
2019 | | | June 30,
2019 | | | September 30,
2019 | | | December 31,
2019 | | | March 31,
2020 | | | June 30,
2020 | | | September 30,
2020 | | | December 31,
2020 | | | March 31,
2021 | |
| | | (In thousands) | |
Revenue (1) | | $ | 102,177 | | | $ | 103,506 | | | $ | 103,977 | | | $ | 98,720 | | | $ | 105,795 | | | $ | 111,007 | | | $ | 131,595 | | | $ | 122,239 | | | $ | 134,632 | |
Cost of revenue | | | 35,947 | | | | 35,999 | | | | 34,144 | | | | 30,825 | | | | 35,112 | | | | 35,759 | | | | 43,841 | | | | 39,851 | | | | 43,960 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross margin | | | 66,230 | | | | 67,507 | | | | 69,833 | | | | 67,895 | | | | 70,683 | | | | 75,248 | | | | 87,754 | | | | 82,388 | | | | 90,672 | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales and marketing | | | 34,328 | | | | 26,765 | | | | 27,414 | | | | 27,406 | | | | 43,481 | | | | 40,173 | | | | 46,833 | | | | 40,903 | | | | 71,361 | |
Technology and development | | | 8,230 | | | | 8,728 | | | | 9,420 | | | | 10,826 | | | | 10,543 | | | | 10,165 | | | | 10,911 | | | | 10,244 | | | | 10,499 | |
General and administrative | | | 12,015 | | | | 13,252 | | | | 17,044 | | | | 15,451 | | | | 12,661 | | | | 12,612 | | | | 10,424 | | | | 15,320 | | | | 13,165 | |
Impairment of goodwill, long-lived and other assets | | | — | | | | — | | | | — | | | | 14,321 | | | | 555 | | | | — | | | | — | | | | 550 | | | | — | |
Loss on sale of business | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,764 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 54,573 | | | | 48,745 | | | | 53,878 | | | | 68,004 | | | | 67,240 | | | | 64,714 | | | | 68,168 | | | | 67,017 | | | | 95,025 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 11,657 | | | | 18,762 | | | | 15,955 | | | | (109 | ) | | | 3,443 | | | | 10,534 | | | | 19,586 | | | | 15,371 | | | | (4,353 | ) |
Interest expense, net | | | (9,826 | ) | | | (9,838 | ) | | | (9,665 | ) | | | (9,230 | ) | | | (9,270 | ) | | | (8,857 | ) | | | (8,658 | ) | | | (8,719 | ) | | | (8,654 | ) |
Other income (expense), net | | | 1,037 | | | | (1,000 | ) | | | (1,079 | ) | | | 3,619 | | | | (1,106 | ) | | | (355 | ) | | | 1,610 | | | | 3,564 | | | | 248 | |
Impairment of available-for-sale debt securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | (4,818 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes and income from equity method investment | | | 2,868 | | | | 7,924 | | | | 5,211 | | | | (5,720 | ) | | | (6,933 | ) | | | (3,496 | ) | | | 12,538 | | | | 10,216 | | | | (12,759 | ) |
Provision for (benefit from) income taxes | | | 1,107 | | | | 2,492 | | | | 1,932 | | | | (2,370 | ) | | | (2,055 | ) | | | 563 | | | | 3,126 | | | | 795 | | | | (2,936 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before income on equity method investment | | | 1,761 | | | | 5,432 | | | | 3,279 | | | | (3,350 | ) | | | (4,878 | ) | | | (4,059 | ) | | | 9,412 | | | | 9,421 | | | | (9,823 | ) |
Income from equity method investment | | | — | | | | — | | | | — | | | | 321 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 1,761 | | | $ | 5,432 | | | $ | 3,279 | | | $ | (3,029 | ) | | $ | (4,878 | ) | | $ | (4,059 | ) | | $ | 9,412 | | | $ | 9,421 | | | $ | (9,823 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Includes revenue by type as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | March 31,
2019 | | | June 30,
2019 | | | September 30,
2019 | | | December 31,
2019 | | | March 31,
2020 | | | June 30,
2020 | | | September 30,
2020 | | | December 31,
2020 | | | March 31,
2021 | |
| | | (In thousands) | |
Transaction | | $ | 45,772 | | | $ | 45,350 | | | $ | 41,376 | | | $ | 35,807 | | | $ | 45,586 | | | $ | 50,429 | | | $ | 63,850 | | | $ | 52,249 | | | $ | 61,388 | |
Subscription | | | 47,419 | | | | 50,175 | | | | 53,879 | | | | 54,974 | | | | 54,235 | | | | 53,832 | | | | 59,348 | | | | 62,425 | | | | 65,493 | |
Partner | | | 8,986 | | | | 7,981 | | | | 8,722 | | | | 7,939 | | | | 5,974 | | | | 6,746 | | | | 8,397 | | | | 7,565 | | | | 7,751 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total revenue | | $ | 102,177 | | | $ | 103,506 | | | $ | 103,977 | | | $ | 98,720 | | | $ | 105,795 | | | $ | 111,007 | | | $ | 131,595 | | | $ | 122,239 | | | $ | 134,632 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Quarterly Revenue, Cost and Operating Expense Trends
We have experienced, and expect that we will continue to experience, seasonality in the FASB issuednumber of orders placed and when we enter into subscription agreements with customers. Customers tend to place a higher number of orders and enter into new disclosure guidance relatedor renewed subscriptions in the first quarter of the year, which is when we believe the demand for forming businesses is the highest. Further seasonality is reflected in the timing of our revenue recognition in the second quarter, when we typically recognize a high amount of revenue from transactions placed in the first quarter but fulfilled in the second quarter. Also, historically we generally see demand for our services decline in the last two months of the fourth quarter as a result of the winter holidays. For example, in 2019, we saw our highest number of transaction orders in the first quarter. Although the number of transactions declined in the second quarter as compared to the presentationfirst quarter of 2019, our revenue increased as we fulfilled a number of transaction orders placed in the first quarter. In addition, starting in the second quarter of 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.
Generally, these seasonal trends also apply to our cost of revenue, which includes all costs of fulfilling our services, such as government filing fees and costs associated with customer care that scale with order volumes.
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 April 2020. Customer acquisition media spend has historically been highest in the first quarter of the Statementyear when customer demand is strongest, while other operating expenses such as technology and development and general and administrative expenses typically exhibit less seasonal fluctuation. We expect our sales and marketing expenses will continue to increase in absolute dollars and be our largest operating expense category for the foreseeable future as we invest to drive additional revenue, further penetrate our expanding addressable market and build on our digital brand leadership and awareness. We also expect technology and development expenses to increase in absolute dollars going forward as we invest in new products and services, enhancing our customer experience, and production automation technologies. Additionally, we expect our general and administrative expenses to increase as we expand our headcount to support our growth and meet our obligations as a public company following the completion of Comprehensive Income. This guidance eliminatesthis offering. In addition, during the current option to report other comprehensive incomesecond and its components inthird quarters of 2020, we saw the consolidated statement of stockholders' equity. The requirement to present reclassification adjustments out of accumulated other comprehensive income on the faceimpact of the consolidated statementCOVID-19 pandemic impact these trends, which cannot be quantified and may not continue in future periods.
Non-GAAP Financial Measures
The following table presents a reconciliation of net income has been deferred. The adoption(loss) to Adjusted EBITDA, the most directly comparable financial measure calculated in accordance with GAAP. For more information as to the limitations of this accounting guidance during the six months ended June 30, 2012 did not have any impact on our consolidated financial statements.using non-GAAP measurements, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”
Reconciliation of Net Income (Loss) to Adjusted EBITDA
As an emerging growth company under
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | March 31,
2019 | | | June 30,
2019 | | | September 30,
2019 | | | December 31,
2019 | | | March 31,
2020 | | | June 30,
2020 | | | September 30,
2020 | | | December 31,
2020 | | | March 31,
2021 | |
| | | (In thousands) | |
Net income (loss) | | $ | 1,761 | | | $ | 5,432 | | | $ | 3,279 | | | $ | (3,029 | ) | | $ | (4,878 | ) | | $ | (4,059 | ) | | $ | 9,412 | | | $ | 9,421 | | | $ | (9,823 | ) |
Interest expense, net | | | 9,826 | | | | 9,838 | | | | 9,665 | | | | 9,230 | | | | 9,270 | | | | 8,857 | | | | 8,658 | | | | 8,719 | | | | 8,654 | |
Provision for (benefit from) income taxes | | | 1,107 | | | | 2,492 | | | | 1,932 | | | | (2,370 | ) | | | (2,055 | ) | | | 563 | | | | 3,126 | | | | 795 | | | | (2,936 | ) |
Depreciation and amortization | | | 4,397 | | | | 4,072 | | | | 4,226 | | | | 3,695 | | | | 4,920 | | | | 4,827 | | | | 4,415 | | | | 5,935 | | | | 4,166 | |
Other (income) expense, net | | | (1,037 | ) | | | 1,000 | | | | 1,079 | | | | (3,619 | ) | | | 1,106 | | | | 355 | | | | (1,610 | ) | | | (3,564 | ) | | | (248 | ) |
Stock-based compensation(1) | | | 1,185 | | | | 1,309 | | | | 1,144 | | | | 1,543 | | | | 4,088 | | | | 3,090 | | | | 2,712 | | | | 3,004 | | | | 3,786 | |
Impairment of goodwill, long-lived and other assets | | | — | | | | — | | | | — | | | | 14,321 | | | | 555 | | | | — | | | | — | | | | 550 | | | | — | |
Impairment of available-for-sale debt securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,818 | | | | — | | | | — | | | | — | |
Acquisition related expenses | | | 5 | | | | 2,244 | | | | 2,695 | | | | 489 | | | | — �� | | | | — | | | | 38 | | | | 94 | | | | — | |
Restructuring expenses(2) | | | 363 | | | | 258 | | | | 137 | | | | 842 | | | | 348 | | | | 64 | | | | 155 | | | | 1,957 | | | | — | |
Legal reserves and settlements(3) | | | — | | | | — | | | | — | | | | 735 | | | | — | | | | — | | | | 525 | | | | — | | | | — | |
Certain other non-recurring expenses(4) | | | 306 | | | | 847 | | | | 3,806 | | | | 1,952 | | | | — | | | | 1,764 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA | | | 17,913 | | | | 27,492 | | | | 27,963 | | | | 23,789 | | | | 13,354 | | | | 20,279 | | | | 27,431 | | | | 26,911 | | | | 3,599 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) margin | | | 1.7 | % | | | 5.2 | % | | | 3.2 | % | | | (3.1 | )% | | | (4.6 | )% | | | (3.7 | )% | | | 7.2 | % | | | 7.7 | % | | | (7.3 | )% |
Adjusted EBITDA margin | | | 17.5 | % | | | 26.6 | % | | | 26.9 | % | | | 24.1 | % | | | 12.6 | % | | | 18.3 | % | | | 20.8 | % | | | 22.0 | % | | | 2.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Stock-based compensation expense excludes amounts paid in cash to certain employees as part of a buyback program as further described in Note 15 to our consolidated financial statements included elsewhere in this prospectus. |
| (2) | Restructuring expenses relate to certain one-time severance events for different components of our business, which were part of our overall reset of business strategy during 2019 and 2020. Such expenses are not expected to recur in the near or longer term. Due to continued decline in the business performance of Beaumont, our conveyancing business in the United Kingdom, we conducted a phased restructuring during 2019. In the fourth quarter of 2019, we restructured our United Kingdom Research and Development team, as part of the reset of our product strategy. In the first half of 2020, we restructured our United Kingdom business, mainly in our leadership and technology team. In the fourth quarter of 2020, we incurred $2.0 million in severance costs related to a reduction in headcount in our U.S. workforce. |
| (3) | Legal reserves and settlements include costs accrued or paid for potential litigation settlements, and are net of insurance recoveries, if any. |
| (4) | In 2019, we incurred certain expenses for strategic transactions that were not consummated, including $4.6 million of costs associated with our filing of a registration statement during the first and second quarters of 2019 and which was later withdrawn in the third quarter of 2019, $1.9 million of compensation expense recorded in general and administrative expenses related the establishment of a financial guarantee for a former executive officer in the fourth quarter of 2019, and $0.4 million for other transaction related expenses. In the second quarter of 2020, we incurred a loss on sale from the disposal of Beaumont, our conveyancing business in the United Kingdom, of $1.8 million. |
The following table presents a reconciliation of net cash provided by operating activities, the JOBS Act, we have electedmost directly comparable GAAP measure, to opt outfree cash flow:
Reconciliation of the extended transition period for complying with new or revised accounting standards pursuantNet Cash Provided by Operating Activities to Section 107(b) of the Act. This election is irrevocable.Free Cash Flow
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | March 31,
2019 | | | June 30,
2019 | | | September 30,
2019 | | | December 31,
2019 | | | March 31,
2020 | | | June 30,
2020 | | | September 30,
2020 | | | December 31,
2020 | | | March 31,
2021 | |
| | | (In thousands) | |
Net cash provided by operating activities | | $ | 23,102 | | | $ | 4,885 | | | $ | 14,410 | | | $ | 10,298 | | | $ | 21,889 | | | $ | 27,431 | | | $ | 32,749 | | | $ | 10,980 | | | $ | 31,415 | |
Purchase of property and equipment | | | (5,442 | ) | | | (4,784 | ) | | | (4,281 | ) | | | (3,842 | ) | | | (1,988 | ) | | | (2,503 | ) | | | (3,328 | ) | | | (2,768 | ) | | | (2,911 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total free cash flow | | $ | 17,660 | | | $ | 101 | | | $ | 10,129 | | | $ | 6,456 | | | $ | 19,901 | | | $ | 24,928 | | | $ | 29,421 | | | $ | 8,212 | | | $ | 28,504 | |
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent liabilities in ourthe consolidated financial statements and relatedaccompanying notes. Estimates are used for, however not limited to, revenue recognition, sales allowances and credit reserves, available-for-sale 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. Our significantmost critical accounting policies are described insummarized below. See Note 2 to our consolidated financial statements included elsewhere in this prospectus. prospectus for a discussion of our other significant accounting policies.
Revenue recognition
We have identified belowderive our critical accounting policiesrevenue from the following sources:
Transaction revenue—Transaction revenue is primarily generated from our customized legal document services upon fulfillment of these services. Transaction revenue includes filing fees and estimates thatis net of cancellations, promotional discounts and sales allowances. Until April 2020, when we believe requireceased providing such services, we also generated transaction revenue from our residential and commercial conveyancing business in the greatest amountUnited Kingdom. Revenue for these services was recognized when delivered to the customer. In addition, until July 2019, when we ceased providing such services, we generated revenue from litigation services in the United Kingdom, and we recognized this revenue based on the time incurred by the attorneys at their market billing rates. In 2020, we commenced providing tax advice and filing services in the United States, which are recognized at the point in time when the customer’s tax return is filed and accepted by the applicable government authority.
Subscription revenue—Subscription revenue is generated primarily from subscriptions to our registered agent services, compliance packages, attorney advice, and legal forms services, in addition to SaaS subscriptions in the United Kingdom. In the fourth quarter of judgment. On an ongoing basis,2020, we evaluatecommenced providing tax, bookkeeping and payroll subscription services. We recognize revenue from our estimates that are subjectsubscriptions ratably over the subscription term. Subscription terms generally range from thirty days to significant judgment including those relatedone 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.
Partner revenue—Partner revenue consists primarily of one-time or recurring referral fees earned from third-party providers from leads generated to such providers through our online legal platform. Revenue is recognized when the evaluationrelated performance-based criteria have been met. We assess whether performance criteria have been met on a cost-per-click or cost-per-action basis.
We determine revenue recognition through the following five steps: identification of a contract with a customer; identification of the performance obligations in the contract; determination of the transaction price; allocation of the transaction price to the performance obligations in the contract; and recognition of revenue recognition criteria, includingwhen or as the determination of standalone value and estimates of the selling price of deliverables in our revenue arrangements, loss contingencies, valuation allowances and reserves related to income taxes and assumptions underlying stock-based compensation. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities. To the extent that thereperformance obligations are material differences between our estimates and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.satisfied.
We believe the assumptions and estimates associated with the following have the greatest potential impact on our financial statements.
We recognize revenues when four basic criteria are met: persuasive evidence of an arrangement exists; services have been rendered; the fees are fixed or determinable and collectability is reasonably assured. We
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consider persuasive evidence of a sales arrangement to be the customer's placement of the order and acceptance of our terms of service. For arrangements with third-party companies related to other revenues, we ensure a written contract is in place. Our customers generally pay for their orders and subscription servicestransactions in advance by credit or debit card.card except for certain services provided under installment plans where we allow customers to pay for their order in two or three equal payments. The first installment due under the installment plans is charged to the customer’s debit or credit card on the date the order is placed, and the remaining installments are generally charged on a monthly basis thereafter. We recognize revenue for the amount we expect to be entitled to for providing the services to our customers. The total fees or the consideration, collected by us for our services include, as applicable, expedited services fees, government filing fees, shipping fees and shipping fees. We record the total consideration initially as deferred revenues thatsales tax.
Subscription services are then recognized as revenues when we meet allgenerally paid monthly or annually in advance of the criteriasubscription period except for SaaS services in the United Kingdom which are invoiced monthly in arrears. Amounts collected in advance of revenue recognition. Deferred revenues that we willrecognition are recorded in deferred revenue. Customers may pay for services, however, may not provide the necessary information to complete a transaction. We attempt to contact the customer to complete the abandoned order. We recognize during the succeeding 12 month period from our balance sheet daterevenue on abandoned services, or breakage, when it is recorded as current deferred revenues,likely to occur and the remaining portionamount can be recognized without significant risk of reversal. We recognize breakage in proportion to the pattern of rights exercised by the customer. Judgment is recorded as non-current atrequired to determine the balance sheet date. In circumstances whereamount of breakage and when breakage is likely to occur, which we do not receive the payment in advance, revenues are only recognized if collectability is reasonably assured, assumingestimate based on historical data of breakage for similar services.
Services we meet all other revenue recognition criteria.
For our legal document preparation services, transaction revenues are recognized when we fulfill the service. For time-based, subscription services, such as legal plans, registered agent services or unlimited access to our forms library, we recognize subscription revenues ratablyoffer can generally either be purchased on a straight-linestand-alone basis over the subscription term for those services, which ranges fromor bundled together as part of a periodpackage of 30 days to two years.
We record transaction revenues net of refunds, cancellations, promotional discounts, sales allowances, credit reserves and the value allocated to bundled free-trials for our subscription services. We record subscription revenues net of promotional discounts, cancellations, sales allowances, credit reserves and payments to legal plan attorneys.
Other revenues are recognized when the related performance based criteria have been met. We assesses whether performance criteria have been met onAccordingly, a cost-per-click or cost-per-action basis and whether the fees are fixed or determinable based on a reconciliation of the performance criteria and the payment terms associated with the transaction. The reconciliation of the performance criteria generally includes a comparison of internally tracked performance data to the contractual performance obligation and, when available, to third-party or affiliate provided performance data. These arrangements do not include multiple deliverables.
A significant number of our arrangements include multiple bundled deliverables,performance obligations, such as the preparation of legal documents combined with related document revision, document storage, 30-day free trial of our registered agent services, orand free trial periods of our legal plans. We therefore recognize revenues for these arrangements in accordance with FASB ASC 605-25,Revenue Recognition—Multiple-Element Arrangements ("ASC 605-25"). ASC 605-25 was updated by Accounting Standards Update ("ASU") 2009-13,Revenue Recognition (Topic 605)—Multiple-Deliverable Revenue Arrangements—a Consensus ofAt contract inception, we assess the Emerging Issues Task Force ("ASU 2009-13").
We elected to early adopt ASU 2009-13 on a prospective basis for all arrangements entered into or materially modified after January 1, 2010.
For multiple deliverable revenue arrangements, we first assesses whether each deliverable has value to our customer on a standalone basis and performance is considered probable and substantiallyservices promised in our control. Ourcontracts with customers and identify performance obligations for each promise to transfer to the customer a service or bundle of services can be sold both on a standalone basis and as partthat is distinct. The identification of multiple deliverable arrangements. Accordingly, substantially alldistinct performance obligations within our packages may require significant judgment.
The transaction price allocated to each separate performance obligation represents the amount of our services have standalone valueconsideration to our customer. Based on that standalone value of the deliverables,which we allocate our revenues among the separate deliverables in the arrangement, including the bundled free-trials, using the relative selling price method hierarchy established in ASU 2009-13. This hierarchy requires the selling price of each deliverable in a multiple deliverable revenue arrangementexpect to be based on,entitled in descending order: (i) vendor-specific objective evidence, or VSOE, (ii) third-party evidence of sellingexchange for the services we provide. The transaction price or TPE, or (iii) management's best estimated selling price, or BESP.
We establish VSOE for a majority of our servicesis based on the price we charge when the deliverable is sold separately. In determining VSOE, we require that a substantial majority of our selling prices for our
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services to fall within a reasonably narrow pricing range, and we then establish VSOE based on the mid-point of the range for those services. This requires significant management judgment, including as to how we group similar services, the time period analyzed for assessing transactions, and the volume of similar transactions available to us in the relevant time period.
When we cannot establish VSOE, we apply our judgment with respect to whether we can obtain TPE based on competitor prices for similar deliverables that are sold separately. We believe our strategy differs from that of our peers, and our services contain a significant level of differentiation such that comparable pricing of our services cannot be obtained. Our competitors do not sell services similar to ours on a standalone basis, and we therefore are unable to reliably determine what similar competitor services' selling prices are on a stand-alone basis. As a result, we have been unable to establish selling price based on TPE.
When we cannot establish VSOE or TPE, we apply our judgment to determine BESP. The objective of BESP is to determine the price at which we would transact a sale if the service were sold on a stand-alone basis. The determination of BESP requires us to make significant estimates and judgments and we consider numerous factors in this determination, including the nature of the deliverables, market conditions and our competitive landscape, internal costs and our pricing and discounting practices. Our determination of BESP is made through consultation with and formal approval by our senior management. We update our estimates of both VSOE and BESP on an ongoing basis as events and as circumstances may require. Because we can establish VSOE for substantially all of our services, use of BESP estimate for revenue recognition is limited to document revisions and document storage services.
We are unable to determine VSOE or TPE for document revision and document storage services, which we bundle with certain of our consumer services. Accordingly, as of January 1, 2010, the selling prices of these document revision and document storage services are determined based on BESP, and we recognize revenues from these services based on the relative selling price of the deliverables in the arrangement. Our adoption of ASU 2009-13 resulted in us recognizing $4.7 million of transaction revenues in 2010 that we would not have otherwise recognized during that year.
Prior to January 1, 2010, we considered document revision and document storage services that we bundle with other consumer services to be a single unit of accounting and the total fees received from those arrangements were recognized as transaction revenues ratably on a straight-line basis over the service term. Prior to August 2009, we offered document revision and document storage services with a term of five years and, accordingly, the deferred revenues will be recognized as transaction revenues through August 2014. Beginning in August 2009, we sold these services only on a one year service term. At December 31, 2010, December 31, 2011 and June 30, 2012, our non-current deferred revenues balances of $7.0 million, $3.3 million and $1.7 million, respectively, includedcontractual amounts in our consolidated balance sheets primarily consist of document revisioncontracts and document storage services.
Our revenue arrangements do not include contractual provisionsis reduced for cancellations or terminations. However, as a business practice we provide a satisfaction guarantee that if our customer is not fully satisfied with the services or support and they notify us within a limited period of time after the purchase, we will attempt to resolve the matter, offer a credit that can be used for future services or provide a refund, excluding third-party fees. Revenues are recognized net of promotional discounts and estimated sales allowances and credit reserves related to credit or debit card chargebacks,for price concessions, charge-backs, sales credits and refunds. For completed services whererefunds, which are accounted for as variable consideration when estimating the customers have elected the three-pay plan, we record a sales allowance for estimated charge backs, credits and collection losses for the second and third payment receivable amounts. The sales allowance is recorded against the customers' receivable balance. For completed and paid services, we record a sales and credit reserve based on our estimate of refunds, charge backs or credits. The sales and credit reserves are included in accrued expenses and other current liabilities. The sales allowance
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and the sales and credit reserves are made at the timeamount of revenue recognition based on our historical experience, activity occurring afterto recognize. We only include variable consideration in the balance sheet date and other factors.transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. We estimate sales allowances using the expected value method. We have established a sufficient history of estimating refunds, charge backs, write offs and creditssales allowances given the large number of our homogeneous transactions and thetransactions. The majority of the our allowances and reserves are known within the timea relatively short period of time following our financial reporting cycle.balance sheet date. The estimated provision for sales allowances and reserves has varied from actual results within ranges consistent with management’s expectations. The transaction price excludes sales taxes.
Contracts with our expectations. If actualcustomers may include options to purchase additional future services, and in the case of subscription services, options to auto-renew the subscription service. Additional consideration attributable to either the option to purchase additional future services or the option to renew are excluded from the transaction price until such time that the option is exercised, unless these options provide a material right to the customer.
For arrangements that contain multiple performance obligations, such as our bundled arrangements, we allocate the transaction price to each performance obligation based on estimates of the standalone selling price of each performance obligation within the bundle. For the services we sell on a standalone basis, we use the sales allowances, credit reserves and promotional discountsprice of these services in the allocation of the transaction price in bundled arrangements. Where we do not sell the service on a standalone basis, we estimate the standalone selling price based on the adjusted market assessment approach or the expected cost plus a margin approach when market information is not observable. In these cases, the determination of the standalone selling price may require significant judgment.
We recognize revenue when we satisfy the performance obligation by transferring the promised good or service to the customer. For our transaction-based services, we generally recognize revenue at a point-in-time when the services are greater than estimated by us, revenues and operating results would be negatively impacted.delivered to the customer. For our subscription-based services we recognize revenue on a straight-line basis over the subscription term. For our partner-based services, we recognize revenue at a point-in-time when the related performance-based criteria have been met.
We do not have significant financing components in arrangements with our customers.
Principal Agent Considerationsagent considerations
In certain of our arrangements, another party may be involved in providing services to our customer. We evaluate the criteria as prescribed by FASB ASC 605-45, Principal Agent Considerations, in order to determine whether we can recognize revenuesrevenue gross as a principal or net as an agent. We record revenuesrevenue on a gross basis when we are the primary obligorprincipal in the arrangement and therefore principally responsible for the fulfillment of the services. We are the primary obligor in substantially all of our legal document preparation and registered agent services. The determination ofarrangement. To determine whether we are thea principal or an agent, requires uswe identify the specified good or service to be provided to the customer and assess whether we control the specified good or service before that good or service is transferred to the customer. We evaluate a number of indicators of whether we control the good or service before it is transferred to the customer, including which party, as applicable, in the arrangement:
•is the primary obligor, or haswhether we have primary fulfillment responsibility and obligation to perform the services being sold to the customer;
•has latitude in establishing the sales price;
•can make changes to or perform part of the service;
•has supplier selection; and
•has credit or collection risk.
When forming our conclusion on whether we are the principal or agent in an arrangement and whether to present revenues gross or net, we weight the above factors, and places more weight on the first factor, or primary obligor, followed by whether we have latitude in establishing the sales priceprice; and whether we perform part of the service.have inventory risk.
In arrangements in which we are the primary obligor and the indicators are weighted towards us acting as a principal, we record as revenuesrevenue the amounts we have billed to our customer, net of sales allowance, and we record the related costs we have incurred in fulfilling our services.fee payable to the third-party as cost of revenue. We are the primary obligorprincipal in substantially allmost of our legal document preparation and registered agent services.services, including legal entity formations and similar arrangements and conveyancing and formation services in the United Kingdom. For these services, revenue includes filing and similar fees.
In arrangements in which we are not the primary obligor and the indicators are more weighted towards us acting as the agent in the arrangement,principal, we record revenuesrevenue on a net basis, which is equal to the amount billed to our customer, net of sales allowances and the fee payable to the primary obligor, which is another third partythird-party or partner that is primarily responsible for performing the services for the customer. Because weWe are not a law firm in the United States and cannot provide legal advice through our U.S. entities, therefore the participating independent law firms in our legal plans control the service to the customer and have the primary service obligation to provide attorney consultations to our customers, for which we pay the law firms a monthly fee. Therefore,For these arrangements, we recognize revenuesrevenue on a net basis as an agent for subscriptionsagent. Since 2016, our Alternative Business Structure, or ABS, subsidiary in the United Kingdom began offering legal advisory services that were marketed through our website. Our ABS provides independent legal advice to our customers and is directly responsible for, and controls the fulfillment of, the legal plans. services. Accordingly, for services provided by our ABS, we recognize revenue as the principal. For other services provided by third-parties, including deed transfer, accounting, tax, credit monitoring, business data protection and logo design services, revenue is recognized net of fees payable to third-parties. For partner revenue, we receive a fee for the referral of our customer to the partner or we retain a portion of the fee paid by the customer and share the remainder with partner. Our partner controls the service to the customer and the partner is responsible for fulfilling the referred service to the customer; accordingly, we recognize revenue for these arrangements on a net basis.
Revenue includes shipping and handling fees charged to customers.
Business combinations
The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business being recorded at their estimated fair values on the acquisition date. Any excess purchase consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.
We also recognized revenuesperform valuations of assets acquired and liabilities assumed for an acquisition and allocate the purchase price to their respective net tangible and intangible assets. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. We generally engage the assistance of third-party valuation specialists in determining fair values of assets acquired and liabilities assumed and contingent consideration, if any, in a business combination.
Transaction costs associated with business combinations are expensed as an agent for registered agent servicesincurred and are included in 43 states priorgeneral and administrative expenses in the accompanying consolidated statements of operations.
Goodwill
Goodwill represents the excess of the aggregate fair value of the consideration transferred in a business combination over the fair value of the assets acquired, net of liabilities assumed. Goodwill is not amortized, however, it is subject to March 2010. Before March 2010,impairment testing at the reporting unit level annually during the fourth quarter of our fiscal year or more frequently if events or changes in circumstances indicate that goodwill may be impaired.
In assessing impairment, we contractedhave the option to first assess qualitative factors to determine whether or not a reporting unit is impaired. Alternatively, we may perform a quantitative impairment assessment or if the qualitative assessment indicates that it is more-likely-than-not that the reporting unit’s fair value is less than its carrying amount, a quantitative analysis is required. The quantitative analysis compares the estimated fair value of the reporting unit with third-party service providersits respective carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount including goodwill, goodwill is considered not to perform substantially all registered agent services on our behalfbe impaired. If the fair value is less than the carrying amount including goodwill, then a goodwill impairment charge is recorded by the amount that the carrying value exceeds the fair value, up to the carrying amount of goodwill.
In 2019, we had two reporting units, the U.S. reporting unit and the U.K. reporting unit. Our U.K. reporting unit’s performance was below expectations and further deteriorated in 2019. Our quantitative goodwill assessment in 2019 concluded that the carrying value of the U.K. reporting unit exceeded its fair value, and accordingly, we recordedimpaired all the amount received from the customer net of the fee payablegoodwill attributable to the service provider.U.K. reporting unit of $10.6 million.
For our goodwill impairment test performed in the fourth quarter of 2020, the fair value of our consolidated reporting unit significantly exceeded our carrying value.
Loss Contingenciescontingencies
We record loss contingencies in our consolidated financial statements in the period when they are probable and reasonably estimable. If the amount is probable and we are able to reasonably estimate a
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range of loss, we accrue the amount that is the best estimate within that range, and if no amount is better than any other in the range, we record the amount at the low end in the range. We disclose those contingencies that we believe are at least reasonably possible but not probable regardless of whether they are reasonably estimable. We currently do not have any loss contingencies that are probable but not estimable. The likelihood of our contingenciesa loss is determined using a number ofseveral factors including the nature of the matter, advice of our internal and external counsel, previous experience and historical and relevant information available to us. As discussed in Note 6 to our consolidated financial statements included elsewhere in this prospectus, we have agreed to settlements with respect to two matters with the maximum settlement, assuming all eligible claimants made a valid claim, estimated to be $16 million. As of December 31, 2011, we had reasonably estimated the collective range of aggregate probable losses for these matters to be between $5.4 million and $7 million and, in accordance with GAAP, had accrued $5.4 million, the low end of the range. The determination of the probabilitylikelihood of loss andor the range of loss requires significant management judgment. We expense legal costs for defending legal proceedings as incurred.
Based on the claims received through May 14 and 15, 2012, the claims submission deadlines for these two matters and claims processed to date, we increased the accrued settlement liability by an additional $0.2 million to $5.6 million during the six months ended June 30, 2012 and in June 2012 we paid $1.9 million to the plaintiffs' attorneys for fees and expenses in one of the two settlements. We have reasonably estimated the collective aggregate probable loss to be approximately $3.7 million included in accrued expenses and other current liabilities as of June 30, 2012.
The ultimate cost of these two settlements are dependent on a number of factors, including the resolution of any appeals of the approved settlements, and actual claims made by, and the resulting payments to, the class members. There is at least a reasonable possibility that we may incur an additional loss in excess of the amount accrued at June 30, 2012. We are unable to estimate the amount of additional loss or range of additional loss, if any, relating to these matters. If the actual payments for the settlements are higher than the amount estimated by us, this difference could have a material adverse effect on our business, operating results, cash flows and financial condition. We will recognize any difference between the amount accrued and the ultimate cost of the settlements as an additional expense or reversal of amount already accrued in the period in which the final settlement is approved and the claims made by the plaintiffs are finalized.
As discussed in Note 613 to our consolidated financial statements included elsewhere in this prospectus, we are subject to additional pending matters for which we believe that we have meritorious defenses to the claims and intend to defend against vigorously. The plaintiffs have yet to state any dollar amounts being sought associated with these matters and we have denied and continue to deny all of the allegations and claims asserted in the lawsuits. Accordingly, we are unable to predict the ultimate outcome of these matters and have not recorded any losses in our consolidated financial statements as the amount of losses, if any, associated with these matters are not probable and estimable. If these matters are not resolved in our favor, the potential losses arising from results of litigation or settlements may have a material adverse effect on our business, operating results, cash flows and financial condition.
We useaccount for income taxes using the asset and liability method, of accounting for income taxes. Underwhich requires the liability method, we determine ourrecognition of deferred tax assets and liabilities based on differences betweenfor the expected future tax consequences of events that have been recognized in our consolidated financial reporting andstatements. Deferred income tax bases of our assets and liabilities and measure themare measured using enacted tax rates anticipated to be in effect when those tax assets and laws thatliabilities are expected to be realized or settled. The effect of a change in effect basedtax rates on when we expect these differences to reverse. deferred tax assets and liabilities is recognized in the consolidated statements of operations in the period that includes the enactment date.
We must also make judgments in evaluating whether deferred tax assets will be recovered from future taxable income. To the extent that we believe that recovery is not likely, we establish a valuation allowance. The carrying value of our net deferred tax assets is based on whether it is more likely than not that we will generate sufficient future taxable income to realize these deferred tax assets. We record aA valuation allowance whenis established if, based upon the available evidence, it is more likely than not that some or all of our netthe deferred tax assets will not be realized. Our judgments regardingWe consider all available evidence, both positive and negative, including historical levels of income, expectations and risk associated with estimates of future taxable
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income may change over time due to changes in market conditions, changes in tax laws, tax planning strategies or other factors.assessing the need for a valuation allowance. If our assumptions and consequently our estimates, change in the future, ourthe valuation allowance established may be increased or decreased, resulting in a material respectivean increase or decrease, inwhich may be material, to our provision for income tax provision (benefit)taxes and the related impact on our reported net income (loss).income.
In determining the need for a valuation allowance, we review all available evidence pursuant to the requirements of ASC 740,Income Taxes. The determination of recording or releasingWe recognize tax valuation allowances is made, in part, pursuant tobenefits from an assessment performed by us regarding the likelihood that we will generate sufficient future taxable income against which benefits of the deferred tax assets may or may not be realized. This assessment requires us to exercise significant judgment and make estimates with respect to our ability to generate revenues, operating income and taxable income in future periods. Amongst other factors, we must make assumptions regarding overall current and projected business and legal document and ancillary services' industry conditions, operating efficiencies, our ability to timely and effectively adapt to technological change, fully and successfully resolve outstanding legal matters, and the competitive environment which may impact our ability to generate taxable income and, in turn, realize the value of the deferred tax assets. Significant cumulative operating losses in 2010 and prior years and economic uncertainties in the market made our ability to project future taxable income uncertain and volatile at December 31, 2010. Based upon our assessment of all available evidence, including our history of cumulative losses, we concluded as of December 31, 2010, that it was not more likely than not that our net deferred tax assets would be realized, and therefore we had a full valuation allowance against our deferred tax assets.
In 2011, we became profitable due to the significant increase in our revenues as we experienced an increase in demand for our services. As a result, we were able to utilize a substantial amount of our federal net operating loss carryforwards. The majority of our year ended December 31, 2011 income from operations was earned in the second half of the year resulting in our achievement of three-year cumulative income before income taxes by the fourth quarter of 2011. Accordingly, during the fourth quarter of 2011, we released our valuation allowance against deferred tax assets based on the weight of positive evidence that existed at December 31, 2011, except for the allowance of $0.4 million relating to our deferred tax asset for a capital loss carryforward which we expected to expire unused. Based upon the current trend of our operating results and forecasts, we believe thatposition only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits. If this threshold is met, we willmeasure the tax benefit as the largest amount of the benefit that is greater than fifty percent likely to be realized upon ultimate settlement. We recognize penalties and interest accrued with respect to uncertain tax positions as a component of the benefits ofincome tax provision.
See Note 18 to our deferred tax assets.
We adopted the provisions of FASBs guidance on Accounting for Uncertainty in Income Taxes on January 1, 2007. This guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise'sconsolidated financial statements and prescribes a recognition threshold and measurement processincluded elsewhere in this prospectus for the accounting of a tax position taken or expected to be taken in a tax return. We consider many factors when evaluating and estimatingfurther information on our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense (benefit) in the accompanying statements of operations. We do not have significant uncertain tax positions.taxes.
We recognize compensation expense related to our employee option grants in accordance with FASB ASC 718,Compensation—Stock Compensation ("ASC 718"). We estimate the fair value of employee share-basedstock-based payment awards on the grant-date.grant-date and recognize the resulting fair value, net of estimated forfeitures, over the requisite service period. We use the Black-Scholes option pricing model for estimating the fair value of our options granted under our stock option plans.plans that vest based on service and performance conditions. The fair value of RSUs, that vest based on service and performance conditions is determined based on the value of the underlying common stock at the date of grant. For awards that contain market conditions, we estimate the fair value using a Monte Carlo simulation model. We record expense for awards that contain performance conditions only to the extent that we determine it is probable that the performance condition will be achieved. Expense for awards containing market conditions is not reversed even if the market condition is not achieved. We have elected to treat share-basedstock-based payment awards with graded vesting schedules and time-based service conditions as a single award and recognize stock-based compensation on a straight-line basis, net of estimated forfeitures, over the requisite service period. As our stock-based compensation expenseAwards with performance or market conditions are recognized is based on our awards that are ultimately expected to vest, the amount has been reduced by our estimated forfeitures. ASC 718 requires us to estimate forfeitures at the time of the grant and revise, if necessary, in subsequent periods if our
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actual forfeitures differ from our estimates. We estimated forfeitures based on our historical experience and future expectations.
We recognize compensation expense for non-employee stock-based awards in accordance with ASC 718 and FASB ASC 505-50,Equity Based Payments to Non-EmployeesOptions ("ASC 505-50"). We account for stock option awards issued to non-employees at fair value using the Black-Scholes option pricing model. We believe that the fair value of the stock options is more reliably measured than the fair value of services received and record compensation expense based on the then-current fair values of the stock options at each financial reporting date. We adjust compensation recorded during the service period in subsequent periods for changes in the stock options' fair value until the earlier of the date at which the non-employee's performance is complete or a performance commitment is reached, which is generally when the stock option award vests.
The Black-Scholes option pricingoption-pricing model and the Monte Carlo simulation model requires us to make certain assumptions including the fair value of our underlying common stock, the expected term, the expected stock price volatility, the risk-free interest raterates and the expected dividend yield.
•Fair valueyield of our common stock: Because our stock is not publicly traded, we must estimatestock. These assumptions used in the Black-Scholes option-pricing model and the Monte Carlo simulation model, other than the fair value of our common stock as discussed in "—(see the section titled “—Common Stock Valuations" below.
•Expected term: Our expected term of our employee stock options represents the weighted-average period that the stock optionsValuations” below), are expected to remain outstanding. We calculate the expected term of options granted based upon our actual historical exercise and post-vesting cancellations, adjusted for our expected future exercise behavior.
•Expected volatility: Because our common stock does not have a publicly traded history, we estimate the expected volatility of the awards from the historical volatility of selected public companies within the Internet and media industry with comparable characteristics to us, including similarity in size, lines of business, market capitalization, revenues and financial leverage. We determined the expected volatility assumption using the frequency of daily historical prices of comparable public company's common stock for a period equal to the expected term of our options in accordance with the guidance in ASC 718. We periodically assess our peer companies and other relevant factors used to measure our expected volatility for future stock option grants.
•Risk-free interest rate: Our risk-free interest rate assumption is based upon our observed interest rates on U.S. government securities appropriate for our expected term.
•Dividend yield: Ourestimated as follows: | • | | Expected term. The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. The expected term of options granted is estimated based upon actual historical exercise and post-vesting cancellations, adjusted for expected future exercise behavior. |
| • | | Risk-free interest rate. The risk-free interest rate assumption is based upon observed interest rates on the U.S. government securities appropriate for the expected term of our stock options. |
| • | | Expected volatility. Because our common stock has no publicly traded history, we estimate the expected volatility from the historical volatility of selected public companies with comparable characteristics to us, including similarity in size, lines of business, market capitalization and revenue and financial leverage. We determine the expected volatility assumption using the frequency of daily historical prices of comparable public company’s common stock for a period equal to the expected term of the options. We periodically assess the comparable companies and other relevant factors used to measure expected volatility for future stock option grants. |
| • | | Expected dividend yield. The dividend yield assumption is based on our history and expectation of dividend payouts. Other than the special dividends paid in 2015, 2017 and 2018 which resulted in corresponding reductions in the exercise price of the stock options, we have not declared or paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future. |
Stock-based compensation expense is recognized based on awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on our historical practiceexperience and future expectations.
If any of the assumptions used in the Black-Scholes option-pricing model change significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously.
The determination of stock-based compensation is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment. If we had made different assumptions, our stock-based compensation expense, and our expectationnet income (loss) for 2019, 2020 and the three months ended March 31, 2020 and 2021, may have been materially different.
The weighted-average assumptions that were used to calculate the grant-date fair-value of dividend payouts. our stock option grants were as follows (in thousands):
| | | | | | | | | | | | |
| | | Year Ended December 31, | | | Three Months Ended
March 31,
2020 | |
| | | 2019 | | | 2020 | |
Expected term (years) | | | 5.1 | | | | 5.2 | | | | 5.1 | |
Risk-free interest rate | | | 1.5 | % | | | 1.1 | % | | | 1.6 | % |
Expected volatility | | | 44 | % | | | 45 | % | | | 43 | % |
Expected dividend yield | | | — | | | | — | | | | — | |
We have never declared or paiddid not grant any cash dividendsstock options in the three months ended March 31, 2021. Our types of stock option awards are as follows:
Options that vest upon the satisfaction of service-based vesting conditions, which is typically over a four-year period. For these options we recognize stock-based compensation expense on a straight-line basis over the vesting period of 4 years net of forfeitures.
Options that vest depending upon the fair value of our common stock appreciation 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, providing the holder remains employed through the date of the event. These options contain a performance vesting condition, a market condition and a service condition, and were valued using a Monte-Carlo simulation model. The market condition is satisfied 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. For these options, since vesting is contingent on a CIC event, no
stock-based compensation expense is recognized until the CIC event occurs. At the date of the CIC event, including this offering, we do not anticipate paying any cash dividends inwill recognize stock-based compensation expense for all of the foreseeable future.then unrecognized stock-based compensation cost, irrespective of whether the market condition is satisfied. At December 31, 2020 and March 31, 2021, there was $8.2 million of unrecognized stock-based compensation expense related to these options.
The assumptionsFurthermore, we granted a separate option to an executive officer that we usedvests depending upon the fair value of our common stock appreciation compared to calculate the grant date fair value of our common stock upon the earlier of (i) consummation of a CIC event, which includes a merger, acquisition, or sale of more than 50% of our assets, or (ii) upon the fourth anniversary of the grant date, provided that the holder remains employed through such date. This option does not vest upon an IPO. Stock-based compensation for this option is being recognized on a straight-line basis over the four-year service period and will be recognized irrespective of whether the market condition is satisfied either upon the CIC event or the fourth anniversary, whichever occurs first. At December 31, 2020 and March 31, 2021, there was $9.2 million and $8.4 million of unrecognized stock-based compensation expense related to this option, respectively.
For time-based options granted to certain executive officers, vesting will accelerate 50% of their unvested options upon a change in ownership of more than 50%, sale, merger, disposition, dissolution or liquidation. Vesting does not accelerate upon an IPO. Furthermore, the time-based options will accelerate up to 100% if the executives are terminated without cause by us or by the executive officer for good reason within 24 months of a CIC event.
Restricted stock units. We have granted several types of restricted stock awards as follows:
RSUs that vest upon the satisfaction of service-based vesting conditions, which is typically over a four-year period. For these RSUs we recognize stock-based compensation expense on a straight-line basis over the vesting period of 4 years.
RSUs that only vest upon the achievement of up to four-years of service and upon the consummation of a CIC event. Employees will be eligible to retain the right to any awards that have met the service vesting condition up to a period of 6.5 years from their respective grant date. If the recipient employee and non-employee stock option grantsterminates for any reason other than for cause, the employee shall retain any service-vested RSUs until 6.5 years from the date of grant or the earlier settlement of the service-vested RSUs upon the consummation of a CIC event. For these RSUs, since vesting is contingent on a CIC event, no stock-based compensation expense is recognized until the CIC event occurs. At the date of the CIC event, including this offering, we will recognize stock-based compensation on a graded vesting basis for the periods indicated:portion of the service period completed prior to the CIC event. At December 31, 2020 and March 31, 2021, there was $17.9 million and $27.5 million of unrecognized stock-based compensation expense related to these RSUs, respectively. There has been no compensation expense recognized as both the CIC event and service-based vesting condition had not been satisfied as of March 31, 2021.
RSUs that vest upon the earlier of either prior to December 31, 2022: (1) a change in control, or CIC event establishing an enterprise value of at least $5.0 billion; or (2) our registered securities achieving a trailing 30-day volume weighted average price on a listed exchange establishing an enterprise value of at least $5.0 billion after our initial public offering, or the IPO event, providing the holder remains employed through the date of the event. These RSUs contain a performance vesting condition, a market vesting condition and service vesting condition, and were valued using a Monte-Carlo simulation model. For these RSUs, since vesting is contingent on a CIC event, no stock-based compensation expense is recognized until the CIC event occurs. At the date of the CIC event, including this offering, we will recognize stock-based compensation expense for the portion of the service period prior to CIC event and continue to recognize expense over the remainder of the derived service period, unless we meet the 30-day trading volume at an enterprise value of at least $5 billion beforehand, in which case, any remaining unrecognized stock-based compensation cost will be expensed. We will incur stock-based compensation expense irrespective of whether the market condition is satisfied. At December 31, 2020 and March 31, 2021, there was $0.3 million of unrecognized stock-based compensation expense related to these RSUs.
| | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months
Ended
June 30,
2012 | |
|---|
| | 2009 | | 2010 | | 2011 | |
|---|
Risk-free interest rate | | | 2.34 | % | | 2.35 | % | | 1.25 | % | | 1.22 | % |
Expected life (years) | | | 5.95 | | | 5.90 | | | 6.10 | | | 5.90 | |
Dividend yield | | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
Volatility | | | 50 | % | | 45 | % | | 42 | % | | 42 | % |
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We have regularly conducted contemporaneous valuations to assist us in the determination ofRSUs that vest depending upon the fair value of our common stock appreciation 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, providing the holder remains employed through the date of the event. These RSUs contain a performance vesting condition, a market condition and a service condition, and were valued using a Monte-Carlo simulation model. The market condition is satisfied 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. For these RSUs, since vesting is contingent on a CIC event, no stock-based compensation expense is recognized until the CIC event occurs. At the date of the CIC event, including this offering, we will recognize stock-based compensation expense for eachall of the then unrecognized stock-based compensation cost, irrespective of whether the market condition is satisfied. At December 31, 2020 and March 31, 2021, there was $0.2 million of unrecognized stock-based compensation expense related to these RSUs.
For 509,165 RSUs granted to an executive officer, vesting will accelerate on 25% of their unvested RSUs upon a CIC event including an IPO, or will accelerate 100% if the executive officer is terminated without cause by us or by the executive officer for good reason. At December 31, 2020, total remaining stock-based compensation expense for the RSU award was $5.0 million, of which $1.3 million will be expensed upon the consummation of a CIC event.
Common stock option grant.valuations. The fair value perof the shares of common sharestock underlying our stock option grants wasoptions and RSUs have historically been determined by our board of directors with input from management at each grant date. The valuationdirectors. Prior to this offering, given the absence of a public trading market of our common stock, was performedand in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid,Accounting and Valuation Guide, or AICPA,Valuation of Privately-Held-CompanyPrivately-Held Company Equity Securities Issued as Compensation. The assumptions we use in the valuation model are based on future expectations combined with management judgement. In the absence of a public trading market for our common stock,, our board of directors with input from management reviewed and discussed a variety ofexercised reasonable judgment and considered numerous objective and subjective factors when exercising its judgment in determiningto determine the deemedbest estimate of fair value of our common stock. These factors generally includestock, including the following:
•the sale of our common stock to unrelated, third parties;
•the nature and history of our business;
•general economic conditions and specific industry outlook;
•our financial condition;
•our operating and financial performance;
•contemporaneous independent valuations performed at periodic intervals;
•the market price of companies engaged in the same or similar line of business having their equity securities actively traded in a free and open market;
•the likelihood of achieving a liquidity event, such as an initial public offeringIPO or sale of our company given prevailing market conditions and the nature and history of our business;
•overall economic indicators, including gross domestic product, employment, inflation and interest rates, and the general economic outlook;
the differences between our preferred and common stock in respect of liquidation preferences, conversion rights, voting rights and other features; and
•an adjustment necessary to recognize a lack of marketability for our common stock.
We performed valuations of our common stock that considered the factors described above. We determine our enterprise value using an income approach and market approach. The income approach estimates our enterprise value based on estimates of future cash flows that are discounted to their present values using a discount rate reflective of the risk associated with the future cash flows. As of each valuation date, we update our forecasts, as applicable, considering our recent results, changes in our expectations and any new strategic
initiatives implemented at the time of the valuation. Under the market approach, we use the guideline public company method to estimate our enterprise value based on a comparison to similar publicly traded companies and other companies that have recently completed an IPO. From these comparable companies, we determine representative multiples for revenue and Adjusted EBITDA, which is then applied to our revenue and Adjusted EBITDA estimates. Once our enterprise value is determined, we then adjust for any excess working capital and other similar items, excess cash and the fair value of our debt to arrive at an equity value.
Once our equity value is determined, we utilize the probability-weighted expected return model,method, or PWERM, to allocate value to our common shares. The PWERM determinesin combination with the fair value of our common stock depending onoption-pricing method, or OPM, as a hybrid method, or Hybrid Method, which is an accepted valuation method under the likelihood of various liquidity scenarios. We then determine the appropriate allocation of value to the common stockholders under each liquidity scenario based on the rights and preferences of our Series A and common stock at that time. The resulting value of common stock under each scenario is multiplied by a present value factor, calculated based on our cost of equity and the expected timing of the event. The value of common stock is then multiplied by an estimated probability for each of the expected events determined by our management. We then calculate the probability-weighted value per share of common stock and apply a lack of marketability discount.
Under the PWERM, the value of our common stock is based upon four possible future events for our company: initial public offering, sale, staying private and dissolution. We use the market approachAICPA Practice Guide, for determining the fair value of our common stock under the IPO, sale and staying private scenarios.stock. The market approach measuresPWERM is a scenario-based analysis that estimates the value per share of a business through an analysis of similar publicly-traded entities. In applying the market approach, valuation multiples are determined for selected comparable companies and are then evaluatedcommon stock based on the strengths and weaknessesprobability-weighted present value of our company relative toexpected future equityvalues for the comparable entities. We then apply these market multiples to our operating data to arrive at a value indication. Under the dissolution scenario, we assumed no value remained to be allocated to our common shareholders.
We also utilize the income approach to test the reasonablenessstock, under various possible future liquidity event scenarios, in light of the resultsrights and preferences of each class and series of stock, discounted for a lack of marketability. The OPM values each equity class by creating a series of call options on the application of the PWERM. The income approach estimatesequity value, with exercise prices based on the expectationliquidation preferences, participation rights and strike prices of derivatives. The Hybrid Method is appropriate for a company expecting a near-term liquidity event, but where, due to market or other factors, the likelihood of completing the liquidity event is uncertain. The Hybrid Method considers a company’s going concern nature, stage of development and our ability to forecast near and long-term future net cash flows that
Table of Contentsliquidity scenarios. The valuation was performed under a Monte Carlo Simulation, or MCS, framework. Under this framework, our equity value was simulated in quarterly time-steps and for each path the exit scenario was determined by drawing from a uniform (0, 1) distribution based on our probabilities.
were then discounted back to the present using a rate of return available from alternative companies of similar type and risk.
We determine the exercise price of our option grants based on the fair value of our common stock as of the immediately preceding valuation, unless circumstances warrant obtaining a more current valuation, including any material changes in our business or events, size of the award and the proximity of the grant to the preceding valuation. The following table summarizes options we granted
Following this offering, it will not be necessary to determine the fair value of our common stock using these valuation approaches as shares of our common stock will be traded in 2011 and the first quarter of 2012 based on the immediately preceding valuation:public market.
| | | | | | | |
Date | | Number of Shares
(in thousands) | | Exercise Price
and Fair Value
Per Share of
Common Stock | |
|---|
September 29, 2011 | | | 537 | | $ | 8.21 | |
December 20, 2011 | | | 51 | | $ | 8.22 | |
January 31, 2012 | | | 56 | | $ | 8.61 | |
March 31, 2012 | | | 280 | | $ | 10.59 | |
Based upon an assumed initial public offering price of $11.00$ per share, which is the mid-pointmidpoint of the estimated price range set forth on the cover page of this prospectus, the aggregate intrinsic value of outstanding stock options as of June 30, 2012March 31, 2021 was $39.1$ million, of which $27.4$ million related to vested options and $11.7$ million related to unvested options.
The most significant factors considered by our board of directors in determiningoptions, and the fairintrinsic value of ourRSUs outstanding as of March 31, 2021 was $ million.
Proposed option modifications upon this offering. For retention purposes, prior to, and contingent upon, the completion of this offering, we expect to amend the vesting schedule of certain performance options of executive officers and employees so that the performance options do not vest immediately upon a CIC event including an IPO. The options will instead be subject to a time-based vesting schedule, such that 1/48th of the total shares of common stock each quarter were as follows:
Our boardunderlying the options or shares of directors determined the fair value of our common stock was $8.21will vest each month following the vesting commencement date, subject to continued service through each applicable vesting date. Under the original terms of the options, options would have vested upon this offering at the assumed initial offering price of $ per share, asthe midpoint of June 30, 2011. Our board of directors took into consideration the February 2011 purchases by third parties of our common stock from our existing stockholders at an imputed purchaseestimated price of $7.46 per share. We obtained a contemporaneous third-party valuation that used PWERM to assist our board of directors in determining the fair value of our common stock. Our board of directors also considered events and changes from the previous valuation, including our business growth, and positive outlook and favorable market conditions, including various other Internet companies recently completing initial public offerings. Significant estimates and assumptions were as follows:
•Probability-weighted expected return method scenario probabilities—a 71% initial public offering probability; a 27% sale or merger probability and remaining a private company or dissolution was deemed unlikely and assigned a 1% probability for each event.
•Discount rate applied was 15% basedrange set forth on the calculated weighted average costcover page of capital.
•Lackthis prospectus, with an immediate stock-based compensation charge of marketability discount was determined to be 16%.
Our board of directors determined the fair value of our common stock was $8.22 per share as of September 30, 2011. We obtained a contemporaneous third-party valuation that used PWERM to assist our board of directors in determining the fair value of our common stock. Our board of directors also considered other factors including our growth in revenues and profitability, as well as the volatile condition of the financial markets$ million. However, as a result of global financial uncertaintiesthe modifications, we will recognize a stock-based compensation charge of $ upon the consummation of this offering, and stock-based compensation of $ will be recognized over a weakening inremaining weighted-average period of years.
In addition, prior to, and contingent upon, the environment for initial public offerings. Significant estimates and assumptions were as follows:
•Probability-weighted expected return method scenario probabilities—our management estimatedcompletion of this offering, we expect to amend the vesting schedule of a 74% initial public offering probability;performance option of an executive officer so that the performance option does not vest immediately upon a 24% saleCIC event or merger probability; and remainingupon the fourth anniversary from the original date of grant. The options will instead be subject to a private companytime-based vesting schedule, such that 1/48th of the total shares of common stock
underlying the options or dissolution was deemed unlikely and assigned a 1% probability.
Tableshares of Contents
•Discount rate applied was 14% based on the calculated weighted average cost of capital.
•Lack of marketability discount was determined to be 13%.
Our board of directors determined the fair value of our common stock was $8.61 per sharewill vest each month following the vesting commencement date, subject to continued service through each applicable vesting date. However, as a result of December 31, 2011, resulting in an increasethe modification, we will recognize a stock-based compensation charge of $0.39 per share or an increase$ and stock-based compensation of 5%$ will be recognized over the September 2011 valuation. We obtained a contemporaneous third-party valuation that used PWERM to assist our boardremaining weighted-average period of directors in determining the fair value of our common stock. Our board of directors also considered other factors including our business growthyears.
Quantitative and stronger than forecasted fourth quarter results, positive outlook and improved financial market conditions in general. Significant estimates and assumptions were as follows:
•Probability-weighted expected return method scenario probabilities—our management estimated an 87% initial public offering probability; a 12% sale or merger probability; and remaining a private company or dissolution was deemed unlikely and assigned a 1% probability.
•Discount rate applied was 14% based on the calculated weighted average cost of capital, unchanged from the previous valuation.
•Lack of marketability discount was determined to be 12%, a 1% decrease from the previous valuation due to the shorter expected time until a potential initial public offering.
Our board of directors determined the fair value of our common stock was $10.59 per share as of February 29, 2012, resulting in an increase of $1.98 per share or an increase of 23% over the December 2011 valuation. We obtained a contemporaneous third-party valuation that used PWERM to assist our board of directors in determining the fair value of our common stock. Our board of directors also considered other factors including:
•Discussions with our underwriters as to the potential timing of an initial public offering of our common stock.
•Improved operating results in the first quarter 2012. Our first quarter volume of business is typically the strongest driven by seasonality and other factors as discussed in this prospectus. We obtained improved clarity as to the operating results in the first quarter of 2012 in February 2012.
•The stock markets in general, and internet related stocks in particular, showed robust growth during the first quarter of 2012. The Dow Jones and NASDAQ composite indices increased by 6% and 14%, respectively from December 30, 2011 through February 29, 2012, and in particular the comparable publicly-traded companies in the internet and e-commerce sector that we use in determining the fair value of our common stock increased by 19% over the same period using a market capitalization weighted index.
Significant estimates and assumptions were as follows:
•Probability-weighted expected return method scenario probabilities—91% initial public offering probability, an increase from the prior valuation date given continued execution and plan to file for an initial public offering; 8% sale or merger probability; and remaining a private company or dissolution was deemed unlikely and assigned a 1% probability.
•Discount rate applied was 14% based on the calculated weighted average cost of capital.
•Lack of marketability discount was determined to be 12%.
Table of Contents
Qualitative and Quantitative Disclosures About Market Risk
We have operations both within the United States and, to a lesser extent, in the United Kingdom, and we are exposed to market risks in the ordinary course of our business. These risks include primarily interest rate fluctuations and foreign currency exchange risks, and to a lesser extent, inflation risk.
Interest Rate Fluctuation Riskrate fluctuation risk
OurAt December 31, 2020 and March 31, 2021, we had cash is comprised entirelyand cash equivalents of $114.5 million and $141.2 million, respectively, which consisted of cash on deposit with banks. banks and short-term highly liquid money market funds. Interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income have not been significant.
We do not have any long-term borrowings. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Because our cash is entirely in bank deposits, our portfolio's fair value is insensitivealso had total outstanding debt subject to interest rate changes.risk of $524.3 million and $523.0 million in principal as of December 31, 2020 and March 31, 2021. We determined thatare exposed to market risk from changes in interest rates on our 2018 Credit Facility, which accrues interest at a variable rate. We performed a sensitivity analysis to determine the effect of interest rate fluctuations on our interest expense. A hypothetical 1% increase or decrease in yield from potentially investingthe interest rates used for our cashoutstanding term loans during 2020 and the three months ended March 31, 2021, with all other variables held constant, would have resulted in longer-term investments did not warrant a changean increase or decrease of $5.4 million or $1.3 million in our investment strategy.reported interest expense for 2020 or the three months ended March 31, 2021, respectively. From time to time, we may enter into derivative transactions in an attempt to hedge our interest rate risk. In future periods,March 2018, we entered into an interest rate cap agreement for an aggregate notional amount of $340.0 million to hedge variability of cash flows in our variable interest payments attributable to fluctuations in LIBOR beyond 3.0%. The interest rate cap expired in March 2021. In April 2019, we entered into interest rate swap agreements for an aggregate notional amount of $131.9 million to swap our variable interest rate on our 2018 Term Loan for a fixed interest rate of 2.2745%. The interest rate swaps were to expire in March 2022. In March 2020, in response to a drop in LIBOR, we modified our interest rate swap agreements to extend the term to March 2024 and also to lower the fixed interest rate from 2.2745% to a revised average rate of 1.6786%. There can be no assurance that such transactions will be effective in hedging some or all of our interest rate exposures and under some circumstances could generate losses for us.
Foreign currency exchange risk
We have foreign currency risks related to our revenue and expenses denominated in currencies other than our functional currency, the U.S. Dollar, principally GBP. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. We have experienced and will continue to evaluateexperience fluctuations in our investment policy in ordernet income as a result of transaction gains and losses related to ensuretranslating certain cash balances, trade accounts receivable and payable balances and intercompany loans that we continue to meet our overall objectives.
Our sales transactions to date have been primarilyare denominated in currencies other than the U.S. dollars and therefore substantially all of our revenues are not subject toDollar. We recognized foreign currency gains of $2.6 million and $1.8 million in 2019 and 2020, respectively, and $0.1 million in the three months ended March 31, 2021. A 10% adverse change in foreign exchange rates on foreign-denominated accounts for the year ended December 31, 2020 or three months ended March 31, 2021, including intercompany balances, would have resulted in a $1.2 million or $0.1 million decrease in our reported foreign currency income for 2020 or the three months ended March 31, 2021, respectively. In the event our non-U.S. Dollar-denominated sales and expenses increase, our results of operations may be more greatly affected by fluctuations in the exchange rates of the currencies in which we do business. At this time, we do not, but we may in the future, enter into derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the impact hedging activities could have on our results of operations.
Inflation Riskrisk
We do not believe that inflation has had a material effect on our business, financial condition, or results of operations.operations or future prospects. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations.operations and future prospects.
Internal Control over Financial Reporting
We have identified three material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
The material weaknesses we identified are listed below:
We did not maintain an effective control environment. Specifically, we did not maintain sufficient accounting resources commensurate with our structure and financial reporting requirements. This material weakness contributed to the additional material weaknesses below.
We did not design and maintain effective controls to address the initial application of complex accounting standards and accounting of non-routine, unusual or complex events and transactions.
We did not design and maintain effective controls over our financial statement close process. Specifically, we did not design and maintain effective controls over certain account analyses and account reconciliations.
These material weaknesses resulted in adjustments to our current and prior year financial statements primarily related to debt extinguishment costs, goodwill, revenue, accounts receivable, foreign exchange expense and deferred revenue, and could result in a misstatement of any account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
We are in the early stages of designing and implementing a plan to remediate the material weaknesses identified. Our plans include:
hiring additional experienced accounting, financial reporting and internal control personnel and changing roles and responsibilities of our personnel as we transition to being a public company and are required to comply with Section 404 of the Sarbanes Oxley Act of 2002. We have recently hired additional resources and we are engaging with a third-party consulting firm to assist us with our formal internal control plan and provide staff augmentation of our internal audit function;
implementing controls to enhance our review of significant accounting transactions and other new technical accounting and financial reporting issues and preparing and reviewing accounting memoranda addressing these issues; and
implementing controls to enable an effective and timely review of account analyses and account reconciliations.
We cannot assure you that these measures will significantly improve or remediate the material weaknesses described above. The implementation of these remediation measures is in the early stages and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles and as a result the timing of when we will be able to fully remediate the material weaknesses is uncertain and we may not fully remediate these material weaknesses during 2021. If the steps we take do not remediate the material weaknesses in a timely manner, there could continue to be a reasonable
possibility that these control deficiencies or others would result in a material misstatement of our annual or interim financial statements that would not be prevented or detected on a timely basis. This, in turn, could jeopardize our ability to comply with our reporting obligations, limit our ability to access the capital markets or adversely impact our stock price.
We and our independent registered public accounting firm were not required to perform an evaluation of our internal control over financial reporting as of December 31, 2020 in accordance with the provisions of the Sarbanes-Oxley Act of 2002. Accordingly, we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses. Material weaknesses may still exist when we report on the effectiveness of our internal control over financial reporting as required by reporting requirements under Section 404 after the completion of this offering.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included elsewhere in this prospectus for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.
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.
In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we intend to rely on such exemptions, we are not required to, among other things, (1) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, (2) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (3) the requirement of the Public Company Accounting Oversight Board regarding the communication of critical audit matters in the auditor’s report on the financial statements and (4) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply until the last day of the fiscal year ending after the fifth anniversary of this offering or until we no longer meet the requirements of being an emerging growth company, whichever is earlier.
BUSINESS
Table of ContentsOur Mission
BUSINESS
Our mission is to democratize law. We believe that everyoneevery business deserves access to quality legal services so they can benefit from the full protection of the law.legal system and a simple way to stay compliant with it. Our missionplatform helps new businesses form. Once a small business is formed, we offer subscription services to beprotect the trusted destination wherebusiness, its ideas, and the families that create them. LegalZoom empowers small business owners to apply their energy and passion to their businesses instead of the legal and consumers address their important legal needs andregulatory complexity required to be our customers' legal partner for life.operate them.
OverviewOur Business
LegalZoom is thea leading online provider of services that meet theplatform for legal needs of small businesses and consumerscompliance solutions in the United States. In 2020, 10% of new limited liability companies, or LLCs, and 5% of new corporations in the United States were formed via LegalZoom. Our unique position at business inception allows us to become a trusted business advisor, supporting the evolving needs of a new business across its lifecycle. Along with formation, LegalZoom offerings 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 believeoperate across all 50 states and over 3,000 counties in the United States, and have more than 20 years of experience navigating complex regulation and simplifying the legal and compliance process for our customers.
The U.S. legal and regulatory landscape is broad and varied, complex, opaque, and constantly evolving, in particular with respect to the following:
| • | | Multiple third-party interactions. The simple act of forming an LLC or incorporating a corporation may require specific federal, state, county and city interactions, each with their own idiosyncrasies. For instance, in Louisiana, the state registration portal asks the not yet formed business for its EIN before completing a formation. For many consumers, this would require that they stop their filing and secure an EIN with the IRS before returning to the Louisiana registration portal, where they would need to restart the formation process again. In South Carolina, in order to incorporate, a small business must engage an attorney licensed in that state to certify its application for formation. |
| • | | Compliance requirements are complex. At formation, basic compliance requirements are not anticipated or understood. More advanced requirements are dictated by industry, geography, and employer type. For instance, a restaurant in Miami with even a single employee would be required to file for formation, have a registered agent, adopt an operating agreement, get an EIN, register for sales tax, receive nine business licenses and have business insurance, among other things. |
| • | | Regulations change constantly. The myriad of regulatory bodies and potential compliance requirements are daunting on their own, and this dynamic is amplified by the fact that they are constantly changing and evolving. According to a 2017 National Small Business Association, or NSBA, Small Business Regulations Survey, 44% of small firms in the United States reported spending 40 hours or more each year dealing with new and existing federal regulations, and 30% spend 40 hours or more each year navigating state and local regulations. |
Many small businesses operate without forming a legal entity, unintentionally introducing financial risk to the owners’ personal assets. The businesses that recognize that risk upfront often struggle to address it. Once they understand the need to be protected, they often do not know what to do, where to turn or how much it will cost to get help. Even when formed properly, small businesses often fail to comply with ongoing compliance requirements, thereby reintroducing personal liability or facing significant financial and operational risk. Furthermore, these difficulties are becoming more acute as the number of U.S. business formations increase, driven by various macroeconomic factors such as the rise of the gig economy and remote work, accentuating the need for a trusted, cost-effective, digital-first and simple legal and compliance solution.
LegalZoom commenced operations in 2000 so more people could access legal help. Initially, we are transformingfocused on business formation, intellectual property, and estate planning. Over the years, we have expanded our offerings to cover a broader set of legal, compliance, tax and business services for small businessbusinesses. In 2020, we helped form 10% of all new limited liability companies and consumerhelped incorporate 5% of all new corporations in the United States. In addition, 25,000 trademark applications, or 6% of all trademark registration applications in the United States in 2020, were made through LegalZoom. At December 31, 2020, we had over 1.0 million subscription units outstanding and were one of the largest registered agent providers for small businesses in the United States. As a result of this success, we have become the leading brand in online legal services, marketwith 70% aided brand awareness as of December 2020 according to a 2020 study hosted by leveragingDynata.
Our platform combines the power of technology and people.people to demystify and simplify complicated processes, creating user-friendly experiences for our customers. Our online legal platformproprietary technology enables us to deliver servicesautomate many complex legal and compliance processes, allowing us to offer solutions at scale withtransparent, flat-fee prices that are at a compellingsignificant discount to traditional offline alternatives. While the majority of our customers complete these transactions without human assistance, many prefer to have some guidance through the process. The combination of quality,technology and people is at the heart of our unique customer experience. For our customers looking for general help, our customer care and value. Oursales organization of over 500 people is available for real-time guidance on how to use our services. For customers preferring credentialed assistance, we embed the option for them to retain attorneys and certified public accountants, or CPAs, from the beginning of the customer journey at affordable and transparent pricing. In addition, our unique and trusted position at business formation gives us unparalleled knowledge of our customers’ needs prior to the business being operational or discoverable by other service providers. We leverage this valuable knowledge and our position as a small business’ first advisor to introduce our customers to the most relevant business solutions within our partner ecosystem to help them run other aspects of their business.
We believe we earn small businesses’ trust and drive significant organic traffic through our free proprietary educational content, which is often our first interaction with a potential customer. From there, our small business customers’ initial purchase is typically a formation product that streamlines the process of starting a business. Alongside and after this initial transaction, our customers generally purchase annual subscription services to solve additional legal, compliance and tax needs, deepening our relationship with our customers. The power of our platform yields highly efficient unit economics: over the past several years for customers in the United States, we have generated a lifetime customer value in excess of customer acquisition costs generally within the first 90 days of establishing a customer relationship. With recurring revenue through subscription services and repurchases from existing customers, we continue to benefit from an increasing customer lifetime value.
As a result of our traction with our customers, we have achieved economies of scale that we expect to continue to leverage as we accelerate the growth of our business. We generated revenue of $408.4 million in 2019 and $470.6 million in 2020, representing a year-over-year increase of 15.2%, and $105.8 million and $134.6 million for the three months ended March 31, 2020 and 2021, respectively, representing a period-over-period increase of 27.3%. We had net income (loss) of $7.4 million, $9.9 million, $(4.9) million and $(9.8) million in 2019, 2020, and the three months ended March 31, 2020 and 2021, respectively. The increase in net income between 2019 and 2020 was driven by higher revenue, which was partially offset by our investments in marketing spend to expand our customer base and build on our digital brand leadership. The increase in net loss between March 31, 2020 and 2021 largely resulted from increased investment in marketing spend, which nearly offset the increase in revenue. Adjusted EBITDA decreased from $97.2 million in 2019 to $88.0 million in 2020 and from $13.4 million to $3.6 million in the three months ended March 31, 2020 and 2021, respectively, as we invested further in marketing spend to expand our customer base and build on our digital brand leadership. Cash flows from operating activities increased from $52.7 million in 2019 to $93.0 million in 2020 and increased from $21.9 million in the three months ended March 31, 2020 to $31.4 million in the three months ended March 31, 2021. Free cash flow increased from $34.3 million in 2019 to $82.5 million in 2020, primarily as a result of growth in deferred revenue, driven by an increase in subscription units, an increase in accounts payable due to the timing of our payments and lower capital expenditures for the purchase of property and equipment, including
capitalization of internal-use software. Free cash flow increased from $19.9 million in the three months ended March 31, 2020 to $28.5 million in the three months ended March 31, 2021, primarily as a result of growth in deferred revenue driven by an increase in the number of transactions and subscription units. For 2019, 2020, and the three months ended March 31, 2020 and 2021, our free cash flow included cash payments for interest of $37.3 million, $27.9 million, $8.3 million and $6.1 million, respectively. Adjusted EBITDA and free cash flow are not financial measures calculated in accordance with GAAP. For further information about Adjusted EBITDA and free cash flow, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”
Industry Trends
Millions of people start small businesses every year, an accelerating trend driven by digital enablement and the gig economy.
Small businesses are the engine of the U.S. economy, representing 65% of net new job creation since 2000, according to the Bureau of Labor Statistics. These businesses are often family affairs—according to a 2016 Annual Survey of Entrepreneurs conducted by the U.S. Census Bureau, during 2017, 64% were started with family or personal savings, and 31% were family owned. These entrepreneurs also come from diverse backgrounds: according to a 2018 Annual Business Survey conducted by the U.S. Census Bureau, out of all employer firms in 2017, 20% were women-owned, 18% were minority-owned, 17% were immigrant-owned, and 6% were veteran-owned. Two major factors are driving an acceleration in small business creation: digital enablement and the gig economy. Today, an idea can become a digital business within a few days with the help of small business enablement tools. Further, with the rise of the gig economy and lead-generating platforms, a person can become a business in hours by engaging in independent work such as renting their home, driving their car, or selling their crafts or services on an established marketplace. According to a report published by MBO Partners, there were 38 million independent workers in the United States in 2020.
People start small businesses when economic times are both good and bad. Based on information available from secretaries of state, the number of business formations in the United States have grown for 26 out of the past 30 years on a year over year basis.
Small business owners often do not know that they may face personal liability and tax consequences depending on their business formation decision.
The first step to form a business entity is choosing a business structure at formation. A person is automatically a sole proprietor if they do not register as any other kind of business. As a sole proprietor, a small business owner has unlimited personal liability for their business activities, impacting their families and well-being. While reliable data on the total number sole proprietorships in operation is not available, we believe that millions of businesses are operating informally without forming a limited liability business, unknowingly exposing themselves to personal risk.
In spite of the risk and the complexity of the U.S. legal system, 35% of new business owners received no professional guidance in selecting a business formation structure, according to a survey conducted by Magid in 2021. According to the U.S. Census Bureau, there were 31.7 million small businesses in the United States in 2017, all of whom could benefit from legal protection.
Many small business owners try to figure out legal requirements on their own, and often face regulatory problems for noncompliance. It can be frustrating, time consuming and expensive to navigate multiple layers of legal and compliance requirements.
The U.S. legal and compliance system is often opaque and complex, so it is challenging for people to access legal advice and protection and to stay compliant with regulations and taxes. According to the World Justice Project, over 70% of people needing legal assistance are unable to get it. Requirements for a small business include local, regional, state and federal rules for employment, insurance, licensing, health and safety, reporting,
and taxation, among other areas, all of which vary depending on industry and size of business. Overlapping, potentially contradicting, and changing guidelines increase the complexity small businesses face while navigating legal and compliance requirements on their own.
Lawyers typically bill by the hour, resulting in unknown expenses for small business clients. Moreover, according to a portfolioClio Legal Trends report based on anonymized data from tens of interactive legal documentsthousands of U.S. based lawyers using the Clio platform, approximately 69% of the attorneys’ average workday was non-billable in 2018, an inefficiency that results in higher hourly rates. The difficulty in staying current with compliance requirements can also result in high expenses for a small business. According to a 2017 NSBA Small Business Regulations Survey, 10% of small businesses in the United States are fined for regulatory non-compliance, with an average total cost of citations of nearly $31,000 for regulatory non-compliance over a five-year period.
There are structural impediments that make traditional offline attorneys unable to adapt to consumer behaviors and technology advancements.
Traditional offline attorneys face significant challenges in creating a scaled technology platform. Attorneys cannot practice nationally without being licensed and regulated in each individual state, or limiting their practice exclusively to federal law. They also face numerous restrictions on the services they offer, how they advertise, their ability to work or partner with people who are not attorneys, and even receiving credit card payments. For example, according to Clio Legal Trends, 91% of attorneys can’t calculate the ROI of advertising spend. In addition, due to regulatory restrictions concerning law firm business models, offline attorneys are prohibited from offering equity to investors that are personalizednot law firms or attorneys and cannot offer equity to employees that are not attorneys. This results in a lack of available technical talent for significant investment in technology and innovation.
Online adoption of legal services lags behind other comparable industries.
While service industries like accounting, tax, marketing and payments have rapidly transitioned online, legal offerings largely remain offline. According to IBISWorld, approximately 8% of legal services in the United States were conducted online in 2020, compared to approximately 70% of financial services and, according to Ernst & Young, 30% to 45% of healthcare services. According to the American Bar Association, more than 40% of solo attorneys do not have a website.
Online penetration has lagged in the legal industry due to the incredible complexity of the U.S. legal and regulatory landscape, which makes it difficult for an online platform to gain scale with use cases that are applicable and tailored to each local jurisdiction. The rules and regulations governing people who are not licensed attorneys providing legal solutions are complicated and vague. Offering these services nationally subjects online providers to regulatory scrutiny in each state and over 3,000 counties in the United States. This requires significant resources and processes to ensure that changes in the law, forms and procedures are monitored, identified and implemented.
The gap between a small business owner’s legal and compliance needs and available offline solutions is widening.
The COVID-19 pandemic spurred new business formation and also highlighted the impact of policy and enforcement differences across local, regional and state levels. At the same time, the challenges associated with traditional offline “do it yourself” or “find an expert” options are becoming relatively worse as service level expectations increase as a result of small business enablement in other industries.
Technological advances are transforming consumer expectations for professional services. According to McKinsey, digital channels will help companies both meet changing customer needs and expectations and prepare for future industry disruption. The standard for digital convenience and efficiency, already high before the pandemic, has only increased. For example, the COVID-19 pandemic has resulted in the rapid adoption of
video conferencing, which dramatically increases the ability for service providers to directly connect with their clients.
Our Market Opportunity
We view our opportunity in terms of a $48.7 billion serviceable addressable market, or SAM, which we believe we address today, and a larger total addressable market, or TAM, which we believe we can address over the long term as we grow small business consumption of legal and compliance solutions. We primarily serve small businesses with up to 50 or fewer employees. In 2017, there were 31.7 million such businesses according to the U.S. Census Bureau. The small business market is dynamic, and we estimate that there are 4.4 million new business formations annually, based on our analysis of secretary of state filings.
Our SAM includes $18.3 billion in services that small businesses use at the time of business formation, $21.5 billion in services that small businesses use later in their lifetime, and $8.8 billion of consumer estate planning services. We categorize our business formation and attach opportunity as total small business spending on business formation, registered agent and government filings, tax planning and bookkeeping/records, and intellectual property protection. We categorize our post-business formation opportunity as contracts, legal forms, and other legal matters and tax preparation. In spite of the benefits of third-party legal and compliance services, there is very little usage today by small businesses of external providers of these services, based on a Kantar study, as detailed in the table below.
| | | | | | | | | | | | |
| | | Total Addressable
Businesses | | | Current Spending—SAM | |
| | | % Usage(1) | | | Total Spend | |
| | | (in millions) | | | | | | (in millions) | |
Business Formation and Attach Opportunity | | | | | | | | | | | | |
Business formation filings(2) | | | 4.4 | | | | 65 | % | | $ | 2,292 | |
Registered agents and government filings | | | 31.7 | | | | 10 | % | | $ | 3,516 | |
Tax planning and bookkeeping / records | | | 31.7 | | | | 21 | % | | $ | 9,574 | |
Intellectual property(3) | | | 31.7 | | | | 8 | % | | $ | 2,967 | |
| | | | | | | | | | | | |
| | | | | | | | | | $ | 18,349 | |
| | | |
Post-Business Formation Opportunity | | | | | | | | | | | | |
Contracts and legal forms | | | 31.7 | | | | 10 | % | | $ | 5,545 | |
Business tax returns | | | 31.7 | | | | 21 | % | | $ | 10,099 | |
Other legal matters(4) | | | 31.7 | | | | 3 | % | | $ | 5,905 | |
| | | | | | | | | | | | |
| | | | | | | | | | $ | 21,549 | |
| | | |
Consumer Estate Planning(3) | | | | | | | | | | $ | 8,830 | |
Total SAM | | | | | | | | | | $ | 48,728 | |
Source: U.S. Census Bureau (businesses) as of 2017 and Kantar Consulting (usage and spend) as of 2019, unless noted below.
| (1) | Usage based percentage of U.S. small business owners that have hired an external provider for specific services. |
| (2) | Addressable businesses based on our estimate of new business filings based on our analysis of secretary of state filings. Current Spending—SAM % Usage based on Magid study. |
| (3) | Addressable business based on management estimates. |
| (4) | Other legal matters include HR and employment matters, board management, immigration, dissolution of business and estate planning for small businesses. |
We believe that our TAM could grow to be multiples of our SAM over the long term with increased usage of legal and compliance solutions by small businesses. By increasing access, we believe we will grow our market opportunity. Many small businesses are not aware of the various legal and compliance solutions that exist, or are daunted by the complexity and uncertainty of traditional solutions. We believe that we can address the needs of every small business with our simple, transparent, and affordable solution.
Our strategy is to grow our number of small business customers and to grow our revenue per customer by serving them throughout their lifetime. In 2020 and the three months ended March 31, 2021, most of our business formation customers purchased another service on our platform. Moreover, we believe the number of new businesses will continue to grow as digital disruption transforms the economy and makes it easier for small businesses to thrive. We also have further opportunities to increase our TAM by adding adjacent services through third-party partnerships, in categories such as business insurance and financial planning.
Our Customer Journey
Our first interaction with potential customers is often through our free proprietary educational content, through which we earn trust and drive significant organic traffic.
Typically, our small business customers’ initial purchase is a business formation product that streamlines the process of starting a business. We use our technology platform to create a simple, user-friendly workflow that enables our customers to confidently form a business with just a few clicks. For many customers, getting real-time general information about the overall business entity formation process and our related products is an important benefit, so we provide care and sales support real time. As a result, our business formation products have a net promoter score, or NPS, of 51, which is over double that of traditional offline attorneys, who have an NPS of 25, and our NPS for our independent attorney network is 77, which is three times that of traditional offline attorneys, helping us form a trusted relationship with small business owners. Based on this trusted relationship, during 2020 and the three months ended March 31, 2021, over 60% of our small business customers purchased one year of one of our subscription services at the time of their initial formation purchase, and over half of our small business customers purchased at least one third-party solution at time of business formation.
Our compliance solutions are our largest group of subscription services. Compliance regulation and process are often cumbersome to follow and difficult to understand. For example, in most states, small businesses are required to have a registered agent, which generally must be an adult or authorized business that can receive mail or hand-delivered court documents at a physical address during normal business hours. With our registered agent subscription, we serve as our customer’s registered agent: accepting their documents through the mail, digitizing critical business documents, and alerting them of critical business documents or notices. This serves to help them adhere to critical tax and annual report deadlines, among other benefits. In this fashion, our compliance solutions simplify cumbersome processes and free up our customers’ time to focus on their businesses.
Customers can freely access live help from our world class customer care and sales organization, while subscribers to our legal and tax advisory plans may consult with a vetted network of independent attorneys licensed in their jurisdiction to provide legal advice, or an accountant for tax advice. With these assisted subscription services, our customers get the benefit of a credentialed professional that can provide advice at an affordable cost. For example, with our business advisory plan, our customers get fast and ongoing legal support from our independent network of attorneys for less than $40 a month. A significant number of our customers purchase attorney advice subscriptions when starting their business, and we have seen strong traction with our tax advice subscriptions, which include advice from a CPA or enrolled agent, since its launch in late 2020.
The majority of our customers have not begun operations when they begin their relationship with LegalZoom, giving us a unique position in the business lifecycle. To help our customers operate, we partner with a variety of third-party solutions, such as business license services, bookkeeping services, banking services, productivity tools and business insurance, among others. We provide our customers with seamless introductions to trusted partners, giving them access to the critical services they need to operate and grow their business. In 2020 and the three months ended March 31, 2021, over half of our small business customers purchased at least one third-party solution.
We continue to engage our customers after their initial purchase of transaction products and subscription services. For example, after forming their business entity, our customers can opt to register their company name and/or logo as a trademark or protect their intellectual property with a patent or copyright. Additionally, as
forming a company is an important life event, some of our small business customers opt to purchase an estate plan offering when they form their company. Our ongoing customer engagement results in additional purchases. For each year since 2017, an average of 28% of our U.S. customers who purchased a transaction in such year had also purchased a transaction product in a prior year.
Our Value Proposition
Our offerings align with our mission of democratizing law and empowering small business owners to apply their energy and passion to their businesses instead of the legal and regulatory complexity required to operate them. We achieve this mission because our platform has:
Simplicity: Streamlined approach to legal and compliance. LegalZoom simplifies complicated legal and compliance processes, creating user-friendly experiences for customers. We offer extensive legal, compliance and tax information that anyone can freely access. Once customers decide to purchase a product, our platform removes the friction associated with filing documents with local, state, and federal regulators through an intuitive user-friendly questionnaire that guides customers through the process. A typical small business forming a business entity offline spends a median of five hours just searching for a quality attorney. By comparison, LegalZoom’s business formation process is designed to take under 15 minutes to complete and is increasingly done on a mobile device. Additionally, our products are reflective of our customer’s evolving behaviors: almost half of our traffic is through mobile devices, and we have built a simple mobile responsive experience.
Affordability: Accessible with fixed pricing. We believe our platform is significantly more efficient when compared to traditional offline legal services, allowing us to offer solutions at transparent, flat-fee prices. Our business formation product starts at a flat fee of $79, plus state-imposed filing fees. We achieve this significant cost saving in part by automating aspects of the legal document production process, such as filing entity formation documents, submitting trademark applications and generating estate planning documents. Additionally, we lower costs by utilizing customer care and fulfillment specialists to provide generalized help and only involve our independent attorney network and CPAs at the customer’s request and where legally required.
Trust: Confidence in quality. Through over 20 years of delivering high-quality solutions, LegalZoom has built a brand associated with ease of use, transparency, and trusted quality. When small businesses come to LegalZoom to form their business and stay protected, they know they are receiving consistently high-quality, comprehensive services that will meet their needs. This trust is reflected in our NPS for our business formation products, which is over double the score of traditional offline attorneys, and our NPS for our independent attorney network, which is three times that of traditional offline attorneys. The independent attorneys in our network have on average of 15 years of experience and an average customer review rating of 4.8 stars. These product features are supplemented by our customer care and sales organization, with over 500 team members that are able to answer customers’ general process questions in real time. The combination of our digital solutions, customer care organization and access to credentialed assistance gives our customers confidence that their needs are being met. In addition, through more than one million telephone conversations we have with our dynamic online processes, as well as subscriptioncustomers every year, we receive valuable feedback that we use to consistently evolve our products and services to meet our customers’ demands for quality.
Expertise: Credentialed professional-assisted solutions. In instances where customers choose to engage a credentialed professional, our platform connects customers with independent attorneys in our network or in-house accountants. Through LegalZoom, customers can access professional expertise when they need it. Our network of over 1,300 independent attorneys and 75 in-house tax advisors provides our users with access to legal plans and registered agent services.
We developedcompliance support when they need it. Since 2011, our easy-to-use, online legal platform to make the law more accessibleindependent network of attorneys has provided over 611,000 individual consultations to small businesses and consumers.families.
Breadth: Comprehensive product and partner ecosystem. We have built a comprehensive product ecosystem that protects businesses, ideas and the families that create them. Our scalableeducational content and business formation products arm entrepreneurs at the start of their journeys, and our IP, compliance, attorney, and tax advisory subscriptions help small business owners as they run their businesses by protecting their ideas and
ensuring they stay compliant. We supplement our products and services with a curated network of partnerships that customers can access through our platform, enabling our customers to discover additional services to run their businesses. We also offer a range of services for families including estate planning services, divorce, name change, residential leases, deed transfers and attorney subscription services.
Our Competitive Strengths
Leading legal platform. We provide a leading online legal platform that helps small businesses form, protect their ideas, stay compliant and run their businesses. We helped form 378,000 businesses in 2020 and helped create 250,000 estate plan documents in 2020. In 2020, approximately 10% of new LLCs and 5% of new corporations in the United States were formed through LegalZoom. In addition, 25,000 trademark applications, or 6% of all trademark registration applications in the United States in 2020, were made through LegalZoom. At December 31, 2020, we had over 1.0 million subscription units outstanding and were one of the largest registered agent providers for small businesses in the United States. Since inception, we have served as registered agent for more than 1.5 million current and former customers. We have invested significantly to create a highly recognizable legal brand, online and offline, with aided brand awareness of 70% and unaided brand awareness of 25% as of December 2020, more than eight times our nearest online competitor. Since inception, we have helped form over 2.8 million businesses, helped create over 3.5 million estate plan documents and served over 4.0 million customers.
Proven ability to operate in a highly regulated market. We have spent more than 20 years building a systematic understanding of many aspects of the U.S. legal system, across 50 states and over 3,000 counties. There is a wide variety of individual statutes and requirements across the United States, making it difficult for small businesses and consumers to fulfill their legal obligations. We have filed millions of documents on behalf of our customers with various county and state agencies in the United States. Our compliance platform allows our customers to stay focused on running their businesses, while we help them manage the ever-changing regulations and filing deadlines. Our compliance database tracks rules and deadlines across multiple jurisdictions and our platform provides notifications of rule changes and deadlines to our customers. In 2020, we sent approximately seven million notifications to our customers. Since we are a large filer of business formation and other documents with these agencies, our fulfillment teams have direct relationships with many of them and interact with many of these agencies every business day. We have also invested substantial time and capital to achieve 50-state coverage for our subscription offerings for attorney advice, registered agent, tax and other compliance related subscriptions.
Attorney integration. Most people prefer the comfort of knowing an attorney is available to help them with their legal needs, even if on an as-needed basis. However, most other online providers are either positioned purely as self-help with no access to attorney advice, or for those who do provide access, it is often a service connecting customers to attorneys with limited integration of the network to ensure consistent service quality. Offering attorney advice nationally through a legal plan, as we do, requires significant initial and ongoing investment, including: sourcing law firms and attorneys licensed in each state; ensuring such plans are acceptable to state regulatory agencies with varying rules; and keeping up with the administration of the plan. It took LegalZoom seven years from service inception to offer 50-state coverage through our network of independent attorneys.
Unique position within small business lifecycle. Given our unique position at business inception, we are typically the first business advisor a small business interacts with. In 2020, approximately two-thirds of the small businesses that formed through LegalZoom had not even begun operations when they first engaged with us. Before a small business has employees, an address or a website, they have LegalZoom. By delivering quality business formation solutions, we are able to establish trust with small businesses, who then frequently trust us with other critical needs as well. We have leveraged this trust to extend our legal and compliance product portfolio over time, through both first-party solutions such as tax, given that, 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, as well as our partner ecosystem, where we recommend third-party partners to our customers. As we grow our product portfolio, we are able to leverage proprietary data we receive at business formation to create more useful and relevant products and services for our customers.
Authority in educational legal and compliance content for small businesses. Our content library serves as a funnel for new customers. Our customers often interact with our educational content before making a purchase. We have grown our content library to thousands of educational articles across our services and established ourselves as a trusted source of expertise before a potential customer even begins seeking access to legal and compliance care.
Our technology platform. We have invested significantly since our inception in building proprietary technology that drives quality and efficiency on our platform. We use software to abstract the many archaic and last mile processes that are involved in processing formations at the state level. We deploy machine learning and natural language processing to power our registered agent offering, in order to scan and sort mail for our small business customers, allowing them to stay compliant and focus on running their businesses. We consistently improve our technology platform, resulting in improved document generation, increased automation, and increased use of the cloud to enable digital collaboration. In addition, we have developed a highly accurate database of millions of business entities we have helped form. And over time, we have collected over 1.5 billion answers as part of the user-friendly questionnaires our customers complete as part of their experience with our products. We are able to leverage this data, in accordance with relevant privacy laws and our data stewardship principles, to understand new products that may be relevant to our customers and optimize our operations. We also use APIs to seamlessly integrate our formation products within third-party applications, further extending our platform reach.
Attractive business model. Our financial performance is a result of attracting new customers and delivering more value over time for customers as they stay on our platform. Our unique position at business formation allows us to grow our relationships with our small business customers as their businesses evolve. Business formation serves as an onboarding point to the LegalZoom platform, and as businesses grow, their legal, compliance and tax needs naturally increase and become more complex. We have expanded our solutions to meet more of these needs, and have seen consistent lifetime value improvement over time. Given our efficient customer acquisition dynamics, we are able to profitably acquire new customers as we pursue our massive market opportunity. We have built a profitable and cash flow generative business, given this customer acquisition efficiency, economies of scale and favorable working capital dynamics.
Our Growth Strategy
We are in the early days of penetrating and growing the online market for small business legal and compliance services. We expect to continue to grow our customer base, retain and expand our customer relationships, and increase our market opportunity with the following strategies.
Grow our customer base.We continue to grow the top of our funnel and improve our customer experience in order to grow our customer base. To accelerate growth, we intend to:
| • | | Increase LegalZoom brand awareness. We intend to continue to invest in our brand to increase awareness of the protection that legal and compliance services offer small businesses, and the ease and affordability of our platform. For example, in March 2021 we launched our latest brand campaign “Let’s Make it Official”, emphasizing the core products that we offer and the benefits of our platform. We will also amplify our net promoter advantage, through social channels that drive word of mouth. We expect to shift our marketing investment towards brand and reduce our performance marketing spend as we pursue this strategy. |
| • | | Improve conversion. We have millions of visitors to our website each month and a large opportunity to increase conversion of prospects into customers. We have invested in improving ease of use and optimizing the checkout flow to drive better conversion upon the first interaction with potential customers. In addition, we plan to leverage machine learning further to create personalized experiences for potential customers, making them more likely to see the value of our platform. |
| • | | Attract new customers through partner integration. We partner with leading players that can help our small business customers and improve our ecosystem. Through our APIs, our partners can offer our solutions within their experience, providing us with a highly efficient customer acquisition channel. For example, our services can ensure that a user of these third-party integrations has an EIN in order to open a financial account or can help the user form an entity to enable independent contractors connected to the gig economy avoid misclassification as employees. We will continue to seek partner integrations to increase awareness of our brand and to grow our customer base. At March 31, 2021, we had over 135,000 paid subscriptions acquired through our partner integration channel. |
Retain and expand our customer relationships following formation. As we innovate for small businesses, we aim to become their trusted partner for life. In order to do this, we intend to:
| • | | Launch adjacent services. Our strategy is to meaningfully expand our product line in the medium term to offer a solution for the majority of small business legal and compliance needs. We have collected a vast amount of data in the past 20+ years to both improve our own solutions as well as identify additional areas where we can launch new products for our customers throughout their lifetime. For example, in 2020, we introduced a tax advisory product. We plan on continuing to invest in a broader array of services to capture this opportunity. |
| • | | Partner to offer our customers broader ecosystem solutions. We plan to offer additional access to third-party solutions to further support small business needs in areas such as banking, payments, payroll, accounting, and website hosting. In 2020, two-thirds of our new customers had not yet started their businesses when they first engaged with us. We believe that by working with our partners, we can increase our customer engagement and retention. |
| • | | Increase customer lifetime value. We plan to continue to improve the lifetime value of our customers, particularly by increasing retention of our small business subscribers. We plan to maintain engagement post-purchase with additional investments in existing solutions, add new solutions to serve additional needs, and improve lifecycle marketing to increase retention rates. We also expect to leverage machine learning even further to create a more bespoke experience for our customers. Through these initiatives, we plan to better monetize our existing customers by allowing them to realize continued value on our platform over time. |
Increase our market opportunity by introducing a new tier of higher-priced, higher-value products. We have a large opportunity to serve customer demand by offering assistance with their legal and compliance needs.
| • | | Broaden customer top of funnel. We aim to reduce peoples’ uncertainty and doubt about forming a business on their own, as well as to expand our opportunity to serve people who would not consider a “do it yourself” solution. We expect to continue to broaden the top of the funnel consideration for LegalZoom by highlighting our attorney integration. We believe the “assisted” market is multiples larger than the “do it yourself” market that we have historically served, because expertise increases customer confidence. |
| • | | Increase adoption of assisted offerings. We plan to provide more value to our customers from existing product lines by adding a tier of Attorney Assist solutions. In June 2020, our “Attorney Assist” product for trademarks became widely available, and we have seen higher average order value, or AOV, and more orders, over time, as customers value the ability to work directly with attorneys. Solutions that incorporate an attorney have higher completion rates. We plan to continue to expand our credentialed professional-assisted offerings to complement our technology-enabled solutions. |
Customer Success Stories
The following customer stories are a couple of examples of how some of our customers have used and benefited from our platform.
Shannon Greevy: A Bigger Room Consulting
Like so many small business owners, Shannon Greevy spent years in corporate America before deciding the moment was right to strike out on her own. Her last day of full-time employment was on February 27, 2020, she formed her LLC through LegalZoom on March 11, and her business was born on March 13. On March 16, San Francisco went into lockdown due to the COVID-19 pandemic. Rather than panicking as she watched potential clients close their businesses and lay off employees, Shannon decided she would focus on what she could control; learning about the elements of running a business for herself. Shannon enrolled in LegalZoom’s tax advisory plan and business legal advisory plan where she consulted with tax professionals and business attorneys to learn about the most important facets of staying compliant while running her business.
As she closes out her first year in business, she boasts a growing client list and considers herself a pandemic success. Contrary to her fears of not finding clients, she says “It turned out that I had a special skill the universe needed. Many of my clients were people who found themselves suddenly needing to pivot from B2B or wholesale to B2C, and I was able to help them establish a social media presence and stay in business.”
Drs. Toya and Tonya Harris: The BluePrint
As twin sisters and chiropractors, you might say Drs. Toya and Tonya Harris are joined at the hip. After pursuing their chiropractic doctorate, a second masters degree in functional nutrition, and graduating as the Valedictorian and Salutatorian from Parker University, they decided to open their own practice in Dallas, Texas. Their ultimate goal is to keep their patients happy and moving, so that their patients are able to do whatever they want in life.
The Harris sisters made it official in January 2021 by forming The BluePrint: A Body Lab, LLC through LegalZoom. They added LegalZoom’s registered agent service, DBA, and secured required business licenses through LegalZoom’s partner ecosystem. The twins stated “LegalZoom made it easy for us to focus on the other aspects of starting a practice. Their team made the process pretty seamless. Whenever we had questions, they were always there to help! ”
When asked what’s next, the Harris twins said they’d love to set up a charitable scholarship for minorities looking to pursue careers as doctors in any healthcare profession. When Drs. Toya and Tonya are ready to set up their non-profit corporation, LegalZoom will be there to help.
Mike Roberts: The Horse’s Axe
Mike Roberts first became a LegalZoom customer in 2016 and has since formed five LLCs, including The Horse’s Axe, an axe throwing and billiards bar opened in November 2020. Signing a lease just when the pandemic hit was a bit of a stumbling block, but Mike and his wife Holly found ways to drum up their Denton, Texas business after they opened. Handing out thousands of free face masks with The Horse’s Axe logo printed on the front at local high school football games and businesses around town, they spread the word about their new bar. Smart marketing and innovative ideas have paid off and they are in the process of opening a second location in Denison, Texas.
In addition to forming his business through LegalZoom, Mike purchased several additional related products and services such as protection of his business name, logo and mascot through LegalZoom’s attorney-assisted trademark service, a DBA, an operating agreement, an amendment package, and a last will and testament. Then in January 2021, Mike came back to LegalZoom for annual report compliance for all five of his companies. As Mike says with “LLC’s, trademarks, annual report compliance and several other services… LegalZoom helped us through every step.”
Mark and Victoria Thompson: GenFree LLC
Mark and Victoria Thompson worked hard to build successful careers in IT after growing up in underserved and disadvantaged communities. The Thompsons have always felt passionate about supporting others in their
community by sponsoring the next generation through educational and financial support. In 2020, they established their own LLC, formed a non-profit, and updated their estate plan within three months– all through LegalZoom. GenFree LLC, the for-profit venture they formed through LegalZoom, is dedicated to building businesses that invest and create opportunities in the black community. Wanting to do even more for their community, the Thompsons also launched their non-profit, Ready for the World, through LegalZoom in February 2020. Ready for the World provides educational programs and mentorship opportunities to women of all ages.
Understanding that a new business and non-profit would require ongoing legal support, the Thompsons enrolled in LegalZoom’s business legal advisory plans for both entities, which provides them access to a third party attorney for their businesses, when they need it. The Thompsons also continue to use LegalZoom for their annual report compliance. Through this journey, Mark and Victoria quickly realized they didn’t have an estate plan for their family. Within hours, they crafted their living will and trust with LegalZoom and enrolled in the personal legal advisory plan, providing them access to an attorney to answer additional questions about their estate plan or other legal matters that might arise.
Our Products and Services
We help customers form their businesses, protect their ideas, stay compliant and scale their operations. Our products and services include business formations, creating estate planning documents, protecting intellectual property, completing certain forms and agreements, providing access to independent attorney advice, and connecting customers with experts for tax preparation and bookkeeping services. The primary driver of new customers is small business formation transactions, and at that moment we aim to start a deeper relationship reflected in bundled subscription services and partner offerings. This combination creates a suite of legal and compliance solutions that are relevant for our customers’ ongoing needs. We also have a partner ecosystem that enables us to offer third-party services to our customers and to offer our services to our partners’ customers.
Transaction products
We completed 691,000, 892,000 and 276,000 transaction orders in 2019, 2020 and the efficient creationthree months ended March 31, 2021, respectively.
Our transaction products are described in the following table.
| | |
Transaction Products for Small Businesses | | Transaction Products for Consumers |
| |
Business Formation Limited Liability Company (LLC) Formation Incorporation of C and S Corporations Nonprofit Formation Doing-Business-As (DBA) Corporate Changes and Filings Business Licenses Legal Forms Intellectual Property Trademark Application Copyright Registration Provisional Patent Application Tax Planning and Bookkeeping and Records(1) State and Federal Tax Preparation Payroll Bookkeeping | | Consumer Estate Planning Last Will and Testament Living Will Living Trust Power of Attorney Other Legal Matters Name Change Uncontested Divorce Real Estate Deed Transfer Real Estate Leases Legal Forms |
| (1) | We launched our LegalZoom-fulfilled tax advisory and preparation, payroll and bookkeeping products in October 2020. |
When generating a customized legal document, customers are guided through every step by our proprietary questionnaire and document engine platform. Related offerings are presented within the questionnaire, enabling customers to opt into complementary products and services. If customers need assistance, our customer care and sales organization is available to help them through the process. Additionally, if they need legal or accounting help, customers can opt into a subscription and get access to our tax experts and our network of personalizedindependent attorneys. Once the customer submits the questionnaire data, our people or technology review responses for completeness prior to delivery or submission to the appropriate federal, state or local jurisdiction.
Subscription services
More than 85% of the U.S. subscription units as of December 31, 2020 and March 31, 2021 were annual plans billed in advance. Our primary subscription services are described in the following table:
| | |
Small Business Subscriptions | | Consumer Subscriptions |
| |
Registered Agent Compliance Attorney Advice Tax Advice Legal Forms | | Attorney Advice through our Legal Plans Estate Planning Bundle Legal Forms |
Registered agent subscriptions. In most states, a business entity, such as an LLC or corporation, is required to appoint and maintain a registered agent in its state of formation to receive service of process and official government communications. The entity must disclose the address of its appointed registered agent and, in many states, the registered agent must be available during business hours. This requirement can be burdensome for many small businesses to handle on their own. Our registered agent services receive, process, and forward served legal documents automatesdigitally or physically to the customer. The majority of our supply chaincustomers who formed their LLCs and fulfillment workflow management,corporations through us in 2020 and provides customer analyticsthe three months ended March 31, 2021 used us as their registered agent as of each period end, and approximately 60% of our subscription units as of December 31, 2020 and March 31, 2021 were for registered agent services.
Compliance subscriptions. Our compliance subscriptions provide assistance with state-mandated regulatory filings, such as tax returns and corporate annual reports that are required to help us improvekeep a business entity in good standing. The subscription plans also monitor the status of our services.customers’ businesses with certain state agencies and provide alerts to notify them if they fall out of good standing as well as to stay abreast of important deadlines.
Attorney advice subscriptions. For small businesses and consumers who wantseeking legal advice, we offer subscription legal plans that connectprovide access to independent attorneys in all 50 states. These subscriptions also include other benefits, such as access to legal forms, discounts on additional legal services offered by the network attorney, and, in some cases, an annual checkup with the network attorney for estate planning purposes.
Tax advice subscriptions. We introduced our LegalZoom-fulfilled tax advice subscription in October 2020. This subscription includes tax advice on essential tax matters at both state and federal levels with the option to add tax preparation, as well as advice on new tax and bookkeeping-related matters from a tax expert (either a certified public accountant or an enrolled agent). Our tax services help small businesses get set up right from the beginning to minimize their tax bill.
Legal forms and other subscriptions. We offer other subscriptions, including unlimited access to our library of legal forms, electronic storage of applicable LegalZoom documents, and document revisions. Additionally, we offer subscriptions that enable customers to monitor trademark applications, create meeting minutes for their board of directors’ meetings and monitor compliance calendar deadlines.
Our subscription agreements generally have annual terms, while some have monthly terms. They are generally non-refundable during their term, including any renewal term, after a 60-day refund period at the beginning of the initial term and any renewal term. They generally automatically renew at the end of each term unless notice of cancellation of the renewal is provided any time in advance of the renewal date. We generally do not issue pro rata refunds outside of the applicable 60-day refund period. Customers can cancel the automatic renewal on our website or by phone. In the case of our subscriptions for registered agent services, the customer needs to appoint a new registered agent for its business in order to complete a cancellation.
Partner ecosystem
We have unique insights into our customers and leverage our product as a channel to introduce small businesses to our partner ecosystem, solving even more of their needs. Our partnering arrangements include reseller models, revenue share, and flat fees earned by introducing small businesses to leading providers of small business services such banking, bookkeeping, credit cards, business licenses, website design, and payment processing. We are evaluating expanding our strategic partnerships to include payroll, human capital management, marketing, and digital presence as well as other best-in-class industry specific solutions. We are increasingly focused on evolving our partner economic structures to recurring revenue models that reflect the value of our unique position in the customer’s business lifecycle.
In addition to serving small businesses and consumers, we offer a developer platform, including application programming interfaces that enable external developers to co-brand or white-label business formation and compliance services with experienced attorneys who participate in oura highly integrated solution. Our enterprise segment customers include both large enterprises and small business platforms with a significant number of users. Our solutions provide large enterprises the ability to manage their multi-entity legal plan network.
We have served approximately two million customers over the last 10 years. In 2011, nine out of ten of the approximately 34,000 customers who respondedand compliance needs and small business platforms to a survey we provided said they would recommend LegalZoomoffer business formation and compliance services to their friends and family. Customers that completed orders for certain of ourown customers, either within their own customer experience or by referring the customer to us. The services are invited to take an email survey. Our customers placed approximately 490,000 orders and more than 20 percent of new California limited liability companies were formeddelivered using our online legalproprietary technology and may include registered agent, regulatory filing, business licenses or compliance services as well. For example, we may help a large enterprise incorporate each of its independent truck drivers via a cobranded referral program, a small business platform in 2011. We believe the volumeprovide formation services on a white-label basis as an integrated part of transactions processedits own customer offering, or an accounting firm incorporate its clients and assist with their compliance needs.
Partner revenue consists primarily of fees earned from third-party providers from leads generated to such providers through our online legal platform createsplatform. Partner revenue is generally composed of one-time or recurring referral fees, which are generated by introducing our customers to third-party providers.
New product development
Our product development strategy is focused on reducing friction and increasing conversion across our existing core products and services and expanding our portfolio of new products and services, gaining market share, and strategically deepening customer relationships, including in ways that will make legal and compliance expertise available to our customers and increase our recurring revenue through subscription offerings. Our product development team gathers customer feedback from our front-line customer service agents and leverages user experience research to inform our product roadmap. We are highly focused on using this feedback to meaningfully expand our service offerings to help our customers, from starting their businesses to successfully running them.
An example of our recent product development success is our launch of the LZ Tax offering in October 2020. Tax advice and ongoing help with bookkeeping, tax preparation and other accounting services is a scale advantageprimary concern for our new business formation customers. Prior to the launch of LZ Tax, we had referred our new business formation customers to a partner for tax preparation and advice. Powered by technology-enabled tax experts that deepenshave been introduced seamlessly into the customer’s journey, we are now able to provide tax services directly to our knowledge and enables uscustomers. For January through March 2021, the transactional NPS on our initial tax consultations was 88.6. We believe that our tax offering naturally leads customers to improve the quality and depth of theother ancillary services we provide, including bookkeeping, tax preparation,
payroll and accounting. We also recognize the opportunity to add additional credentialed professional assistance across our product portfolio. In 2016, we added access to attorneys to our customers.do it yourself trademark offering through a new “Attorney Led Trademark” service. In 2020, 30% of all trademark transaction customers chose this enhanced service, paying an additional $300 per transaction. For the three months ended March 31, 2021, the share of trademark customers selecting this service rose to 51%. We intend to introduce additional access to independent attorney support into more of our business formation products. Over time, we believe we have the opportunity to build out a fully integrated technology enabled ecosystem where business formation customers will visit LegalZoom as their first and only stop, and we’ll connect them with all the appropriate, best in class credentialed professionals and advisors they need to launch and grow their small businesses.
The Small BusinessOur content
In our more than 20 years of operating history, we have amassed and Consumer Legal Services Market
The law provides numerous benefits and protections to businesses and consumers. Businesses use patents and trademarks to protect their intellectual property and help them achieve the full potentialmaintained a database of their ideas and innovations. Entrepreneurs incorporate their businesses to shield personal assets, limit liabilities and help raise capital. Consumers use wills, trustsforms and other estate planning tools to ensure their assets are distributed according to their wishes, to minimize tax liabilities and to avoid or limit probate process and expenses. The law also provides a framework for resolving disputes and navigating life's challenges, including bankruptcy and divorce.
According to the U.S. Census Bureau, in 2009, there were approximately 26 million small businesses with fewer than ten employees. We estimate that in 2010, approximately two million new businesses were formed in the United States. According to the U.S. Bureau of Economic Analysis, legal services in the United States in 2010 represented a $266 billion market. We estimate that in 2011 approximately $97 billion of legal services were provided to small businesses and consumers, based on a study conducted on our behalf by L.E.K. Consulting LLC.
Despite the enormous amount spent on legal services, we believe that small businesses and consumers have not been adequately served by the options traditionally available to them. Every year, small
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businesses enter into legal contracts and become entangled in disputes, many of which require legal services to address. Consumers experience important life events that affect their families, including the birth of a child, marriage, divorce and death, all of which can also give rise to diverse needs for legal services.
Making the right choices with respect to legal matters can be difficult, especially for those with limited time and resources. The U.S. legal system consists of overlapping jurisdictions at the city, county, state and federal levels, each of which has its own evolving laws and regulations. Businesses may be subject to additional laws, regulations and legal issues applying specifically to the industries in which they operate. In addition, the policies and procedures associated with the creation, filing and certification of legal documents are often arcane and confusing.
When in need of legal help, small businesses and consumers lack an efficient and reliable way to find high quality, trustworthy attorneys with the appropriate experience to navigate this complex legal system and handle their specific needs. Small businesses and consumers often do not understand their legal needs or know where to start looking for an attorney. Some are wary of attorneys in general, and others may have heard from friends or family about negative experiences with attorneys or the legal system.
The high and unpredictable cost of traditional legal services also presents challenges for many small businesses and consumers. In 2011, the average billing rate for small and midsize law firms was $318 per hour, according to ALM's 2012 Survey of Billing and Practices for Small and Midsize Law Firms. Attorneys are frequently unable to predict the time required to address a client's legal matter, sometimes billing thousands of dollars to research a legal issue they have not previously encountered. This can be particularly true of generalist attorneys that offer many disparate legal services to members of their local communities. Unlike attorneys at large global law firms or specialty boutiques who handle high volumes of similar matters and develop expertise in specific domains, generalists can find it difficult to efficiently address a client's particular legal issue due to their lack of specialized expertise. Due to the high and unpredictable costs of traditional legal services, many small businesses and consumers limit their use of attorneys and instead often attempt to resolve legal issues without assistance.
As a result of these factors, many small businesses and consumers often are unsure of or dissatisfied with the legal services available to them, and many either elect not to seek help or take no action to address their important legal needs.
The use of technology and the Internet to address the inefficiencies in the small business and consumer legal services market has been limited to date. Available online services include distribution of standardized legal forms that are generally incapable of meeting the specific needs of a particular small business or consumer. Many legal form distributors do not provide tools for customers to make informed decisions or connect with experienced attorneys. While many solo attorneys and small law firms maintain their own websites, and other websites aggregate attorney listings or feature attorney advertisements, these attorney and firm websites, online directories, and online advertisements generally do little to assure that small businesses and consumers receive the quality, customer care and value they deserve.
Our Opportunity
We founded LegalZoom with a vision of combining the power of online technology with deep legal experience to create a scalable online legal platform that would fundamentally transform the way legal services are delivered to small businesses and consumers. We believe we are uniquely positioned to continue transforming the small business and consumer legal services market through the use of technology. Furthermore, there is a significant opportunity to expand the legal services market by making
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the benefits and protection of the law more accessible to small businesses and consumers. We are taking advantage of this opportunity by providing the following benefits to our customers:
•Quality. Our deep legal knowledge, portfolio of interactive legal documents and subscription legal plans enable us to provide quality services designed to meet the specific needs of our customers.
•Customer Care. We provide all of our customers with end-to-end support and strive to deliver an exceptional customer experience. We guarantee customer satisfaction, and if our customers are not satisfied with our services for any reason, we will attempt to correct the situation, or provide a refund or credit.
•Value. We believe that fixed, transparent pricing offers superior value compared to traditional hourly billing.
Our Strengths
Our key strengths include:
•Leading Brand. We are the leading, nationally recognized legal brand for small businesses and consumers in the United States, with 60% aided brand awareness based on a survey we conducted using United Sample, Inc. in January 2012. We believe that we are redefining the small business and consumer legal services market and that the strength of our brand is enabling us to expand this market.
•Deep Legal Knowledge. We have a deep understanding of the legal needs of small businesses and consumers based on over 10 years of experience serving our customers.
–Extensive Legal Experience. We leverage our legal knowledge and team of experienced, in-house attorneys, often in consultation with outside attorneys from across the United States, to design, review and maintain our services. We update and enhance our interactive legal documents based on changes in the law at the federal, state, county and local levels, review by our in-house and external attorneys, feedback from government agencies like secretary of state offices and county clerks, court rule changes and customer feedback. For customers who want legal advice, our legal plans offer access to a variety of experienced attorneys licensed in their jurisdiction to address their specific legal needs.
–Powerful Scale Advantage. In 2011, our customers placed approximately 490,000 orders. As of June 30, 2012, we had approximately 300,000 subscribers in our legal plans and other subscription services. The high volume of transactions we handle and feedback we receive from customers and government agenciesused at the federal, state, and county level throughout the United States for business formations, intellectual property registrations, and estate planning purposes. We distilled the forms completion process into an easy-to-understand questionnaire that asks our customers the appropriate questions to complete the documents. The result is our proprietary logic-based architecture that translates the customers responses onto one of over 1,100 documents across 150 different product types. Our core systems use automation to map the customer’s data onto the appropriate document, prepare the document in the proper format, and, in most cases, submit it to the state or county.Our Technology
We have developed a highly scalable and flexible technology platform that enables us to efficiently process thousands of customer orders daily and facilitate seamless interactions with our customers and the independent attorneys participating in our legal network. We devote substantial resources to consistently enhance our technology platform. Key components of our technology are described below.
Dynamic online questionnaire
Legal documents are populated by our platform through the use of our dynamic online questionnaires. Our customers complete a comprehensive yet intuitive questionnaire that is powered by a rules-based engine to pose questions based on the customer’s legal jurisdiction, location and prior responses to solicit the information needed to comply with local levels giveand state laws and regulations.
Document automation
Our technology platform includes complex automation systems that transfer customer responses into our more than 1,650 state or county-specific templates to generate customized legal documents. Our automation unifies the various methods used by states and counties to form businesses into a single easy-to-understand customer experience. We have introduced straight through processing, or STP, for a subset of our estate planning and business formation documents, which has enabled us to deliver the documents to the customer in near real-time. We plan to incorporate STP in additional transactional offerings.
Compliance platform
We have built a scale advantagesystem to notify our customers of upcoming compliance milestones and associated requirements. Additionally, for our registered agent subscribers, we have a system of receiving, scanning, sorting, and labeling documents from state agencies across the country that deepensleverages technology to quickly deliver physical and electronic copies to our knowledgecustomer.
Robust CRM platform
Our account executives, customer care and sales organization, fulfillment specialists, and tax advisors leverage a multi-channel customer relationship management, or CRM, platform, powered by integrating a variety of tier one contact center technologies. The platform is integrated within our production and fulfillment systems and enables us to further develop additionalsupport customers through communications via multiple channels including our websites, email, text, phone, online chat, and our mobile applications. For example, we automatically notify business formation customers over multiple channels regarding their order status as their legal documents progress through our workflow and when we receive confirmation of the documents being filed with or approved by government agencies.
Scalable and secure infrastructure
Our platform resides on a combination of on-premises infrastructure located in California and Texas and best-in-class public cloud-based platforms. Our platform is highly scalable to accommodate an increasing volume of customer orders. We have designed our websites to be highly intuitive and secure using proprietary software and commercially supported tools. Maintaining the integrity and security of our websites is a key priority. We utilize national security standards and appropriate tools for secure transmission of personal information between our customers and our websites and maintain a dedicated security team that drives compliance with data security standards. We intend to transition our platform to the public cloud with all essential products operating on public cloud platforms that have built-in security, and data and privacy controls.
Our website allows users to access the same content on our platform from their laptops, tablets, or smart phones. We also maintain apps on iOS and Android that make it easy for customers to access their documents, schedule consultations, and get status updates on their orders.
Our Attorney Advice Network
We offer attorney advice across all 50 states in the United States to our subscribers through a network of independent law firms that manage relationships with approximately 1,300 attorneys. Our network consists of a core group of over 135 attorneys who handle the majority of consultations across the most common legal issues. The remaining attorneys handle more specialized needs, including worker compensation, landlord and tenant issues and bankruptcy.
In 2020 and the three months ended March 31, 2021, our network completed over 80,000 and 22,000 consultations, respectively, bringing our total completed consultations, since the launch of our attorney assistance division in 2011, to over 611,000. Participating law firms must focus on customer care and satisfy stringent customer satisfaction standards to remain on the network. Customers are given the opportunity to review an attorney after each consultation. Based on these reviews, attorneys in our network achieved an average NPS of 77 in 2020. This compares to 25 for traditional offline attorneys in that same time period.
According to a Clio Legal Trends report based on anonymized data from tens of thousands of U.S. based lawyers using the Clio platform, approximately 69% of the attorneys’ average workday was non-billable in 2018. Our brand and marketing efforts allow the participating attorneys to focus more on the practice of law and less on business development. The initial free consultation serves as a platform for business development, where the participating attorney can offer to provide billable legal services to address our customers'customers at discounted rates. In addition, participating law firms can leverage our brand awareness as well as the customer feedback and testimonials to market their own practice. Each firm receives a flat administrative fee from us for each legal plan participant in its area to cover the administrative costs associated with participating in our network.
Our Tax and Advisory Services
We believe our goal of becoming the trusted advisor to the small business ecosystem hinges on our ability to offer high-quality legal and compliance services at business formation and beyond. We are often the first service
provider a new business interacts with, a unique position from which we can form a long-term customer relationship. Our research suggests that our customers welcome assistance from us for their bookkeeping and tax needs, and refinethat many of those needs are highly relevant and top-of-mind in the moment of business entity formation. We provide our business processes.
•customers with tax advice, tax preparation, and related tax services (like bookkeeping and payroll) in affordable subscriptions through LZ Tax, which we launched in October 2020. In addition, our customers receive a consultation included in their formation that includes guidance on their tax strategy, including how to maximize their deductions and income. Our customers gave this tax consultation a transactional NPS score of 88.6 from January 1 through March 2021, and one in five customers chose ongoing guidance with LZ Tax at the end of the consultation during that period.Customer Care
As of March 31, 2021, we had over 300 customer care representatives providing assistance, support and account management to small businesses and individuals. Exceptional Customer Experience.
Customer carecustomer experience is central to our culture and we are highly focused on providing exceptionaltake pride in our customer experiences.
–Ease of Use. Our online legal platform was designed to be easy for our customers to navigate and use. care team based in Austin, Texas, which handled over 1.1 million customer contacts in 2020.Our customers have access to live help from customer care representatives by phone, online chat, text, email, or via our mobile applications. In addition, our website and subscribersmobile experience contain extensive educational content in an article center, FAQs and a knowledge center designed to our legal plans may consult with an experienced attorney licensedassist customers in choosing the products and services that best suit their jurisdiction. needs.
We actively monitor our service levels, fulfillment speed and quality to maintain the highesta high level of customer care.
–High Customer Satisfaction. In 2011,care team members have metrics-driven incentives that further align their goals and compensation with our net promoter score, orfocus on the customer while maintaining regulatory compliance. We believe the effectiveness of our approach is reflected in our strong NPS was 65%of 64.8 in 2020, which is based on the approximately 34,000 customers who responded to a survey we provided, which places us at the upper end of customer satisfaction ratings, comparable to Amazon.com,
over 58,000 responses from customers.Table of Contents
the highest rated Internet company with a score of 76%,Sales and Apple, the highest rated hardware company with a score of 71%, according to the Satmetrix 2012 Net Promoter Benchmark Study. Customers that completed orders for certain of our services are invited to take an email survey. NPSMarketing
LegalZoom is a commonly used metric to gauge customer satisfaction and is calculated based on customer responses to the question, "How likely are you to recommend a particular service or company to your friends or family?" The percentage of "detractors," or customers who respond with a rating of 6 or less, is subtracted from the percentage of "promoters," or customers who respond with a 9 or 10, to yield NPS. Attorneys in ourhighly recognizable online legal plan network have NPS averaging 65%, based on the approximately 34,000 customers who responded to a survey we provided. This is more than ten times higher than attorneys outside our legal plan network, who yielded NPS averaging 4%, according to surveys we conducted through United Sample, Inc. in January and April 2012. If a customer is not completely satisfied with our services brand for any reason, we will attempt to correct the situation, or provide a refund or credit.
•Advanced Systems and Processes. We have developed advanced systems and processes to efficiently deliver services at scale that meet the specific needs of our customers.
–Scalable Technology Platform. Over the past decade, we have invested extensively in developing our scalable technology platform. Our technology allows us to efficiently serve thousands of small businesses and consumers every day.
–Integrated Workflow Management. Our integrated workflow management consists of our online questionnaires, document automation and customer relationship management, supply chain and fulfillment systems. Our integrated workflow management systems enable us to deliver efficient, personalized services at scale to our customers. Additionally, our systems allow us to seamlessly connect our customers with an experienced attorney participatingindividuals in our legal plan network. Our supply chain and fulfillment systems integrate external and internal technologies, enabling intelligent workflow management while increasing processing speed and efficiency.
•Accessible Services. We provide our customers access to our online legal platform, fixed, transparent pricing and legal plans to address their specific legal needs. Our online legal platform allows customers to access our services from their home, office or anywhere they have an Internet connection. Our fixed, transparent pricing is often more affordable when compared to traditional hourly billing. For example, we offer a basic will to consumers for as low as $69, and we offer basic corporate formation services to consumers looking to form a business for as low as $99 plus government filing fees. Our subscription legal plans allow our customers to avoid the often difficult process of finding and meeting with an attorney.
Our Strategy
The key elements of our strategy include:
•Expand and Improve Our Services.United States. We have been providing interactiveinvested significantly to create a highly recognizable legal document services for over 10 years,brand, online and we planoffline, with aided brand awareness of 70% and unaided brand awareness of 25% as of December 2020, the latter more than eight times our nearest online competitor according to expand and improve the services we offer our customers to better address their legal needs and deepen our relationships with them. We have a quality program led2020 study hosted by a team of experienced in-house attorneys that leverages the professional knowledge of attorneys across the United States to review, assess, maintain and improve our interactive legal documents. In 2011, we implemented self-scheduling and ratings review systems for legal plan subscribers as well as a legal knowledge base to share information and best practices for attorneys who participate in our legal plan network. We also recently opened a research and development center in San Francisco to further focus on enhancing our existing services, accessing new markets and developing new services.
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•Leverage and Grow Our Subscription Legal Plans.Dynata. We intend to offer our subscription legal plans to a wider group of customers by making them available in additional states, bundling them with more of our services, and offering them on a standalone basis. We plancontinue to invest in marketing campaigns to promote our subscription legal plans. Our aim is to reach a broader group of customers through our legal plans, including those who are unsure of their legal needs or who wantbrand awareness, emphasizing the added comfort of speaking with an attorney.
•Expand Internationally. We plan to replicate our U.S. model abroad incore products that we offer and the near term, as we believe that our online legal platform represents a compelling value proposition to small businesses and consumers globally. We plan to partner with legal services providers outside of the United States to expand our operations internationally, and we have engaged in preliminary discussions with potential partners but no definitive agreements have been reached. We believe that the strengthbenefits of our brand, focus on customer care, deep understandingplatform. We attract a meaningful percentage of the legal needs of small businesses and consumers, and scalable technology will help us successfully enter markets outside of the United States.
•Continue to Build a Trusted Brand and Drive Awareness of Our Services. We will continue to build a trusted brand by delivering a compelling combination of quality, customer care and value. We plan to enhance our marketing activities to buildunpaid website traffic, underscoring our brand strength and increase awareness ofunique content offering. Our content marketing includes educational initiatives such as our services. We planArticle Center on our website, where we create content to continue to make significant investments in marketing campaigns, including through online, television and radio advertising to enhance our ability to acquire new customers and increase customer retention.
Our Services
Through our online legal platform, we offer a variety of services to meet the specific needs of small businesses and consumers. We have built our services seeking to be each customer's legal partner for life.
We offer a broad portfolio of interactive legal documents thatbetter inform our customers on how they can tailorplan for and protect themselves, their families, and their businesses.
We use a strategic mix of online and offline marketing in combination with inbound sales. We are highly disciplined and metric-driven in driving customer acquisition cost efficiencies. Our largest customer acquisition media spend is in search engine marketing to their specific needs through our dynamic online processes and scalable technology. Our interactive legal documents are designed for use, as appropriate, at the federal level as well as in all 50 states, the District of Columbia and approximately 2,900 U.S. counties. Our interactive legal documents are created by our customers via an easy three-step process. First, our customers complete an online questionnaire that uses conditional, rules-based logic to personalize questions based on earlier responses. Customer responses to the questionnaires often prompt our systems to automatically offer additional complementary services to our customers, such as Employer Identification Number obtainment and registered agent services for our small business customers. Second, we check customer responses for spelling, grammar and completeness. After our review is completed, our proprietary LegalZip software generates a final document tailored, as applicable, to the appropriate federal, state, or local jurisdiction. Last, we complete the services by printing and shipping the final document and further instructions to our customer. If applicable, we also handle any filing of the customer's completed documents with the appropriate government agency. Our system automatically notifies customers of the status of their order as the documents progress through the workflow cycle, including confirmation of filing with government agencies.
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Our primary interactive legal document services include the following:
| | |
Small Business Services | | Consumer Services |
|---|
LLC Formation | | Last Will and Testament |
Incorporation | | Power of Attorney |
Trademark | | Living Will |
DBA/Fictitious Business Name | | Living Trust |
Copyright | | Uncontested Divorce |
Non-Profit Corporation | | Name Change |
Provisional Application for Patent | | |
For small businesses and consumers who want legal advice, we offer legal plans that connect subscribers with experienced attorneys licensed in their jurisdiction to address their specific legal needs. Most of the attorneys who participate in our legal plan network practice at small law firms. We pay the participating independent law firms in our legal plan network a monthly fee per paid customer subscription to provide up to 30 minutes of free attorney consultations on new legal matters to our customers, and we do not receive or share in any fees from the law firms. We typically enter into one-year contractual agreements with law firms participating in our legal plan network, with the option to renew for successive one-year periods. In order to be considered for participation in our legal plan network, independent attorneys must satisfy certain quality standards established by us and be highly focused on customer care. We regularly assess our customers' satisfaction with the attorneys who participate in our legal plan network and remove attorneys that fail to satisfy our customers. Our small business and consumer subscription legal plans are currently available in 40 states and the District of Columbia.
Subscription to a legal plan provides the following benefits to our customers:
•Free attorney consultations of up to 30 minutes on new legal matters;
•Review of LegalZoom interactive legal documents and other legal documents up to 10 pages in length;
•Discounts on other LegalZoom services;
•25% discount on additional services provided by legal plan network attorneys;
•Annual estate planning check-up (for consumer legal plans);
•Revisions and electronic storage of applicable LegalZoom estate planning documents; and
•Unlimited access to our forms library.
Our small business legal plans are currently priced at $29.99 per month and our consumer legal plans are currently priced at $14.99 per month.
Business entities are often required by state law to appoint and maintain a registered agent in their state of formation to receive service of process and official government communications. For our business formation customers, we offer subscriptions currently priced at $159 per year.
We offer other services to our customers, including unlimited access to our forms library, electronic storage of applicable LegalZoom documents and document revisions. We also introduce our customers to relevant services and products through our relationships with leading credit card companies, commercial banks and other companies serving our customer base.
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Our Technology
We have developed technology that enables us to efficiently process thousands of daily orders, as well as facilitate interactions between our customers and the attorneys who participate in our legal plan network.
The key components of our technology include:
•Dynamic Online Questionnaire. Our interactive legal documents arecapture demand generated by our customers through our dynamic online processes.other paid and organic channels. We also advertise across television, radio, podcasts, digital video, and social media. Our customers complete a comprehensive, branching questionnaire that uses conditional, rules-based logic to personalize questions each based on earlier responses.
•Document Automation. Our technology includes complex automation systems that utilize customer responses to generate a document based on specific customer input.
•Customer Relationship Management. Our technology integrates and manages e-mail and telephone customer notifications and enablesaffiliate partnerships have historically been another very successful channel for customers to remain informeddiscover LegalZoom and learn more about our products.We maintain a sales team of over 200 professionals in the Austin, Texas area. This team takes inbound calls from customers and prospects, using a conversational approach to introduce our services, explain features and recommend various partners. When our sales team becomes involved, the average order status. For example, we automatically notifysize frequently increases due to their effectiveness in selling ancillary offerings. Our sales teams also proactively target qualified prospects, such as those who began a questionnaire in our customers about the status of their order as interactive legal documents move through our workflow and when we receive confirmation of filing with government agencies.
•Supply Chain and Fulfillment.customer experience journey but have yet to purchase.
Our supply chain and fulfillment systems integrate external and internal technologies, enabling intelligent workflow management between our locations, while increasing processing speed and efficiency.
•Infrastructure. Our website is hosted on hardware and software co-located at a third-party facility in Los Angeles, California. CompetitionWe currently have a data center locatedoperate in a third-party facility in Seattle, Washington that could power the limited operation of our website in case of disaster. Within the next year, we plan to relocate this disaster recovery site to Austin, Texas and will increase its scope to cover the website and fulfillment systems. We have designed our websites to be highly available, secure and cost-effective using a variety of proprietary software and freely available and commercially supported tools. We can scale to accommodate increasing numbers of customers by adding relatively inexpensive industry-standard hardware. We use encryption technologies and certificates for secure transmission of personal information between our customers and our website. Maintaining the integrity and security of our websites is critical and we have a dedicated security team that promotes industry best practices and drives compliance with data security standards.
We devote a substantial portion of our resources to developing new technologies and features and improving our technologies. As of June 30, 2012, we employed approximately 70 engineers, developers, project managers and support technicians who focus on the design and development of new features and products, as well as the development and maintenance of our websites, network infrastructure and internal operations systems. Additionally, we engage with third parties for additional development support as needed.
Customer Care
Customer care is central to our culture and we are highly focused on providing exceptional customer experiences. All of our employees are trained to focus on our customers and deliver quality customer service. Our customers have access to live customer care representatives and subscribers to legal plans may consult an experienced attorney. As of June 30, 2012, we had 159 customer care representatives located in the United States and 78 attorneys who participate in our legal plan network. As part of our customer relationship management, our customer care representatives proactively contact our customers by phone and email to resolve any issues that may arise during the order fulfillment process as soon as possible in order to timely fulfill an order. Customer satisfaction is a key component of our value proposition. We offer our customers a satisfaction guarantee for our interactive legal document services. If a customer is
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not completely satisfied with our services for any reason, we will attempt to correct the situation, or provide a refund or credit. We actively monitor our service levels, fulfillment speed and quality to maintain the highest level of customer care, including the NPS scores of our services and of attorneys who participate in our legal plan network.
Sales and Marketing
Our key marketing efforts include:
•Customer Acquisition and Brand Marketing. Our customer acquisition and brand marketing includes search engine marketing, television and radio advertising, search engine optimization, online display advertising, e-mail, affiliate marketing and outbound sales. We routinely monitor return on investment to optimize our customer acquisition and marketing initiatives. We have a long history of advertising on television and radio to drive traffic and enhance customer acquisition. For television, we plan our campaigns at the network, creative and programming level by analyzing data from our past campaigns. For radio, we have successfully used exclusive radio endorsements featuring prominent radio personalities. In addition, we use remarketing efforts such as online retargeting and shopping cart abandonment e-mail campaigns. All of our marketing leverages the brand we have developed from customer referrals and our public relations efforts.
•Conversion Marketing. Our conversion marketing efforts are focused on converting website visitors to paying customers through optimization of our website user workflows, questionnaire, and navigation experience. We also test and continuously optimize the visual design, messaging and promotion offers to improve conversion. Outbound sales calls and trial offers of our legal plans have also proved to be effective ways for us to acquire new customers.
•Retention Marketing. Our retention marketing is focused on establishing and maintaining long-term relationships with our customers through personalized marketing of our services, including telephone outreach, e-mail marketing and continuous customer care.
Research and Development
We are making substantial investments in research and development to increase innovation and develop new services to meet our customers' legal needs. Our research and development efforts are focused on enhancing our existing services, accessing new markets and developing new services. In 2011, we opened a research and development center in San Francisco that has enhanced our ability to focus on developing new services. Our research and development team works closely with both our marketing and technology teams to evaluate and react to customer demand.
Competition
very competitive industry. We face intense competition from law firms and solo attorneys, online legal document providers (includingservices, legal plans, secretaries of state, tax preparation companies and other service providers. The online providers)legal solutions market is evolving rapidly and nationalis becoming increasingly competitive. Other companies that focus on the online legal plan providers. We expectdocument services market or business formations, such competitionas BizFilings, LegalShield, MyCorporation, and RocketLawyer, and law firms that may elect to continue to increase. In addition,pursue the competitive landscapeonline legal document services market, can shift rapidly as new companies enter markets in which weand do directly compete and existing companies broaden their offerings. This is particularly true for online services, where barriers to entry are lower.
Our primary competition comes from small lawwith us. Law firms and solo attorneys. Many of our customers have in the past used law firms or solo attorneys, to address their legal needs. Attorneyswho provide in-person consultations and are generally able to provide direct legal advice that we cannot offer due to laws and regulations regarding the unauthorized practice of law, or UPL, compete with us offline and firmshave and may develop a competing online legal service division. Our primary online competitors for our interactive legal documents services include BizFilings, RocketLawyer, and The Company Corporation.services. We compete in the registered agent services business primarily with CT Corporationseveral companies that target small businesses, including Wolters Kluwer, and Corporation Services Company. these competitors have extensive experience in this market. In addition, certain U.S. states, including Nevada and Louisiana, offer online portals where consumers may file their articles of organization. We also compete in tax advisory service business with several companies, including H&R Block and Jackson Hewitt.
We may also face potential competition from large internet providers, such as Amazon or Alphabet, who may choose to enter into the online legal solutions business. These businesses have disrupted multiple industries and routinely enter new verticals. While they have no particular expertise in providing legal solutions online, their extensive resources and brand recognition would make them formidable competitors and could adversely affect our business.
Our primarydirect and indirect competitors, forwhether they are online legal document providers, legal plan providers, law firms, accounting firms, solo attorneys or large internet providers, may also be developing innovative and cost-effective services that target our existing and potential customers. We expect to face increasing competition from offline and online legal plans include Hyatt Legal Plans (a
Tableservices providers in our market, and our failure to effectively compete with these providers could result in revenue reductions, reduced margins, and loss of Contentsmarket share, any of which could materially and adversely affect our business, results of operations, financial condition and future prospects.
MetLife company), ARAG and LegalShield. Hyatt Legal Plans and ARAG primarily focus their marketing to larger employer groups, while LegalShield primarily focuses its marketing to individuals.
We believe competitive factors for our services include ease of use, breadth of offerings, brand name recognition, reputation, price, quality and customer service.service and that we compare favorably on all these bases.
Human Capital Management
As of March 31, 2021, we, together with all our subsidiaries, had 1,055 employees worldwide. As of March 31, 2021, we also engage 17 contractors and consultants. None of our employees are represented by a labor union. We have not experienced any work stoppages, and we believe that our employee relations are strong.
Our primary compensation strategy is to promote a pay-for-performance culture. Our guiding principles are anchored on the goals of being able to attract, incentivize, and retain talented employees who can develop, implement, and drive long-term value creation strategies. We’ve designed our compensation program so that every employee has a component of their compensation that is performance or incentive driven. We offer competitive compensation that we believe is aligned with the market and fair relative to our peers.
At LegalZoom, one of our core values is People First. By that, we not only mean caring for and protecting the millions of customers we have served since inception, but investing in, empowering and fostering trust and wellness among our employees, whom we call Zoomers. For example, when many of our Zoomers were impacted by the recent unprecedented storms and power outages in Texas in February 2021, we moved quickly to set up a relief fund for all of our impacted Zoomers and we donated directly to an organization directly serving the broader impacted community. In addition, we provided additional paid days off for employees who were unable to work due to power outages or internet connection issues.
We made an abrupt change in March 2020, in the face of the global COVID-19 pandemic, to move all of our non-essential workers to a remote, work-from-home environment. The primary drive for all decision-making
in the face of the pandemic has been focused on employee wellness. We’ve remained agile to accommodate the ever-changing needs of our employees as well as the changing nature of the pandemic. Our non-essential workforce continues to be almost entirely remote today. We’ve made numerous investments in our employees to accommodate this new remote environment, including providing an allowance for home office needs, giving employees an added rest day each year, providing paid transportation via ridesharing apps for essential workers who would normally take public transportation, and providing ten emergency paid sick days for employees to use if they have been impacted by COVID-19 in any way. We also host virtual live Yoga sessions twice a week, and are expanding our virtual development courses to better support employees working remotely.
We are focused on building a diverse and inclusive workplace and we strive to have our employees mirror the diversity of our customers and communities we serve. We believe we are thriving when every voice is nurtured and heard.
We have five employee networks today, each with dedicated internal funding, executive sponsorship and a focus on supporting diversity equity and inclusion within and outside of LegalZoom:
Pride Zoomer Alliance Network
The mission of the Pride Zoomer Alliance is to support and empower LGBTQIA+ Zoomers, customers, and communities—and their allies—by providing a safe place for them to be seen and heard. We work to ensure that LegalZoom is a fair and inclusive workplace for all, and we join our allies across the organization who share our vision for equity, inclusion, and social justice.
Lift Every Voice Black Network
The mission of Lift Every Voice Black Network is to uplift, empower and promote the advancement of Black Zoomers. The network serves to do the following:
Provide professional development through educational, mentoring and networking opportunities;
Provide assistance with the recruitment and retention of Black talent;
Promote company-wide awareness of Black culture and issues impacting Black Zoomers and the larger Black community;
Strengthen the relationships Black Zoomers have with each other and the Zoomer community; and
Strengthen the relationship LegalZoom has with the greater Black community.
Rise Up — Women’s Network
The mission of Rise Up is to amplify the drivers of success for women at LegalZoom to increase representation in senior positions and support overall career development.
Women in Tech Network
The mission of Women in Tech is to build a community within LegalZoom where women can learn, grow and develop as leaders in technology and beyond.
LatinX Network
The mission of the LatinX network is to serve as the hub for Latinx support, inspiration, and engagement focused on empowering each other and their allies with the tools to overcome challenges that prevent their voices from being valued, heard, and represented. The network commits to work together and remove barriers, discrimination, and intolerance so that everyone feels included and supported in a safe place environment.
Environmental, Social, and Governance
We believe legal help should be available to everyone, and take to heart the responsibility that comes with our mission of democratizing law. According to the Center for American Progress, 40-60% of the middle class allow legal needs to go unmet, which contributes to economic and entrepreneurial inequality, especially in under-represented communities. The cost and complexity of legal assistance is daunting for many without the financial means and legal training. As a result, LegalZoom set out to reduce these obstacles and disrupt an industry many believed couldn’t be disrupted given the rules and regulations of the legal system. We built a platform of technology and people to demystify and simplify complicated processes, creating user-friendly and cost-effective experiences for our customers while keeping their data and privacy top-of-mind. Fast-forward 20 years, now people can form a business starting at a flat fee of $79 (plus state-imposed filing fees), a significant cost savings compared to traditional offline legal services. We are committed to continuing to work so that anyone with a dream can protect their business, family and creative work by accessing our small business, estate planning, tax, and intellectual property products.
We believe that we also have a responsibility to serve those who do not have access to legal services because of who they are, who they love, where they live, the color of their skin, or their economic status. While the inherent nature of our business opens up new opportunity for many who may not have had it otherwise, we aim to do more to empower under-represented communities. That is why we partnered with Accion Opportunity Fund (AOF), who provides microloans to small business owners who face hurdles in accessing capital. They focus on people of color, women, and immigrant-owned businesses and, by joining forces with them, we can bring two critical components – access to capital and legal services – to communities that need them the most. By donating funds to their Small Business Relief Fund, LegalZoom has helped provide immediate loan payment relief and loan deferments to small business owners. To-date, 85% of the overall fund recipients are people of color, 67% low to moderate income, and 31% female. We are strategizing on providing in-kind support through product donation to their clients, and we are identifying ways to offer AOF’s loan products to our customers.
Aside from helping those with legal matters that tie closely to our business, we also feel a responsibility to contribute to the larger access to justice movement, no matter what type of legal matter it is. That is why we helped fund the first national disaster relief pro bono portal built by Paladin, a justice technology b-corp. The portal is the result of a partnership with the American Bar Association Young Lawyer’s Disaster Legal Services Program, the exclusive legal services coordinator for the Federal Emergency Management Agency, or FEMA, and it connects legal nonprofits all over the country with attorneys who raise their hand to provide legal assistance during times of crisis. The COVID-19 crisis and other national disasters have created immediate legal needs for millions of Americans. With many people now having to navigate unlawful evictions, loss of wages and benefits, delays in court proceedings and more, there is an unprecedented need to connect low-income Americans to pro bono attorneys. Since inception, the portal has connected 5,300 Americans with attorneys to pro bono legal support.
Our social impact goes beyond our external partnership efforts and support—it’s embedded in our culture and employee experience. Addressing inequities starts internally, which is why we made hires for roles in diversity, equity, and inclusion to help us be the most diverse and inclusive company we can be. We have created new roles to ensure these priorities continue to rise in importance, including senior roles: Head of Social Impact and Director of Diversity Equity & Inclusion. 63% of our C-Suite identify as either female or people of color.
Being a purpose-driven company is crucial to our employee experience, which is why we have dedicated groups, events, initiatives, and programs that help contribute to the greater good. We also support giving back outside of our walls through our employee giving and volunteerism programs. Every full-time employee has two volunteer PTO days, and can apply for a company donation match to organizations they fundraise for. Finally, we are part of the Time to Vote initiative, a nonpartisan movement led by the business community to contribute to the culture shift needed to increase voter participation in our country’s elections. We have made the
presidential Election Day a company holiday to ensure that every employee can participate in the democratic process and make time to vote.
Aside from our social initiatives, we also find environmental issues to be important. LegalZoom is committed to clean, renewable energy. In our Austin, Texas office, we have installed a 260 kW solar electric system. This produces 345,800 kWh of energy per year. The environmental impact amounts to an annual reduction of 450,000 pounds, or 224 tons of carbon dioxide emissions, an environmental benefit equivalent to planting 8,000 carbon-sequestering trees.
Data security and privacy is also important to our operations. Ensuring that we meet or exceed expectations with respect to maintaining the confidentiality of the information in our possession is embedded throughout our operations. Our customers and employees trust us with their most sensitive information, including business plans, intellectual property, tax information, and the intimate details of their personal documents (e.g. wills). To attract customers, some online competitorsensure the security of this data, we have implemented security practices that maintain physical, technical and administrative safeguards. We also conduct regular risk assessments to evaluate the effectiveness of our program to ensure that we are offering freecontinuing to expand and adapt to a changing threat landscape.
We are equally committed to protecting our customers’ privacy. As part of this commitment, we have adopted data stewardship principles that inform our partnerships with third parties and other data sharing arrangements. These principles, which are based on principles of transparency and consent, align with our commitment to never sell our customers’ data. We conduct robust privacy reviews of our vendors for new or low-priced entry-level services that may affectmodified internal processes. Finally, despite the invalidation of Privacy Shield, we have opted to continue to participate in third-party audits of our pricing strategy.privacy practices to help supplement our internal privacy program activities.
Intellectual Property
Our success depends onWe believe that our proprietary technology.technology is an important and valuable part of our business. We protect this proprietary technology by relying on a variety of intellectual property mechanisms including copyright trade secret and trademark laws, and restrictions on disclosure and other methods. For example, weWe frequently file applications for copyrights, trademarks and service marks in order to protect our intellectual property. As of June 30, 2012,At March 31, 2021, we have registered 12 trademarkshad 17 trademark registrations and 17 pending trademark applications in the United States including LegalZoom, LegalZoom.com, LegalZip, CreatingWill.comStates. We also had over 30 trademark registrations in 13 foreign jurisdictions or under international or European Union and ProxiLaw, and 27 trademarks in 42 foreign countries.European Community registrations. We have no issued patents or pending patent applications.patents. We also license intellectual property from third parties, such as software used to support our technology and operations.
In addition, we seek to protect our intellectual property rights by requiring our employees and independent contractors to enter into agreements acknowledging that all works or other intellectual property generated or conceived by them on our behalf are our property, and assigning to us any rights, including intellectual property rights, that they may claim or otherwise have in those works or property, to the extent allowable under applicable law.
Government RegulationsRegulation
Our businessWe operate in a particularly complex legal and the services we provide subject us to complex and evolving U.S. and foreign laws and regulations regarding UPL, legal document processing and preparation, legal plans, privacy and other matters.regulatory environment. We do not purport to be a law firm and we do not engage in the practice of law, whether authorized or not. We provide self-help at our customers' specific direction and general information on legal issues generally encountered. Licensed attorneys provide services to our customers through our legal plans, and we rely on third parties to provide certain of our other services.
Our business involves providing services that meet the legal needs of our customers and, as a result, isare subject to a variety of complexU.S., U.K. and other foreign laws, rules and regulations, including those related to internet activities, UPL, the corporate practice of law, or CPL, privacy, data protection, cybersecurity, data retention, consumer protection, content regulation, automatically renewing subscriptions, the processing of legal documents, legal plans, human resource services, employment and labor laws, workplace safety, intellectual property and the provision of online payment services, including credit card processing, anti-bribery and anti-corruption laws, federal securities laws, tax regulations and other matters, which are continuously evolving and developing. We own and operate an alternative business structure, or ABS, in the United Kingdom to provide legal services to U.K. and U.S. based
consumers. The ABS employs solicitors licensed in the United Kingdom as well as attorneys licensed in the United States to provide limited scope legal services to consumers who purchase such services on our websites. The ABS is regulated by the Solicitors Regulation Authority. While we believe this structure is legally permissible, it is generally untested in U.S. courts and foreignwe cannot assure you that it will insulate us from claims of CPL or UPL. These laws and regulations including the following:are regularly evolving and tested in courts, and may be interpreted, applied, created, or amended, in a manner that could harm our business.
•Our business model includes the provision of services that represent an alternative to traditional legal services, which subjectshas subjected us to allegations of UPL.UPL in the United States. UPL generally refers to an entity or person giving or offering legal advice who is not licensed to practice law. However, laws and regulations defining UPL, and the governing bodies that enforce UPL rules, differ among the various jurisdictions in which we operate. WeWhile several states are implementing exploratory programs to allow non-lawyers to own law firms under strict ethical parameters, we are currently unable to acquire a license to practice law in the United States, or employ licensed attorneys to provide legal advice to our customers, because we do not meet the regulatory requirement of being exclusively owned by licensed attorneys. We areOur business model is also subject to laws and regulations that govern business transactions between attorneys and non-attorneys,persons who are not licensed attorneys, including those related to the ethics of attorney fee-splitting and CPL.
We are subject to certain regulations relating to the corporate practice of law.
•Regulationprocessing of legal document processing and preparation services variesdocuments, which vary among the jurisdictions in which we conduct business.
•- Regulation of our legal plans also varies considerably among the insurance departments, bar associations and attorneys general of the particular states in which we
offer, or plan to offer our legal plans. In addition, some states may seek to regulate our legal plans as insurance or specialized legal service products.
Additionally, we are required to comply with laws and regulations related to privacy and the storing, use, processing, disclosure and protection of personal information and other customer data.
Our business operations also subject us to laws and regulations relating to general business practices and the manner in which we offer our services to customers subjects us to various consumer laws and regulations, including false advertising and deceptive trade practices.
The scope of these laws and regulations are often vague and broad, and their applications and interpretations are often uncertain and conflicting. Compliance with these disparate laws and regulations requires us to structure our business and services differently in certain jurisdictions. Any failure or
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perceived failure to comply with applicable laws and regulations, or if our services are considered to constitute UPL, could cause us to modify or discontinue some of our services or incur significant expenses.
In addition, any failure or perceived failure by us to comply with applicable laws and regulations may subject us to regulatory inquiries, claims, suits and prosecutions. We have been subject to, and currently are subject to, litigation and regulatory inquiries relating to UPL. We expect to continue to be subject to such litigation and regulatory inquiries, as well as potential investigations from other regulatory agencies as our business expands into new jurisdictions and we introduce new services.
Employees
As of June 30, 2012, we had 551 full-time and part-time employees and 120 temporary workers, all of whom are located in the United States. We do not currently have any collective bargaining agreements with our employees and we believe employee relations are generally good.
Property and Facilities
Our corporate headquarters and principal operationsexecutive headquarters are located in Glendale, California, where we lease and occupy approximately 49,00056,000 square feet. The term of our lease expires in 2021.
We also2022, and we have additional facilitiestwo options to extend the term of this lease for five years each. Our operational headquarters are located in Glendale, California, where we lease and occupy approximately 6,000 square feet, Austin, Texas, where we subleaseown and occupy approximately 59,000 square feet, and San Francisco, California, where we lease and occupy approximately 6,000206,000 square feet. The terms of these leases expireWe maintain additional facilities in 2016, 2013multiple locations in the United States and 2016, respectively.United Kingdom.
We believe that our facilities are adequate formay lease or purchase additional space as needed to accommodate our needs and that any additional space will be available to us on commercially reasonable terms for the foreseeable future.
Legal Proceedings
On September 15, 2009We are a party to various currently pending legal proceedings and May 27, 2010, class action lawsuits were filedgovernment inquiries, and we anticipate that legal proceedings, government investigations, government inquiries or claims could be brought against us in California state court alleging, primarily, that we failedthe future. For more information on our pending legal proceedings and governmental inquiries, see Note 13 to comply with the California Legal Document Assistant Act, engaged in unfair business practices and made misrepresentations in our business operations. The September 15, 2009 case was brought by Charles Drozdyk. Plaintiff filed an amended complaint on February 14, 2011, principally replacing Drozdyk with a new plaintiff, Randall Whiting. The May 27, 2010 case was brought by Kathryn Webster, as executor of the Estate of Anthony Ferrantino. Between the cases, plaintiffs sought to have all contracts between LegalZoom and its customers for the prior four years declared void, a return of all revenues generated from these customers, punitive damages, penalties, and injunctive relief. While we have denied and continue to deny all of the allegations and claims asserted in these lawsuits, without admitting liability, and to avoid additional legal costs to defend these matters, we signed a settlement agreement of the May 27, 2010 action to resolve the claims in both cases. A fairness hearing was held on April 5, 2012. The court issued an Order Granting Final Approval of Class Action Settlement and Judgment on April 18, 2012. Objector Whiting has filed a notice of appeal of the court's denial of his motion to intervene. Objectors Johnson and Manbeck, Mings and Whiting have filed notices of appeal of the court's order and judgment, but Mings' appeal was subsequently dismissed. At June 30, 2012, we have accrued an estimated settlement liability of $2.9 million for this lawsuit as further described in Note 6 to the consolidated financial statements included elsewhere in this prospectus.
On December 17, 2009, a statewide class action lawsuit was filed against us by Todd Janson in Missouri state court, alleging that we were engaged in the unauthorized practice of law and violated the Missouri Merchandising Practices Act. The complaint was amended on January 15, 2010 to add plaintiffs Gerald T. Ardrey, Chad M. Ferrell, and C & J Remodeling LLC. It sought damages of five years of fees charged to Missouri customers with the fees from the two years immediately preceding the complaint trebled and an injunction enjoining LegalZoom from continued operation in Missouri. We subsequently removed the case to federal court in Missouri. While we have denied and continue to deny all of the allegations and claims asserted in this lawsuit, without admitting liability, and to avoid additional legal
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costs to defend the matter, we signed a settlement agreement to resolve the lawsuit. A fairness hearing was held on April 13, 2012. The court issued a Final Approval Order and Dismissal with Prejudice on April 30, 2012. In June 2012, we paid $1.9 million to the plaintiffs' attorneys for fees and expenses pursuant to the settlement. At June 30, 2012, we have accrued an estimated settlement liability of $0.8 million for this lawsuit as further described in Note 6 to the consolidated financial statements included elsewhere in this prospectus.
On June 10, 2011, a purportedquo warranto action was filed in Alabama state court against us by DeKalb County Bar Association. The complaint generally alleges that LegalZoom engages in the unauthorized practice of law and requests injunctive relief, not damages. We have denied and continue to deny all of the allegations and claims asserted in this lawsuit.
On July 19, 2012, we prevailed on a motion to dismiss a purported statewide class action filed against us by Christopher Lowry in federal court in Ohio, alleging that we engage in the unauthorized practice of law and violated the Ohio Consumer Sales Practices Act. The complaint, filed on October 27, 2011, sought disgorgement of revenues, among other remedies. We denied and continue to deny all of the allegations and claims asserted in this lawsuit.
On January 25, 2012, a purported class action complaint was filed against us by Jonathan McIllwain in Arkansas state court, generally alleging that we engage in the unauthorized practice of law constituting violation of the Arkansas Deceptive Trade Practices Act and unjust enrichment. The complaint seeks a refund of all monies paid to us and punitive damages, among other remedies. We have denied and continue to deny all of the allegations and claims asserted in this lawsuit.
On February 17, 2012, a complaint was filed against us by T. Travis Medlock in South Carolina state court, generally alleging that we engage in the unauthorized practice of law. The complaint requests declaratory relief, injunctive relief and disgorgement of revenues, among other measures. We have denied and continue to deny all of the allegations and claims asserted in this lawsuit.
On September 30, 2011 we filed a complaint in Raleigh, North Carolina against the North Carolina State Bar. We brought this suit requesting a declaration that our self-help services are lawful and require the registration of our subscription legal plans. We cannot predict the outcome of this matter.
In addition to these lawsuits, from time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently involved incurrently a party to any such legal proceeding in whichactions that we expect the outcome, if determined adverselybelieve to us,be likely to have a material adverse effectimpact on our business, financial condition, results of operations or financial condition.cash flows. However, management’s views and estimates related to these matters may change in the future, as new events and circumstances arise and the matters continue to develop.
MANAGEMENT
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MANAGEMENT
Executive Officers and Directors
The following table provides information regarding our executive officers and directors as of the date of this prospectus:June 1, 2021:
| | | | |
Name
| | Age | | Position(s)
| | |
|---|
John SuhName
| | 41Age | | | Position(s) |
Executive Officers | | | | | | |
Dan Wernikoff | | | 49 | | | Chief Executive Officer and Director |
Frank MonestereNicole Miller
| | 43 | 38 | | President and Chief Operating Officer | General Counsel |
Edward HartmanRich Preece
| | 41 | 46 | | | Chief StrategyOperating Officer and Chief Product Officer |
Fred KrupicaShrisha Radhakrishna
| | 60 | 44 | | | Chief Technology Officer |
Noel Watson | | | 46 | | | Chief Financial Officer |
| | |
Sheila TanKey Employees
| | 48 | | | | |
John Buchanan | | | 47 | | | Chief Marketing Officer |
Tracy TerrillSheily Chhabria Panchal
| | | 37 | | | Chief TechnologyPeople Officer |
Chas RampenthalKathy Tsitovich
| | 44 | 47 | | General Counsel and Secretary | Chief Partnership Officer |
| | |
Brian Liu(5)Non-Employee Directors
| | 44 | | | | |
Jeffrey Stibel | | | 47 | | | Chairman |
Daniel Cooperman(1)(3)(4)Dipanjan “DJ” Deb (2)
| | 61 | 52 | | Nominated Director |
Susan Decker(2)(3)
| | 49 | | Director |
Kenneth McBride(1)(4)Khai Ha (3)
| | 44 | 38 | | Nominated Director |
Alan Spoon(3)
| | 61 | | Director |
Jason TrevisanJohn Murphy (1)(3)
| | 37 | 52 | | | Director |
Nehemia (Hemi) Zucker(1)Dipan Patel (2)
| | 55 | 38 | | | Director |
Brian Ruder (3) | | | 48 | | | Director |
Christine Wang (1)(3) | | | 34 | | | Director |
David Yuan (1)(2) | | | 46 | | | Director |
(1)Member of the audit committee upon the completion of this offering.(2)Member of the compensation committee upon the completion of this offering.(3)Member of the governance and nominating committee upon the completion of this offering.(4)Has been nominated and has agreed to serve on our board of directors effective immediately after this registration statement is declared effective by the SEC.(5)Mr. Liu intends to resign his position as the Chairman of our board of directors immediately upon the completion of this offering but will remain as a member of our board of directors.
| (1) | Member of the audit committee. |
| (2) | Member of the compensation committee. |
| (3) | Member of the nominating and corporate governance committee upon the completion of this offering. |
Executive Officers
John SuhDan Wernikoff has served as our Chief Executive Officer since February 2007 and as a member of our boardBoard of directorsDirectors since February 2005.October 2019. From March 2019 to August 2019, Mr. Wernikoff served as a Venture Partner at TCV, a venture capital firm. From 2003 to October 2018, Mr. Wernikoff held various general manager roles at Intuit Inc., most recently serving as been Executive Vice President and General Manager of Intuit’s Consumer Tax Group from May 2016 to May 2018. Before that role he was the GM of the Small Business Group from May 2014 to May 2016. He also served as the GM of QuickBooks from August 2010 to May 2014. Prior to LegalZoom,his various general manager roles, Mr. Suh was Chief Executive OfficerWernikoff held various product and marketing leadership positions while at Intuit. Mr. Wernikoff holds a B.S. in Finance from Miami University, and an M.B.A. from the Katz Graduate School of StudioDirect,Business at the Internet divisionUniversity of a global supply chainPittsburgh. We believe that Mr. Wernikoff’s extensive knowledge of our company Li and Fung. Prior to StudioDirect, Mr. Suh co-founded and served as Chief Executive Officer, of Castling Group, helping offline companies create their Internet divisionshis management background and launching category leaders such as jcrew.com and hifi.com. Mr. Suh received a B.A.experience in Organizational Behavior and Public Policy from Harvard College and received his M.B.A. with high distinction from Harvard Business School, graduating as a George F. Baker Scholar. Mr. Suh was selectedonline technology industry qualifies him to serve on our board of directors due to the perspective and experience he bringsdirectors.
Nicole Miller has served as our Chief Executive OfficerGeneral Counsel since June 2020, and his extensive backgroundas our Secretary since August 2020. From July 2014 to June 2020, Ms. Miller held various roles at The Honest Company, most recently serving as General Counsel. Prior to The Honest Company, Ms. Miller practiced corporate law at the law offices of Cooley LLP and Gibson Dunn & Crutcher LLP. Ms. Miller was a Senate Fellow in the Internet industry.California State Senate from October 2005 to September 2006. Ms. Miller holds a B.A. in humanities from Stanford University and a J.D. from the University of Texas School of Law.
Frank MonestereRich Preece has served as our Chief Operating Officer and Chief Product Officer since SeptemberDecember 2019. From 2002 andto December 2019, Mr. Preece held various roles at Intuit, most recently serving as ourSenior Vice President and Chief Operating Officer since January 2005. Before joining LegalZoom,Head of Customer Success for the Small Business and Self-employed group from August 2019 to December 2019. Prior roles include Vice President and Global Accountant Segment Leader, and Vice President and Managing Director, Europe, Middle East, and Africa (EMEA). Mr. Monestere was a management consultant from 2000 to 2002, and assisted clients in executing technology-focused business initiatives for clients such as Comcast and Time Warner Cable. Before that, he served in the U.S. Army as an Infantry Officer in the 82nd Airborne Division from 1991 to 1995 and as a Special Forces Officer from 1995 to 1998 with deployments to Bosnia and Sub-Saharan Africa. He also serves on the Board of Advisors of Special Forces Association, a non-profit organization. Mr. Monestere graduated withPreece holds a B.S. in International RelationsMarketing from the United States Military Academy at West Point and received his M.B.A. from Harvard Business School where he focused on operations strategy and management.Bournemouth University.
Edward HartmanShrisha Radhakrishna is one of our co-founders and has served as Chief Strategy Officer since June 2000. Prior to LegalZoom, Mr. Hartman was theour Chief Technology Officer since August 2020. From April 2009 to August 2020, Mr. Radhakrishna held various roles at TROON, LTD, later acquired by
TableIntuit, most recently serving as Vice President of Contents
Xceed International.Product Development from August 2016 to August 2020. Prior to Intuit, Mr. Hartman wasRadhakrishna served as Director of Engineering at BooRah, Inc. Mr. Radhakrishna holds a creatorBachelor of two web-based applications, MajorFind and Megaphone. He sat on the board of the Project Management Institute (Los Angeles Chapter) and is a current board member of the Brent Shapiro Foundation. Mr. Hartman received a B.S.Engineering degree in ComputerInformation Science and a B.A. in Anthropology from YaleBangalore University and an M.B.A. from the WhartonKellogg School University of Pennsylvania Program for Executives in San Francisco, California, where he was designated a Palmer Scholar. He is a member of the California Bar.Management at Northwestern University.
Fred KrupicaNoel Watson has served as our Chief Financial Officer since April 2008.November 2020. From June 2019 to November 2020, Mr. Krupica has over 30 years of experience at several high-growth corporations, most recentlyWatson served as Chief Financial Officer of Altraat TrueCar, Inc., a leading biofuels company from January From April 2006 through April 2008. Prior to Altra,June 2019, Mr. Krupica was Chief Financial Officer of Fastclick, Inc., an Internet advertising technology company, where he led Fastclick's initial public offering and subsequent sale and merger to Valueclick Inc. Mr. Krupica's previous positions include serving as the Chief Financial Officer of WJ Communications, Chief Financial Officer of Magnetic Data Technologies, Chief Financial Officer and Chief Operating Officer of a private equity firm, and founder of a professional services firm. Mr. Krupica alsoWatson served in various senior financial management positionsroles at Atlantic Richfield, PullmanTripAdvisor, Inc., including as Vice President Finance and PricewaterhouseCoopers.Chief Accounting Officer. Since July 2020, Mr. Krupica is a Certified Public Accountant andWatson has served on Zynga’s Board of Directors. Mr. Watson holds a B.S. in Accountingaccounting from the University of Illinois and an M.B.A. in Finance from UCLA's Anderson School of Management.Bryant University.
Sheila Tan has served as our Chief Marketing Officer since March 2012. Before joining LegalZoom, Ms. Tan held executive positions at Align Technology Inc. as Vice President, Marketing and Chief Marketing Officer from March 2009 to December 2011 and Vice President of Product Innovation and Marketing Strategy from September 2008 to March 2009. Prior to that, she was Vice President, Marketing for Moka5, Inc., a provider of virtual desktop technology, from August 2007 to July 2008. Ms. Tan served as Vice President Marketing of Presto Services Inc., a digital-delivery service that enables families and friends to stay in touch via e-mail, without the need for a computer or Internet connection, from June 2006 to August 2007. Prior to that, Ms. Tan was Senior Director of Marketing, Quicken.com and QuickBooks at Intuit from 2001 to 2004. From 1995 to 2000, Ms. Tan held marketing positions of increasing scope and responsibility at The Procter & Gamble Company and its subsidiaries. Ms. Tan received a B.S. in Business Management from California Polytechnic State University and an M.B.A. in Business Management from UCLA's Anderson School of Management.
Tracy Terrill joined LegalZoom in January 2007 and has served as our Chief Technology Officer since October 2008. From March 2005 to December 2006, Mr. Terrill was Director of Sales and Marketing (systems) for GE NBC Universal Home Entertainment. Previous positions included Sr. Director of Digital Business Development and Sr. Director of Research and Development for Universal Music Group. Earlier in his career, Mr. Terrill was a management consultant for Gartner Group. Terrill holds a B.S. in Business Administration from Sonoma State University and an M.B.A. from the University of Southern California.
Chas Rampenthal has served as our General Counsel since October 2003 and as our Corporate Secretary since February 2007. Before joining LegalZoom, Mr. Rampenthal was a partner at Belanger and Rampenthal, LLC from October 2002 to October 2003. Prior to that, Mr. Rampenthal was an associate at Testa, Hurwitz & Thibeault, LLP of Boston, Massachusetts and the Los Angeles office of Thelen Reid & Priest LLP. Mr. Rampenthal also served as an officer and aviator in the United States Navy. Mr. Rampenthal received his B.S. in Economics and Math Studies from Southern Illinois University at Edwardsville and a J.D. from the University of Southern California.
Brian Liu, one of our co-founders, has served on our board of directors since July 1999, and as our Chairman from July 1999 to February 2005 and since February 2007. Mr. Liu was our Chief Executive Officer from July 1999 to February 2007. Prior to LegalZoom, Mr. Liu was a corporate attorney with the law firm of Sullivan & Cromwell LLP. In addition, Mr. Liu was formerly assistant Vice President—Legal
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with investment adviser Oaktree Capital Management, LLC. Mr. Liu graduated from U.C. Berkeley, Phi Beta Kappa, and with honors, in Biochemistry. Mr. Liu received his J.D. from UCLA School of Law and is a member of the California Bar. Mr. Liu intends to resign his position as the Chairman of our board of directors immediately upon the completion of this offering but will remain as a member of our board of directors. Mr. Liu was selected to serve on our board of directors due to his experience as our prior Chief Executive Officer and his involvement with our formation, along with his knowledge of our business, management skills and performance as a board member.
Daniel Cooperman has agreed to serve on our board of directors effective immediately after this registration statement is declared effective by the SEC. From 2010 to the present, Mr. Cooperman has been Of Counsel with Bingham McCutchen LLP, a law firm. From 2007 to 2009, Mr. Cooperman was the Senior Vice-President, General Counsel & Secretary of Apple Inc. and, before that time, he was the Senior Vice-President, General Counsel & Secretary of Oracle Corporation from 1997 to 2007. Mr. Cooperman is currently a Lecturer in Law at Stanford Law School and is a Fellow at the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford Law School and Graduate School of Business. He is also currently a strategic advisor to Institutional Venture Partners and several private technology companies. Mr. Cooperman earned his A.B. in Economics from Dartmouth College, his J.D. from Stanford Law School and his M.B.A. from Stanford Graduate School of Business. Mr. Cooperman was nominated to serve on our board of directors upon the completion of this offering due to his extensive knowledge and experience in the legal industry, his expertise in corporate leadership, governance and management practices and his experience with Internet and technology companies.
Susan Decker has served on our board of directors since October 2010. Ms. Decker also currently serves on the boards of directors of Intel Corporation, Berkshire Hathaway Corporation and Costco Wholesale Corporation and is a Trustee of Save the Children. Previously, Ms. Decker served on the board of directors of Stanford Institute of Economic Policy Research from March 2005 to May 2007. During the 2009-2010 school year, Ms. Decker served as Entrepreneur-in-Residence at Harvard Business School. Prior to that, from June 2000 to April 2009, Ms. Decker held various executive management positions at Yahoo! Inc., including serving as President from June 2007 to April 2009, Head of the Advertiser and Publisher Group from December 2006 to June 2007, and Chief Financial Officer from June 2000-June 2007. Before Yahoo!, Ms. Decker spent 14 years with Donaldson, Lufkin & Jenrette, most recently as Managing Director, Global Equity Research from 1998 to 2000, and previously as an equity research analyst, covering publishing and advertising stocks from 1986 to 1998. In this capacity, Ms. Decker received recognition by Institutional Investor magazine as a top-rated analyst for ten consecutive years. Ms. Decker was selected to serve on our board of directors due to her extensive experience as president of a global Internet company, providing expertise in corporate leadership, financial management, and Internet technology, and to the extent Ms. Decker services as a director for other multinational companies, Ms. Decker also provides cross-board experience.
Kenneth McBride has agreed to serve on our board of directors effective immediately after this registration statement is declared effective by the SEC. Since 2001, Mr. McBride has been the Chief Executive Officer of Stamps.com, a Nasdaq-traded provider of Internet-based services for mailing or shipping letters, packages or parcels. Beginning in 1999, he has held various positions at Stamps.com, as President from 2001 until January 2012, as Chief Financial Officer from 2000 to 2004 and as Senior Director of Finance from 1999 to 2000. Mr. McBride is also Chairman of the board of directors of Stamps.com. He also serves on the Board of Trustees of The California Science Center Foundation, a non-profit organization. Prior to Stamps.com, Mr. McBride was a research analyst for Salomon Smith Barney covering several industries in the high technology area. Mr. McBride has also worked as an engineer and manager in the semiconductor industry. Mr. McBride holds a bachelor's degree, with honors, and a master's degree, in Electrical Engineering from Stanford University. Mr. McBride also holds an M.B.A. from the Graduate School of Business at Stanford University. Mr. McBride was selected to serve
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on our board of directors due to his extensive experience in Internet and technology companies, corporate leadership and financial management.
Alan Spoon has served on our board of directors since February 2007. Mr. Spoon is a general partner with Polaris Venture Partners, a venture capital firm. Before joining Polaris in 2000, Mr. Spoon served for 18 years in a variety of roles with The Washington Post Company, including President, board member, and Chief Financial Officer. At The Washington Post, Mr. Spoon also was responsible for early stage technology investments in cellular companies, such as Cellular One and Digital PCS, distance learning and educational software, and digital media and e-commerce services. Prior to The Washington Post, Mr. Spoon was an officer at The Boston Consulting Group. In addition to serving on our board of directors, Mr. Spoon also sits on the boards of a variety of other companies, including Art.com, Focus Financial Partners, Remedy Health Media, Phreesia, Danaher Corporation and IAC/InterActiveCorp. In his not-for-profit activities, Mr. Spoon is a member of the Massachusetts Institute of Technology's Corporation and The Council on Foreign Relations. Mr. Spoon was also formerly a member of the MIT Corporation, and a member and Vice Chairman of the Smithsonian Board of Regents. He remains active in both institutions. Mr. Spoon earned his S.B. at Massachusetts Institute of Technology, an S.M. at M.I.T.'s Sloan School of Management, and a J.D., with honors, from Harvard Law School. Mr. Spoon was selected to serve on our board of directors due to his extensive experience with private and public company boards, management practices and involvement with private equity, providing insights into the Internet and technology industries as well as into acquisition strategy and financing.
Jason Trevisan has served on our board of directors since February 2007. Mr. Trevisan is a general partner with Polaris Venture Partners focusing on growth equity investments and buyouts in Internet, technology and healthcare industries. Before joining Polaris in 2003, Mr. Trevisan held various management roles at aQuantive, which was acquired by Microsoft, where he oversaw client relationships in industries including pharmaceuticals, media/entertainment, financial services and consumer products. Prior to aQuantive, Mr. Trevisan was a consultant with Bain & Company where his clients included private equity firms and Fortune 500 companies in technology, media and consumer products. In addition to serving on our board of directors, Mr. Trevisan is also a member of the board of directors of ShoeDazzle, Life Line Screening, PartsSource and Snappcloud. Mr. Trevisan received his M.B.A. with Distinction from the Tuck School of Business at Dartmouth, where he was recognized as an Edward Tuck Scholar. Mr. Trevisan holds an A.B., cum laude, in English from Duke University. Mr. Trevisan was selected to serve on our board of directors due to his extensive experience in Internet and technology companies, as a venture capitalist and as one of our investors.
Nehemia (Hemi) Zucker has served on our board of directors since April 2012. Mr. Zucker has been the Chief Executive Officer of j2 Global, Inc., a Nasdaq-traded provider of business cloud services, since May 2008. Prior to that time, and beginning in 1996, he held various executive positions with j2 Global, as Co-President and Chief Operating Officer from August 2005 to May 2008, as Co-President from April 2005 to August 2005, as Chief Marketing Officer from May 2003 to August 2005, as Chief Marketing Officer and Chief Financial Officer from December 2000 to May 2003, and as Chief Financial Officer from 1996 to December 2000. Prior to j2 Global, Mr. Zucker was Chief Operations Manager of Motorola's EMBARC division, which packaged CNBC and ESPN for distribution to paging and wireless networks. From 1980 to 1996, he held various positions in finance, operations and marketing at Motorola in the United States and abroad. Mr. Zucker received his B.A. in Economics from Tel Aviv University. Mr. Zucker was selected to serve on our board of directors due to his extensive experience in Internet, technology and telecommunication companies and his international management experience.
Each officer serves at the discretion of our board of directors and holds office until his or her successor is duly elected and qualified or until his or her earlier resignation or removal.
Key Employees
John Buchanan has served as our Chief Marketing Officer since August 2020. From May 2019 to September 2020, Mr. Buchanan served as Senior Vice President of Marketing Strategy and Sciences for the National Football League. From February 2018 to May 2019, Mr. Buchanan served as Global Vice President, Head of Marking and Digital Media at Adobe Inc. From January 2015 to February 2018, Mr. Buchanan served as Vice President, Global Brand Management at Electronic Arts Inc. Mr. Buchanan holds a B.S. in political science and a B.S. in international relations from the University of Southern California.
Sheily Chhabria Panchal has served as our Chief People Officer since April 2021. From October 2019 to April 2021, Ms. Panchal served as Vice President of Global Human Resources at Activision Blizzard. Prior to that, she served as Executive Vice President of People Operations for ServiceTitan, Inc. from January 2017 to May 2019. From August 2006 to February 2016, Ms. Panchal held various leadership positions at Google, Inc., most recently serving as Director of Global Trust and Safety Operations. Ms. Panchal holds a B.S. in Business Administration and Management from the University of Southern California.
Kathy Tsitovich has served as our Chief Partnership Officer since August 2020. From September 1999 to August 2020, Ms. Tsitovich held various roles at Intuit, most recently serving as Vice President, Consumer Group from March 2020 to August 2020. Prior to that, she held multiple leadership roles including Vice President, Business Development & Partnerships, Director New Business Development and Director of the Small Business Group. Ms. Tsitovich holds a B.S. in Business Administration and Finance from the University of Missouri.
Non-Employee Directors
Jeffrey Stibel has served as a member of our board of directors since October 2014 and Chairman since October 2018. Mr. Stibel has been a partner of Bryant Stibel & Company, an investment and strategic advisory platform since January 2013. Mr. Stibel also serves as a member of the board of directors of a number of privately held companies and non-profit entities. He is also a USA Today columnist and author of The New York Times bestseller Breakpoint (Macmillan: 2013) and Wired for Thought (Harvard Business Press: 2009). Mr. Stibel served as the President, Chief Executive Officer and Chairman of the Dun & Bradstreet Credibility Corporation from July 2010 to July 2015, and as Vice Chairman of Dun & Bradstreet Corporation (NYSE) from July 2015 to March 2018. Prior to that, Mr. Stibel was President and Chief Executive Officer of Web.com, Inc. (Nasdaq). From December 2006 to January 2019, Mr. Stibel served as a member of the board of directors of AutoWeb, Inc. (Nasdaq). He holds a bachelor’s degree in psychology, philosophy, and
cognitive science from Tufts University and a master’s degree in cognitive science from Brown University, where he was the recipient of a Brain and Behavior Fellowship while studying for a Ph.D. Mr. Stibel also received an honorary doctorate of business from Pepperdine University. We believe that Mr. Stibel’s experience as an executive officer of various online technology companies combined with his experience serving on the boards of directors of multiple public companies qualifies him to serve on our board of directors.
Dipanjan (DJ) Deb has served as a member of our board of directors from August 2018 through September 2019, and from February 2020 to date. Mr. Deb is a co-founder and Chief Executive Officer of Francisco Partners Management, L.P., or Francisco Partners, and has served at Francisco Partners since September 2005. Mr. Deb has also served as a Partner of Francisco Partners since its founding in August 1999. Prior to founding Francisco Partners, Mr. Deb was a principal at TPG Capital, a private equity firm, a Director of Semiconductor Banking at Robertson, Stephens & Company and a management consultant at McKinsey & Company. Mr. Deb serves on the board of directors of GoodRx Holdings, Inc. which is a public company and has served on the board of directors of other public companies including most recently Ichor Systems, Inc. from February 2012 to May 2018, and currently also serves on the board of directors of several private companies. Mr. Deb holds a B.S. in Electrical Engineering and Computer Science from the University of California, Berkeley and an M.B.A. from the Stanford Graduate School of Business. We believe that Mr. Deb’s private equity expertise combined with his experience serving on the boards of directors of both publicly and privately held companies qualifies him to serve on our board of directors.
Khai Ha has served as a member of our board of directors since July 2018. Mr. Ha is a managing partner and investment committee member of GPI Capital L.P., co-founding the firm in May 2016. Before joining GPI Capital L.P., he was a managing director at BTG Pactual Global Partnership Investing, the predecessor fund. Prior to that, Mr. Ha served as a portfolio manager at Ontario Teachers’ Pension Plan and worked at investment firms Moore Capital Management LP and Epic Capital Management Inc. He started his career in mergers and acquisitions and investment banking at Merrill Lynch, Pierce, Fenner & Smith Incorporated and BMO Nesbitt Burns Inc. Mr. Ha has also served on the board of directors of a number of privately held companies. Mr. Ha holds a bachelor of commerce, finance, and economics degree from the University of Toronto and is a chartered financial analyst. We believe that Mr. Ha’s financial and investment management expertise qualifies him to serve on our board of directors.
John Murphy has served as a member of our board of directors since June 2021. Mr. Murphy has served as the Executive Vice President and Chief Financial Officer of Adobe Systems, Inc., since April 2018, and served as Adobe’s Senior Vice President, Chief Accounting Officer and Corporate Controller from March 2017 until April 2018. Prior to joining Adobe, Mr. Murphy served as Senior Vice President, Chief Accounting Officer and Corporate Controller of Qualcomm Incorporated from September 2014 to March 2017. He previously served as Senior Vice President, Controller and Chief Accounting Officer of DIRECTV Inc. from November 2007 to August 2014, and Vice President and General Auditor of DIRECTV from October 2004 to November 2007. Prior to joining DIRECTV he worked at several global companies, including Experian, Nestle, and Atlantic Richfield (ARCO), in a variety of finance and accounting roles. He served as Director of DirecTV Holdings LLC from November 2007 until August 2014. Mr. Murphy serves on the Corporate Advisory Board of the Marshall School of Business at the University of Southern California. He holds an MBA from the Marshall School of Business at the University of Southern California, and a B.S. in Accounting from Fordham University. We believe that Mr. Murphy’s extensive experience in finance and accounting, as well as his background in the technology sector, qualifies him to serve on our board of directors.
Dipan Patel has served as a member of our board of directors since April 2014. Mr. Patel serves as a partner at Permira, a leading global private equity firm, and has been with the firm since October 2009. He is Head of Global Consumer and serves on the Investment Committee and Executive Committee. Prior to that, Mr. Patel worked for The Gores Group LLC and Lehman Brothers Holdings Inc. Mr. Patel also serves on the board of directors of The Knot Worldwide, Boats Group, Axiom and Catawiki. Mr. Patel holds a B.A. in economics from the University of Cambridge. We believe that Mr. Patel’s experience with and knowledge of technology and media companies and his private equity background qualifies him to serve on our board of directors.
Brian Ruder has served as a member of our board of directors since April 2014. Mr. Ruder has served as a partner at Permira since November 2008 and co-heads Permira’s Technology investing sector, sits on the firm’s Executive Committee, and is co-chair of the Permira Investment Committee. Prior to Permira, Mr. Ruder was a partner at Francisco Partners and previously he worked at Hellman & Friedman and Morgan Stanley. Mr. Ruder holds a B.A. in philosophy with mathematics from Harvard College and an M.B.A. from Harvard Business School. We believe that Mr. Ruder’s financial and investment expertise along with his knowledge of the technology industry qualifies him to serve on our board of directors.
Christine Wang has served as a member of our board of directors since September 2019. Ms. Wang serves as a principal at Francisco Partners and has been with Francisco Partners since August 2015. Prior to joining Francisco Partners, Ms. Wang was an associate at Advent International where she evaluated investments in the business services, financial services, and technology sectors. Earlier in her career, she was an investment banker in the Financial Institutions Group at J.P. Morgan. Ms. Wang also serves on the board of directors of a number of privately held technology companies. Ms. Wang holds a B.A. in economics and East Asian languages and cultures from Columbia University and an M.B.A. from the Stanford Graduate School of Business. We believe that Ms. Wang’s private equity expertise combined with her experience serving on the boards of directors of privately held companies qualifies her to serve on our board of directors.
David Yuan has served as a member of our board of directors since October 2018. Mr. Yuan is a Senior Advisor at Technology Crossover Ventures, or TCV, which he joined in 2005. Mr. Yuan serves on the Board of Directors, or as a Board observer, of multiple other companies within the technology and the financial technology space, including Avetta, Klook, SiteMinder, Toast and Wealthsimple. Prior to joining TCV, Mr. Yuan served as a private equity investor at JPMorgan Partners from 2000 through 2003, director of Business Development at 1stUp.com (acquired by CMGi) from 1999 through 2000, and as a management consultant with Bain and Company from 1997 through 1999. Mr. Yuan holds a bachelor’s degree in economics from Harvard College and a Master of Business Administration degree from the Stanford Graduate School of Business. We believe that Mr. Yuan is qualified to serve on our board of directors based on his broad professional experience within the technology and FinTech industries and services as a director or board observer to other technology companies.
Family Relationships
There are no family relationships among any of our directors orand executive officers.
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Current Board Composition
Our board of directors currently consists of six members. Our current certificate of incorporation and voting agreement provide for certainnine members with no vacancies. All of our board of directors to be elected by certain classes of our capital stock. The current members ofcurrently serve on the board of directors were elected as follows:
•Messrs. Suhpursuant to the provisions of a voting agreement between us and Liu were elected by the holders of the majority of the outstanding sharesseveral of our common stock.
•Messrs. Spoon and Trevisan were elected by the holders of the majority of the outstanding shares of our Series A.
•Ms. Decker was elected by the holders of the majority of the outstanding shares of our common stock and our Series A, voting together as a single class.
•Mr. Zucker was appointed by our board of directors.
stockholders. The voting agreement and the provisions of our certificate of incorporation by which the directors were elected will terminate in connection with our initial public offering, and there will be no further contractual obligations regardingupon the electioncompletion of our directors. Our current directors will continue to serve as directors until their resignations or until their successors are duly elected by the holders of our common stock.
Board Composition After This Offering
Immediately after this registration statement is declared effective by the SEC, our board of directors will consist of eight members.offering. In accordance with our amended and restated certificate of incorporation, and amended and restated bylaws thatwhich will becomebe effective immediately uponafter the completion of this offering, our board of directors will be divided into three classes with staggered three-year terms. At each annual general meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Upon the completion of this offering, ourOur directors will be divided among the three classes as follows:
•The Class I directors will be Messrs. LiuKhai Ha, Dipan Patel and Trevisan,Christine Wang, and their terms will expire at the annual general meeting of stockholders to be held in 2013;
•- 2022;
The Class II directors will be Ms. DeckerDipanjan Deb, Brian Ruder and Messrs. Cooperman and Spoon,David Yuan, and their terms will expire at the annual general meeting of stockholders to be held in 2014;2023; and
•The Class III directors will be Messrs. McBride, SuhJohn Murphy, Jeff Stibel and Zucker,Dan Wernikoff, and their terms will expire at the annual general meeting of stockholders to be held in 2015.2024.
We expect that any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors.
The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control.
UnderOn , we entered into a director nomination agreement (the “Director Nomination Agreement”) with each of (i) LucasZoom, LLC (collectively with its affiliated investment entities, “Permira”) and (ii) FPLZ I, L.P. and FPLZ II, L.P. (together with FPLZ I, L.P. and their affiliated investment entities, “FP”, and together with Permira, the listing requirements and rules“Lead Sponsors”) to provide certain rights with respect to their ability to designate members of the NYSE, independent directors must comprise a majority of a listed company'sour board of directors within(the “Sponsor Designees”).
Pursuant to the Director Nomination Agreement, we will have the obligation to support the nomination of, and to cause our board of directors to include in the slate of nominees recommended to our stockholders for election, a specified periodnumber of designees equal to at least: (i) two individuals for so long as each Lead Sponsor continuously from the time of the completion of this offering beneficially owns shares of common stock representing at least 50% of the shares of common stock owned by such Lead Sponsor immediately following the completion of this offering and (ii) one individual for so long as each Lead Sponsor continuously from the time of the completion of this offering beneficially owns shares of common stock representing at least 25% but less than 50% of the shares of common stock owned by such Lead Sponsor immediately following the completion of this offering.
The nomination of each Sponsor Designee shall be subject to the reasonable and good faith determination of a majority of our disinterested directors, after consultation with our outside legal counsel, that such Sponsor Designee is qualified to serve as a member of our board of directors under applicable laws, the rules of the Nasdaq Stock Market LLC, our amended and restated bylaws and any of our company policies. If a Sponsor Designee resigns from his or her seat on our board of directors or is removed or does not become a director for any reason, the vacancy will be filled by the election or appointment of another Sponsor Designee of the applicable Lead Sponsor as soon as reasonably practicable, subject to compliance with applicable laws, rules and regulations.
Director independence
Our board of directors has undertaken a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each incumbent and proposed new director to take office upon completion of this offering concerning his or her
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background, employment and affiliations, including family relationships, our board of directors has determined that Ms. Deckerall of our directors except Dan Wernikoff and Messrs. Cooperman, Spoon, Trevisan and ZuckerJeff Stibel, representing seven of our nine directors, do not have a relationshipany relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is "independent"“independent” as that term is defined under the applicable rules and regulations of the U.S. Securities and Exchange Commission, or the SEC, and the listing requirements of The Nasdaq Stock Market LLC. Our board of directors has determined that Dan Wernikoff, by virtue of his position as our Chief Executive Officer, as well as Jeff Stibel, by virtue of his relationship with Bryant Stibel Growth, LLC and its former consulting relationship with us, are not independent under applicable rules and regulations of the NYSE.SEC and The Nasdaq Stock Market LLC. In making this determination, our board of directors considered the current and prior relationships that each non-employee director has with usour company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stockshares by each non-employee director.
Lead Independent Director
Our board of directors is currently chaired by Jeffrey Stibel. Our corporate governance guidelines provide that, if the chairperson of the board is a member of management or does not otherwise qualify as independent, the independent directors of the board may or may not elect a lead independent director. The lead independent director’s responsibilities include, but are not limited to: presiding over all meetings of the board of directors at
which the chairperson is not present, including any executive sessions of the independent directors; acting as the liaison between the independent directors and the chief executive officer and chairperson of the board of directors; and such additional duties as our board of directors may otherwise delegate. Our corporate governance guidelines further provide the flexibility for our board of directors to modify our leadership structure in the future, as it deems appropriate.
Board Committees
UponOur board of directors established a compensation committee and will establish an audit committee and a nominating and corporate governance committee prior to the completion of this offering, we will have an audit committee, a compensation committee and a governance and nominating committee.offering. Our board of directors may establish other committees to facilitate the management of our business. The composition and responsibilitiesfunctions of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board of directors. Each committee has adopted a written charter that satisfies the applicable rules and regulations of the SEC and The Nasdaq Stock Market LLC, which we will post on our corporate website upon completion of this offering.
Our audit committee provides oversightconsists of our accountingJohn Murphy, David Yuan and financial reporting process, the audit of our financial statements and our internal control function. Among other matters, the audit committee assists theChristine Wang. Our board of directors has determined that each of Mr. Murphy, Mr. Yuan and Ms. Wang satisfies the independence requirements under The Nasdaq Stock Market LLC listing standards and Rule 10A-3(b)(1) of the Exchange Act. The chair of our audit committee is Mr. Murphy, who our board of directors has determined is an “audit committee financial expert” within the meaning of SEC regulations. Each member of our audit committee can read and understand fundamental financial statements in oversightaccordance with applicable requirements. In arriving at these determinations, our board of directors has examined each audit committee member’s scope of experience and the nature of their employment in the corporate finance sector. The principal duties and responsibilities of our audit committee include, among other things:
selecting a qualified firm to serve as the independent registered public accounting firm to audit our financial statements;
helping to ensure the independence and performance of the independent registered public accounting firm qualifications, independencefirm;
helping to maintain and performance; is responsible forfoster an open avenue of communication between management and the engagement, retentionindependent registered public accounting firm;
discussing the scope and compensationresults of the audit with the independent auditors; reviews the scope of the annual audit; reviewsregistered public accounting firm, and discussesreviewing, with management and the independent registered public accounting firm, the results of the annualour interim and year-end operating results;
developing procedures for employees to submit concerns anonymously about questionable accounting or audit and the review ofmatters;
reviewing our quarterly consolidated financial statements including the disclosures in our annual and quarterly reports filed with the SEC; reviews ourpolicies on risk assessment and risk management processes; establishes procedures for receiving, retainingmanagement;
reviewing related party transactions;
obtaining and investigating complaints receivedreviewing a report by us regarding accounting, internal accounting controls or audit matters; approves audit and permissible non-audit services provided by ourthe independent registered public accounting firm;firm at least annually, that describes its internal quality-control procedures, any material issues with such procedures, and reviewsany steps taken to deal with such issues when required by applicable law; and approves related person transactions under Item 404 of Regulation S-K. In addition, our
approving (or, as permitted, pre-approving) all audit and all permissible non-audit services to be performed by the independent registered public accounting firm.
Our audit committee will oversee our internal audit function when it is established.
Uponoperate under a written charter, to be effective prior to the completion of this offering, that satisfies the membersapplicable listing standards of The Nasdaq Stock Market LLC.
Compensation committee
Our compensation committee consists of Dipanjan Deb, Dipan Patel, and David Yuan. The chair of our auditcompensation committee will beis Mr. McBride, who will be the chair of the committee, and Messrs. Cooperman and Zucker. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the NYSE.Deb. Our board of directors has determined that Messrs. McBrideeach of Mr. Deb, Mr. Patel and Zucker are audit committee financial expertsMr. Yuan is independent under The Nasdaq Stock Market LLC listing standards and a “non-employee director” as defined in Rule 16b-3 promulgated under the applicable rules of the SECExchange Act.
The principal duties and have the requisite financial sophistication as defined under the applicable rules and regulations of the NYSE. All of the membersresponsibilities of our audit committee are independent directors as defined under the applicable rules and regulations of the SEC and the NYSE.
Our compensation committee adoptsis include, among other things:
approving the retention of compensation consultants and administersoutside service providers and advisors;
reviewing and approving, or recommending that our board of directors approve, the compensation, policies, plansindividual and benefit programs forcorporate performance goals and objectives and other terms of employment of our executive officers, and all other membersincluding evaluating the performance of our chief executive team. In addition, amongofficer and, with his assistance, that of our other things,executive officers;
reviewing and recommending to our compensation committee annually evaluates, in consultation with the board of directors the performance of our Chief Executive Officer, reviews and approves corporate goals and objectives relevant to compensation of our Chief Executive Officerdirectors;
administering our equity and other executivesnon-equity incentive plans;
reviewing our practices and evaluatespolicies of employee compensation as they relate to risk management and risk-taking incentives;
reviewing and evaluating succession plans for the performanceexecutive officers;
reviewing and approving, or recommending that our board of these executives in lightdirectors approve, incentive compensation and equity plans; and
reviewing and establishing general policies relating to compensation and benefits of those goalsour employees and objectives. reviewing our overall compensation philosophy.
Our compensation committee also adopts and administers our equity compensation plans. Uponwill operate under a written charter, to be effective prior to the completion of
this offering, that satisfies the membersapplicable listing standards of The Nasdaq Stock Market LLC.
Nominating and corporate governance committee
Our nominating and corporate governance committee will consist of Khai Ha, John Murphy, Brian Ruder, and Christine Wang. The chair of our compensationnominating and corporate governance committee will be Mr. Zucker, who will be the chairRuder. Our board of the committee,directors has determined that each of Mr. Ha, Mr. Murphy, Mr. Ruder and Ms. Decker. AllWang is independent under The Nasdaq Stock Market LLC listing standards.
The nominating and corporate governance committee’s responsibilities include, among other things:
Tableidentifying, evaluating, and selecting, or recommending that our board of Contents
directors approve, nominees for election to our board of directors and its committees;
approving the membersretention of director search firms;
evaluating the performance of our compensation committee are independent under the applicable rulesboard of directors and regulations of the SECindividual directors;
considering and the NYSE, and Section 162(m) of the Internal Revenue Code, or the Code.
Our governance and nominating committee is responsible for, among other things, making recommendations to our board of directors regarding corporate governance, the composition of our board of directors identification, evaluation and nominationits committees;
evaluating the adequacy of director candidates and the structure and composition of committees of our board of directors. In addition, our governance and nominating committee oversees our corporate governance guidelines, approves ourpractices and reporting; and
overseeing an annual evaluation of the board’s performance.
Our nominating and corporate governance committee charters, oversees compliance with our code of business conduct and ethics, contributeswill operate under a written charter, to succession planning, reviews actual and potential conflicts of interest of our directors and officers other than related person transactions reviewed by the audit committee and oversees the board self-evaluation process. Our governance and nominating committee is also responsible for making recommendations regarding non-employee director compensationbe effective prior to the full board of directors. Upon the completion of this offering, the members of our governance and nominating committee will be Mr. Cooperman, who will be the chair of the committee, Ms. Decker and Mr. Spoon. All of the members of our governance and nominating committee are independent underthat satisfies the applicable rules and regulationslisting standards of the SEC and the NYSE.The Nasdaq Stock Market LLC.
Compensation Committee Interlocks and Insider Participation
None of the members of ourthe compensation committee is currently, or has been at any time, during the past year been one of our executive officers or employees. None of our executive officers currently serves, or inhas served during the pastlast year, has served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving onas a member of our board of directors or on our compensation committee.
Code of Business Conduct and Ethics
We willIn connection with this offering, we intend to adopt a codeCode of business conduct and ethics applicableConduct that applies to all our employees, officers and directors. This includes our principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions. The full text of our Code of Conduct will be posted on our corporate website upon completion of this offering. We intend to disclose on our website any future amendments of our Code of Conduct or waivers that exempt any principal executive officer, principal financial officer, principal accounting officer or controller, persons performing similar functions or our directors from provisions in the Code of Conduct. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.
Limitations of Liability and Indemnification Matters
Our amended and restated certificate of incorporation, which will become effective immediately after the completion of this offering, and our amended and restated bylaws, which will become effective immediately prior to completion of this offering, limits our directors’ liability, and may indemnify our directors and officers to the fullest extent permitted under Delaware General Corporation Law, or the DGCL. The DGCL provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability for any:
transaction from which the director derives an improper personal benefit;
act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
unlawful payment of dividends or redemption of shares; or
breach of a director’s duty of loyalty to the corporation or its stockholders.
Such limitation of liability does not apply to liabilities arising under federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission.
Our amended and restated certificate of incorporation that will be in effect immediately prior to the completion of this offering will authorize us to indemnify our directors, officers, employees includingand other agents to the fullest extent permitted by the DGCL. Our amended and restated bylaws that will be in effect immediately prior to the completion of this offering will provide that we are required to indemnify our directors and officers to the fullest extent permitted by the DGCL and may indemnify our other employees and agents. Our amended and restated bylaws that will be in effect immediately prior to the completion of this offering will also provide that, on satisfaction of certain conditions, we will advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether we would otherwise be permitted to indemnify him or her under the provisions of the DGCL. We have entered and expect to continue to enter into agreements to indemnify our directors, executive officers and other employees as determined by our board of directors. With certain exceptions, these agreements provide for indemnification for related expenses including attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe these provisions in our amended and restated certificate of incorporation and amended and restated bylaws and these indemnification agreements are necessary
to attract and retain qualified persons as directors and those employees responsibleofficers. We also maintain customary directors’ and officers’ liability insurance.
The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against our directors for financial reporting. The codebreach of business conducttheir fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and ethics willofficers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholder’s investment may be available on our website. We expect that,adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by law, any amendments tothese indemnification provisions.
Insofar as indemnification for liabilities arising under the code,Securities Act may be permitted for directors, executive officers or any waiverspersons controlling us, we have been informed that, in the opinion of its requirements, will be disclosed on our website.the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
EXECUTIVE AND DIRECTOR COMPENSATION
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EXECUTIVE COMPENSATION
Our named executive officers for 2011,2020, which consist of our principal executive officer and the two other most highly compensated executive officers, are:
•John Suh,Dan Wernikoff, Chief Executive Officer and Director;
•Fred Krupica,Shrisha Radhakrishna, Chief Technology Officer; and
Noel Watson, Chief Financial Officer;Officer and
•Edward Hartman, Chief Strategy Officer.The following tables and narrativesnarrative address and explain the compensation provided to our named executive officers in fiscal 2011. All figures below2020.
Summary Compensation Table
| | | | | | | | | | | | | | | | | | | | | | | | |
Name and Principal Position | | Year | | | Salary
($)(1) | | | Bonus
($) | | | Stock
Awards
($)(2) | | | Option Awards
($)(3) | | | Total
($) | |
Dan Wernikoff | | | 2020 | | | | 800,000 | | | | 250,000 | (4) | | | — | | | | 3,401,916 | | | | 4,451,916 | |
Chief Executive Officer and Director | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Shrisha Radhakrishna(5) | | | 2020 | | | | 136,923 | | | | 93,000 | (4) | | | 4,000,000 | | | | — | | | | 4,222,923 | |
Chief Technology Officer | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Noel Watson(6) | | | 2020 | | | | 57,115 | | | | 300,000 | (7) | | | 5,000,000 | | | | — | | | | 5,357,115 | |
Chief Financial Officer | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Salary amounts represent actual amounts earned during 2020. See the section titled “—Narrative to the Summary Compensation Table—Annual base salary” below. |
| (2) | Amounts reported represent the aggregate grant-date fair value of awards granted to our named executive officers during 2020 under our 2016 Plan, computed in accordance with FASB ASC Topic 718 Compensation—Stock Compensation, or ASC 718, without consideration to the probability of achieving the performance condition. The assumptions used in calculating the grant-date fair value of the stock-based awards reported in this column are set forth in the notes to our consolidated financial statements included elsewhere in this prospectus. This amount does not reflect the actual economic value that may be realized by the named executive officer. The RSU awards are eligible to vest as described in the table below titled “2020 Outstanding Equity Awards at Year-End.” |
| (3) | For Mr. Wernikoff, the amount reported represents the incremental fair value attributable to the repricing of stock options during 2020, computed as of the repricing date in accordance with ASC 718. For Mr. Radhakrishna and Mr. Watson, the amounts reported represent the aggregate grant-date fair value of the stock options granted to them during 2020 under our 2016 Plan, computed in accordance with ASC 718. Such stock options are subject to performance conditions and their grant-date fair value is based on the probable outcome of the performance conditions. The maximum grant-date fair value of the performance-based stock options granted to Mr. Radhakrishna and Mr. Watson during 2020 was $1.4 million and $1.3 million, respectively, which assumes the achievement of the highest level of the performance conditions. The assumptions used in calculating the grant-date fair value of the stock options reported in this column are set forth in the notes to our consolidated financial statements included elsewhere in this prospectus. This amount does not reflect the actual economic value that may be realized by the named executive officer. |
| (4) | Bonus amounts represent actual amounts earned during 2020, but paid in 2021. See the section titled “—Narrative to the Summary Compensation Table—Annual discretionary bonus plan” below. |
| (5) | Mr. Radhakrishna commenced his employment in August 2020. |
| (6) | Mr. Watson commenced his employment in November 2020. |
| (7) | Mr. Watson received a $300,000 signing bonus in 2020 in connection with the commencement of his employment. |
Narrative to the Summary Compensation Table
Our board of directors reviews compensation annually for our July 2011 3-for-1 forward stock splitnamed executive officers. In setting executive base salaries and bonuses and granting equity incentive awards, we consider compensation for comparable positions in the market, the historical compensation levels of our executives, individual performance as compared to our expectations and objectives, our desire to motivate our employees to achieve short- and long-term results that are in the best interests of our stockholders, and a 2-for-3 reverse stock split which was effectedlong-term commitment to our company.
Our board of directors has historically determined our executive officers’ compensation and has typically reviewed and discussed management’s proposed compensation with our chief executive officer for all executives other than our chief executive officer. Based on July 31, 2012.those discussions and its discretion, our full board of directors then reviews the compensation of each executive officer. Upon the completion of this offering, the compensation committee will determine our executive officers’ compensation and follow this process, but the compensation committee itself, rather than our board of directors, will approve the compensation of each executive officer.
2011 Summary Compensation TableAnnual base salary
| | | | | | | | | | | | | | | | | | | | | | |
Name and Principal Position | | Year | | Salary
($)(1) | | Bonus
($)(2) | | Option
Awards
($)(3) | | Non-Equity
Incentive
Plan
Compensation
($)(4) | | All Other
Compensation
($)(5) | | Total
($) | |
|---|
John Suh,
Chief Executive Officer and Director | | | 2011 | | | 332,250 | | | — | | | — | | | 350,000 | | | 9,800 | | | 692,050 | |
Fred Krupica,
Chief Financial Officer | | | 2011 | | | 253,050 | | | — | | | 548,472 | | | 254,000 | | | 68,470 | | | 1,123,992 | |
Edward Hartman,
Chief Strategy Officer | | | 2011 | | | 215,100 | | | 40,000 | | | 342,795 | | | 120,000 | | | 15,651 | | | 733,546 | |
(1)The baseBase salaries for our executive officers are initially established through arm’s-length negotiations at the time of the executive officer’s hiring, taking into account such executive officer’s qualifications, experience, the scope of his or her responsibilities and competitive market compensation paid by other companies for similar positions within the industry and geography. Base salaries are reviewed annually, typically in connection with our annual performance review process, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience. In making decisions regarding salary increases, we may also draw upon the experience of members of our board of directors with executives at other companies. The 2020 base salary for each of our named executive officers were increased effective as of April 1, 2011 and areis as follows: | | | | |
Name | | Base Salary | |
Dan Wernikoff | | $ | 800,000 | |
Shrisha Radhakrishna | | $ | 400,000 | |
Noel Watson | | $ | 450,000 | |
Annual discretionary bonus plan
From time to time, our board of directors or compensation committee may approve discretionary annual bonuses for our named executive officers based on individual performance, company performance or as otherwise determined appropriate. Our board of directors awarded discretionary annual cash bonuses to Mr. Suh—$340,000;Wernikoff and Mr. Krupica—$255,000;Radhakrishna in 2020, based on the achievement of performance objectives determined by our board of directors. Mr. Hartman—$225,000.
(2)- Radhakrishna’s bonus was prorated based on his months of service in 2020. Mr.
HartmanWatson was awardednot eligible to receive a discretionary cashannual bonus award of $40,000 in fiscal 2011 (in addition2020.Equity-based incentive awards
Our equity-based incentive awards are designed to his fiscal 2011 performance-based incentive award described in footnote (4)) for his superior performance in heading the broad expansionalign our interests and those of our legal plan services in fiscal 2011.
(3)Represents the total grant date fair value, as determined under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718, Stock Compensation,stockholders with those of allour employees, directors and consultants, including our named executive officers. At December 31, 2020, stock option awards and RSU awards were the only forms of equity awards we granted to theour named executive officer during fiscal 2011. Assumptionsofficers.We have historically used to calculate these amounts are included in Note 8, "Stock Option Plans,"stock options as an incentive for long-term compensation to our consolidated financial statements included elsewhere in this prospectus. Thesenamed executive officers because they are able to profit from stock options were each granted on September 29, 2011 and each has a maximum 10-year term and a per-shareonly if our stock price increases relative to the stock option’s exercise price, of $8.205 which wasexercise price is set at the fair market value of our common stock on the date of grant. However, more recently, we have used a common share oncombination of RSU awards and performance-based options to diversify the equity compensation we use to incentivize and deliver value to our named executive officers. We may grant equity awards at such times as our board of directors determines appropriate.
Prior to this offering, all of the equity awards we have granted were made pursuant to our 2016 Stock Incentive Plan, or 2016 Plan. Equity awards are currently outstanding under only our 2016 Plan. Following this offering, we will grant date. Vestingequity incentive awards under the terms of our 2021 Equity Incentive Plan, or 2021 Plan. The terms of our 2021 Plan and our equity plans governing outstanding equity awards are described below under “—Equity Incentive Plans.”
All options are granted with an exercise price per share that is no less than the fair market value of our common stock on the date of grant of such award. In September 2020, our board of directors approved a stock option repricing in footnotes (5), (6), and (7)which the strike price of certain stock options was modified to the "—2011strike price equal to the then-current per-share fair market value. Mr. Wernikoff participated in the repricing. Our stock option awards and RSU awards generally vest over a four-year period, and may be subject to acceleration of vesting and exercisability under certain termination and change in control events. We also have granted RSU awards and stock options that vest in accordance with performance conditions. See the section titled “—2020 Outstanding Equity Awards at Fiscal Year-End" table below.
(4)The named executive officers earned the maximum cash incentive awardYear-End” below for fiscal 2011 based on the achievement of annual company performance objectives as discussed in "—Annual Performance-based Cash Bonus Opportunity" below.
(5)We provided our named executive officers with additional benefits that we believe are reasonable, competitive and consistent with LegalZoom's overall executive compensation program. The incremental costs of these benefits are shown in the table below. | | | | | | | | | | | | | |
Name | | Relocation($) | | Housing($) | | LegalZoom
401(k) Match($)(c) | | Total "Other
Compensation"($) | |
|---|
John Suh | | | — | | | — | | | 9,800 | | | 9,800 | |
Fred Krupica | | | — | | | 62,173 | (a) | | 6,297 | | | 68,470 | |
Edward Hartman | | | 10,971 | (b) | | 4,680 | (b) | | — | | | 15,651 | |
(a)Represents the incremental cost incurred in connection with Mr. Krupica's usage of LegalZoom's corporate apartment, as further described in "—Executive Employment Agreements" below.
(b)In December 2011, Mr. Hartman, as the head of research and development of LegalZoom, relocated to the San Francisco area to co-oversee LegalZoom's research and development center in San Francisco. The amounts in these columns represent a relocation and a housing allowance in connection with Mr. Hartman's establishment of residency.
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(c)Represents LegalZoom matching contributions to the named executive officers' 401(k) savings accounts.
The following table provides the annual base salaries for each of the named executive officers for fiscal 2011 based on decisions made by the compensation committee in fiscal 2011. Fiscal 2011 salaries were adjusted effective as of April 1, 2011 as set forth below.
| | | | | | | |
Name | | Fiscal 2011
Salary First
Quarter($) | | Fiscal 2011
Salary (effective
April 1, 2011)($) | |
|---|
John Suh | | | 309,000 | | | 340,000 | |
Fred Krupica | | | 247,200 | | | 255,000 | |
Edward Hartman | | | 185,400 | | | 225,000 | |
In addition to base salaries, our named executive officers were eligible to receive performance-based cash bonuses in fiscal 2011. The annual cash bonus payouts for the named executive officers in fiscal 2011 were based on the degree of attainment of LegalZoom's performance criteria.information.
For fiscal 2011, the annual performance-based cash bonus plan was based on a dollar pool determined alongside the establishment of LegalZoom's overall annual budget. Each named executive officer then had target and maximum bonus amounts established as set forth below:
| | | | | | | |
Name | | Target
Bonus($) | | Maximum
Bonus($) | |
|---|
John Suh | | | 175,000 | | | 350,000 | |
Fred Krupica | | | 127,000 | | | 254,000 | |
Edward Hartman | | | 60,000 | | | 120,000 | |
Payment of a performance-based cash bonus was based on two company performance metrics: non-GAAP Adjusted EBITDA and annual revenue growth. Non-GAAP Adjusted EBITDA is a non-GAAP financial measure. For a definition of non-GAAP Adjusted EBITDA and reconciliation to net income (loss), the most comparable U.S. GAAP item, see "Prospectus Summary—Summary Selected Financial and Other Data Non-GAAP discussion." These performance metrics were chosen based on the compensation committee's belief that attaining or exceeding targets for these metrics would increase LegalZoom's value and growth. The actual amount awarded for the fiscal 2011 cash bonus was primarily dependent on LegalZoom's achievement of a target annual revenue growth of 17.7%. However, in order for a named executive officer to receive any performance-based cash bonus, LegalZoom had to achieve a minimum non-GAAP Adjusted EBITDA of $11.4 million. If LegalZoom did not achieve the minimum non-GAAP Adjusted EBITDA of $11.4 million, regardless of its achievement of the annual revenue growth target, no cash bonus would have been paid to the named executive officers. If this non-GAAP Adjusted EBITDA minimum was achieved, then the amount of the performance bonus would be determined based on the non-GAAP Adjusted EBITDA and annual revenue growth results, with annual revenue growth receiving approximately 70% of the weighting and non-GAAP Adjusted EBITDA receiving approximately 30% of the weighting.
If LegalZoom had achieved a target annual revenue growth of 17.7% and the minimum non-GAAP Adjusted EBITDA of $11.4 million, the named executive officers would have received the target bonus amount. In all cases, the total annual cash bonus opportunity for each named executive officer for fiscal 2011 had a maximum payout of two times his target amount. If LegalZoom achieved approximately 26% or more in annual revenue growth (and met or exceeded the minimum non-GAAP Adjusted EBITDA goal of $11.4 million), the named executive officers would have received the maximum bonus payout of two times their target bonus amount. If LegalZoom achieved between 17.7% and 26% in annual revenue growth (and met or exceeded the minimum non-GAAP Adjusted EBITDA goal of $11.4 million), the
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named executive officers would have received a ratable bonus payout amount in excess of his target bonus amount but not to exceed two times his target amount (maximum payout). As a hypothetical example, if LegalZoom achieved 21.85% in annual revenue growth and a non-GAAP Adjusted EBITDA of at least $11.4 million, the bonus the named executive officers would have earned would be 150% of their target bonus.
For fiscal 2011, LegalZoom achieved an annual revenue growth of 29.2% and non-GAAP Adjusted EBITDA of $11.8 million. As a result, the compensation committee awarded each of the named executive officers the maximum amount for fiscal 2011 performance-based cash bonuses, which amounts are reported above in the Non-Equity Incentive Plan Compensation column of the 2011 Summary Compensation Table. In fiscal 2011, the compensation committee also awarded Mr. Hartman a $40,000 discretionary bonus in connection with his exceptional performance in fiscal 2011 in growing our legal plan services and almost tripling the number of subscribers in our legal plans.
Historically, the compensation committee and/or our board of directors has provided long-term equity incentive compensation to retain our named executive officers and to provide for a portion of their compensation to be at risk and linked directly with the appreciation of stockholder value. Long-term compensation has generally been provided through equity awards in the form of stock options subject to continued service and under the terms and conditions of our 2007 Stock Option Plan, which was renamed as the 2010 Stock Incentive Plan (hereafter, referred to as the "2010 Plan"), and related award agreements. Through possession of stock options, our executives participate in the long-term results of their efforts.
The 2010 Plan, or the stock option grant agreements, can provide for some or all of the unvested stock options to vest immediately when certain events occur, including a change in control. For example, in the event of a corporate change in control transaction in which the named executive officer's stock options are not substituted, assumed or converted, then the named executive officer's stock options shall fully vest and become exercisable immediately prior to the consummation of the change in control.
The board of directors granted stock option awards to each of the named executive officers, except for Mr. Suh, in fiscal 2011. Mr. Suh did not receive an equity award in fiscal 2011, as he had received a stock option award in 2010 (and the other named executive officers had not). Details on stock option grants in fiscal 2011 are provided in footnote (3) to the "—2011 Summary Compensation Table".
We have generally not offered extensive or elaboratespecial benefits to theour named executive officers, except for permitting Mr. Krupica to stay in our corporate apartment located near our corporate headquarters and providing relocation benefits to Mr. Hartman.officers. Further details on these benefits are described in footnote (5)footnotes to the "—2011 “—Summary Compensation Table".Table.” We also provide 401(k) matching contributions as discussed in the "401(k) Plan"“—Health and Welfare and Retirement Benefits—401(k) Plan” section below.
Table Our named executive officers are eligible to participate in the 401(k) plan on the same basis as our other employees, but none of Contentsour named executive officers had matching contributions in 2020.
20112020 Outstanding Equity Awards at Fiscal Year-End
The following table showsprovides information regarding the number of shares of our common stock covered by stock options and restricted stock unitsoutstanding equity awards held by theour named executive officers as of December 31, 2011.2020. All of the awards shown in the below table were granted underpursuant to the 20102016 Plan. Additionally, all ofSee the stock options in thesection titled “—Equity Incentive Plans—2016 Stock Incentive Plan” below tablefor additional information.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Option Awards | | | Stock Awards | |
Name | | Grant Date | | | Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable | | | Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable | | | Option
Exercise
Price ($)(2) | | | Option
Expiration
Date | | | Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#) | | | Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)(6) | |
Dan Wernikoff | | | 9/19/2019 | (1) | | | 906,984 | | | | 2,720,95 | 2(3) | | | 9.82 | | | | 9/19/2029 | | | | — | | | | — | |
| | | 9/19/2019 | (1) | | | — | | | | 3,627,93 | 6(4) | | | 9.82 | | | | 9/19/2029 | | | | — | | | | — | |
Shrisha Radhakrishna | | | 9/23/2020 | | | | — | | | | 763,74 | 7(4) | | | 9.82 | | | | 9/23/2030 | | | | — | | | | — | |
| | | — | | | | — | | | | — | | | | — | | | | — | | | | 407,332 | (5) | | | 4,684,318 | |
Noel Watson | | | 11/18/2020 | | | | — | | | | 763,74 | 7(4) | | | 9.82 | | | | 11/18/2030 | | | | — | | | | — | |
| | | — | | | | — | | | | — | | | | — | | | | — | | | | 509,165 | (5) | | | 5,855,398 | |
| (1) | On September 23, 2020, this option award was repriced and the strike price was modified to the strike price consummate with the then-current per-share fair market value. |
| (2) | All of the option awards were granted with a per share exercise price equal to the fair market value of one share of our common stock on the date of grant, or date of modification, as determined in good faith by our board of directors or compensation committee. |
| (3) | 25% of the total shares of common stock underlying this option vested on October 1, 2020, and then the remaining 75% will vest in equal quarterly installments over the three years following October 1, 2020, subject to continued service through each applicable vesting date. Immediately prior to, but contingent on, a “change in control”, the option will vest with respect to 50% of the then unvested shares subject to the option. In addition, if we terminate Mr. Wernikoff’s employment without “cause” or Mr. Wernikoff resigns for “good reason,” then, if Mr. Wernikoff timely executes and does not revoke a general release of claims against us and our affiliates, Mr. Wernikoff will to receive 12 months accelerated vesting of the option, except, if the termination occurs within 24 months following a “change in control,” then the option will vest in full. Prior to, and contingent upon, the completion of this offering, we expect to amend the vesting acceleration provisions that apply to this option. |
| (4) | Subject to optionee’s continuous service as of the vesting date, the total shares of common stock underlying this option vest immediately prior to, but conditioned on the closing of, a “liquidity event” (which, in the case of Mr. Radhakrishna and Mr. Watson, includes the completion of this offering) on an interpolated linear basis starting at 0% and ending at 100% of the option vesting, depending on the per share common stock valuation at the time of the “liquidity event”. For retention purposes, prior to, and contingent upon, the completion of this offering, we expect to amend the vesting schedule of this option so that the option does not vest immediately upon a liquidity event but is instead subject to a time-based vesting schedule, such that 1/48th of the total shares of common stock underlying this option will vest each month following the vesting commencement date, subject to continued service through each applicable vesting date. |
| (5) | The restricted stock units will vest only if both a service-based condition and a liquidity event condition are satisfied prior to the expiration date. The service-based condition will be satisfied as follows: 25% of the award meeting the service-based requirement on the first anniversary of the vesting commencement date, and the remainder of the award meeting the service-based requirement in 12 equal quarterly installments thereafter, subject to continuous service as of the vesting date. In the event that the named executive officer’s employment is terminated without “cause” or the named executive officer resigns for “good reason,” then 100% of the restricted stock units will be deemed to have met the service-based requirement. In the case of Mr. Watson only, in the event of a “liquidity event,” 25% of the restricted stock units will vest. The liquidity event requirement will be satisfied as of the occurrence of a liquidity event. Prior to, and contingent upon, the completion of this offering, we expect to amend the vesting acceleration provisions that apply to the restricted stock units. |
| (6) | This amount reflects the fair market value of our common stock of $11.50 per share as of December 31, 2020 as determined by our compensation committee. |
IPO Grants
Immediately prior to the effectiveness of the registration statement of which this prospectus forms a part, we expect to grant shares of our common stock issuable as RSUs and options to purchase shares of common stock with an exercise price equal to the fair market value of one of our shares of common stock on the date of grant. No stock options were exercised by the named executive officers during fiscal 2011.
| | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards | |
| |
| |
|---|
| | Stock Awards | |
|---|
| |
| |
| | Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#) | |
| |
| |
|---|
Name | | Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable | | Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable | | Option
Exercise
Price
($) | | Option
Expiration
Date | | Number of
Shares or
Units of
Stock That
Have Not
Vested
(#) | | Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($) | |
|---|
John Suh | | | 383,604 | | | — | | | — | | | 1.7900 | | | 2/9/17 | (1) | | — | | | — | |
| | | 40,000 | | | 360,000 | | | — | | | 2.1000 | | | 2/25/20 | (2) | | — | | | — | |
Fred Krupica | | |
420,000 | | |
60,000 | | |
— | | |
2.2450 | | |
6/24/18 |
(3) | | | | | | |
| | | | | | | | | | | | | | | | | | 50,000 | (4) | | 430,500 | |
| | | — | | | 160,000 | | | — | | | 8.2050 | | | 9/29/21 | (5)(7) | | — | | | — | |
Edward Hartman | | |
— | | |
100,000 | | |
— | | |
8.2050 | | |
9/29/21 |
(6)(7) | |
— | | |
— | |
(1)This option was granted on April 18, 2007 and the first vest date was February 9, 2007. This time-based option vested as follows: on the ninth day of each month following the first vest date, 1/48th of the option incrementally vested.
(2)This option was granted on February 25, 2010 and the first vest date was February 25, 2011. This time-based option vests as follows: (i) 10% of the option vested on the first vest date, (ii) 20% of the option vested on the one-year anniversary of the first vest date, (iii) 30% of the option vests on the two-year anniversary of the first vest date and (iv) 40% of the option vests on the three-year anniversary of the first vest date.
(3)This option was granted on June 24, 2008 and the first vest date was April 28, 2009. This time-based option vested as follows: (i) 25% of the option vested on the first vest date and (ii) the remaining 75% vested in equal quarterly installments on July 28, October 28, January 28 and April 28 over the three years following the first vest date.
(4)This stock units award was granted on April 20, 2010. These units shall become fully vested upon the earliest to occur of: (i) the closing of an initial public offering of shares pursuant to an effective registration statement with the SEC on the first business day that the shares have a closing trading price of $7.50 or more per share on a fully-diluted, as-converted basis; or (ii) the consummation of a change in control in which the net consideration to the then holders of shares is equal to or greater than $7.50 or more per share on a fully-diluted, as-converted basis and the change in control also constitutes a change in ownership or effective control of a corporation or change in the ownership of a substantial portion of the assets of a corporation within the meaning of Code section 409A; or (iii) April 20, 2015. In addition, the units shall become fully vested upon the termination date of Mr. Krupica's employment if his employment is terminated by LegalZoom without cause (as defined in the 2010 Plan).
(5)This option was granted on September 29, 2011 and the first vest date is April 28, 2013.
(6)This option was granted on September 29, 2011 and the first vest date is July 31, 2012.
(7)These time-based options vest as follows: (i) 25% of the option vests on the first vest date and (ii) the remaining 75% shall vest in equal annual installments over the three years following the first vest date.
Executive Employment Agreements
We previously entered into employment agreements with each of the named executive officers which were effective during fiscal 2011. Below are descriptions of these agreements, which have been superseded by new employment agreements.
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Mr. Suh's offer letter, dated February 15, 2007 and amended on April 20, 2010, provided that he would serve as LegalZoom's Chief Executive Officer. It also provided that Mr. Suh would originally receive an initial annual base salary of $200,000, an annual performance-based bonus equal to approximately $200,000 and a stock option award. The agreement further provided that Mr. Suh was eligible to participate in employee benefit plans in accordance with LegalZoom's policies. This included medical programs, three weeks of paid vacation per year and reimbursement for all costs of his professional licensing and any professional organizations. Under the agreement, if LegalZoom terminated Mr. Suh's employment without "cause" then, conditioned on his providing a release of any employment related claims against LegalZoom, Mr. Suh would have been entitled to receive 12 months of continued salary and health insurance coverage. Further, if Mr. Suh resigned for "good reason" then, conditioned on his providing a release of any employment related claims against LegalZoom, Mr. Suh would have been entitled to receive 12 months of continued salary and health insurance coverage, any bonus earned and/or accrued through the date of termination and 12 months accelerated vesting of his unvested stock options. Upon an involuntary termination of Mr. Suh's employment within 12 months after a change in control of LegalZoom, he would have received a cash severance payment equal to one year of base salary and his then-outstanding unvested stock options, restricted stock, stock appreciation rights and stock units would become fully vested immediately before his termination of employment. Additionally, upon the completion of a qualified initial public offering, such as the consummation of this offering, Mr. Suh would have received a one year acceleration of vesting for his then unvested stock options and a $100,000 cash bonus. The agreement further provided that LegalZoom would indemnify Mr. Suh for any liability incurred within the scope of his employment and that LegalZoom would maintain directors and officers liability insurance.
The agreement defined "cause" as Mr. Suh's (i) willful, intentional or grossly negligent failure to perform his duties under the agreement, (ii) admission or final convictionEach of a misdemeanor materially adversely affecting LegalZoom or of any felony, (iii) commission of an act of fraud against, or material misappropriation of property belonging to, LegalZoom, or (iv) material breach of any provision of the agreement that is not remedied within 30 days of his receipt of written notice from LegalZoom. The agreement defined "good reason" as (1) a breach by LegalZoom of its obligations under the agreement, (2) a significant reduction of Mr. Suh's duties, title or authority, or (3) any requirement or suggestion that Mr. Suh violated his professional ethics. The agreement defined "change in control" as any of the following events:
•any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act, other than a trustee or other fiduciary holding securities of LegalZoom under an employee benefit plan of LegalZoom, becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of LegalZoom representing 50% or more of (A) the outstanding shares of LegalZoom's common stock or (B) the combined voting power of LegalZoom's then-outstanding securities;
•LegalZoom is party to a merger or consolidation, or series of related transactions, which results in the voting securities of LegalZoom outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of LegalZoom or such surviving entity outstanding immediately after such merger or consolidation;
•the sale or disposition of all or substantially all of LegalZoom's assets (or consummation of any transaction, or series of related transactions, having similar effect);
•the dissolution or liquidation of LegalZoom; or
•any transaction or series of related transactions that has the substantial effect of any one or more of the foregoing.
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Mr. Krupica's offer letter, dated March 19, 2008 and amended on April 20, 2010, was effective upon the commencement of his employment in April 2008 and provided that he would serve in an at-will capacity as LegalZoom's Chief Financial Officer. It provided that Mr. Krupica would originally receive an initial annual base salary of $230,000, an annual performance-based bonus of up to $120,000 and a stock option award. The agreement also provided that Mr. Krupica was eligible to participate in employee benefit plans in accordance with LegalZoom's policies including medical and dental plans and that he would accrue 20 vacation days per year. Under the agreement, Mr. Krupica was permitted to stay in LegalZoom's corporate apartment which is near LegalZoom's headquarters. If LegalZoom had terminated Mr. Krupica's employment without "good reason" or if Mr. Krupica had experienced a "constructive termination" then, conditioned on his providing a release of any claims against LegalZoom, Mr. Krupica would have been entitled to receive six months of continued salary and health insurance coverage along with six months accelerated vesting of his unvested stock options. Upon an involuntary termination of Mr. Krupica's employment within the six months before or 12 months after a change in control of LegalZoom, his cash severance would have equaled one year of salary and his then outstanding unvested stock options, restricted stock, stock appreciation rights and stock units would have become fully vested immediately before his termination of employment. The agreement further provided that LegalZoom would indemnify Mr. Krupica for any liability incurred within the scope of his employment and that LegalZoom would maintain directors and officers liability insurance. The agreement also imposed various restrictions on Mr. Krupica, for the benefit of LegalZoom, including maintaining the confidentiality of LegalZoom information.
Mr. Krupica's agreement defined "good reason" as Mr. Krupica's (i) commission of a crime involving dishonesty, breach of trust, or physical harm to any person, (ii) willful engagement in conduct that is in bad faith and materially injurious to LegalZoom, or (iii) willful refusal to implement or follow a lawful policy or directive of LegalZoom. The agreement defined "constructive termination" as (1) a material reduction in responsibility, (2) a material reduction in annual cash compensation except for reductions that are comparably applied to similarly situated executives, or (3) a relocation to a new work location that is more than 50 miles away from Mr. Krupica's current place of employment. Mr. Krupica's agreement provided for the same definition of "change in control" as described above for Mr. Suh.
Mr. Hartman's "Executive Employment, Confidential Information and Assignment of Inventions Agreement," dated March 25, 2004 and amended on April 20, 2010, was made effective as of the commencement of his employment in February 2001 and provided that he would serve in an at-will capacity as LegalZoom's Chief Strategy Officer. It provided that Mr. Hartman would originally receive an initial annual base salary of $130,000. The agreement also provided that Mr. Hartman was eligible to receive stock option grants, in the discretion of LegalZoom, and that he was eligible to participate in employee benefit plans in accordance with LegalZoom's policies, including paid time off and medical and dental plans. The agreement further provided that upon an "involuntary termination" of Mr. Hartman's employment within 12 months of a change in control of LegalZoom, his then-outstanding unvested stock options, restricted stock, stock units and stock appreciation rights would have become fully vested immediately before his termination of employment. The agreement also imposed various restrictions on Mr. Hartman for the benefit of LegalZoom, including maintaining the confidentiality of LegalZoom information and a 12 month post-employment non-solicitation of LegalZoom executives.
Mr. Hartman's agreement provided for the same definition of "change in control" as described above for Mr. Suh. Mr. Hartman's agreement defined "cause" generally to mean any of the following acts committed by Mr. Hartman and where such acts have not been cured or corrected:
•willful failure to follow the lawful written directions of our board of directors;
•engaging in gross misconduct which is materially detrimental to LegalZoom;
•willful and repeated failure or refusal to comply in any material respect to the agreement, LegalZoom's insider trading policy, or any other reasonable policies of LegalZoom where non-compliance would be materially detrimental to LegalZoom; or
•commission of an unlawful or criminal act (serious in nature) which would reflect adversely on LegalZoom.
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Mr. Hartman's agreement defined "involuntary termination" as a termination of his employment due to any of the following:
•actual termination of employment by LegalZoom other than for "cause";
•his resignation due to the material diminution of position or responsibility;
•his resignation due to any reduction in salary, bonus and other compensation; or
•his resignation due to a company requirement that Mr. Hartman relocate to a new job location of 50 miles or more from his then-current office location.
In May 2012, the compensation committee unanimously approved new employment agreements and compensation arrangements with the named executive officers, which replace and supersede the predecessor employment agreements described above, effective May 9, 2012. The new compensation arrangements also include the potential future grant of stock option awards, on or around the date of this offering, to our named executive officers (see footnotes 4has executed our standard form of confidential information and 5employee invention assignment agreement.
Agreement with Dan Wernikoff
Prior to the table below). These stock options will generally have a per share exercise price equal to 115% of the price at which shares will be offered to be sold to the public in this offering and will vest as follows: 1/4 of the option vests on the first anniversary of the date of grant and the remaining 3/4 of the option will vest in equal quarterly installments over the following three years. Additionally, Mr. Suh will be granted a second stock option of 166,666 shares with a per share exercise price equal to 125% of the price at which shares will be offered to be sold to the public in this offering, and will vest as follows: 1/2 of the shares will vest annually on the third and fourth anniversaries of the date of grant.
In determining the compensation for fiscal 2012 for the named executive officers, the compensation committee reviewed a compensation report prepared by its independent compensation consultant, Frederic W. Cook & Co., Inc., or FWCook & Co. The findings of the FWCook & Co. report were one factor that the compensation committee considered, but it was not the predominant basis for the compensation committee's compensation decisions for our named executive officers. The compensation committee wanted to provide further equity retention and incentive compensation for the named executive officers.
In accordance with the foregoing, on May 8, 2012, we entered into a new employment agreement with each of the named executive officers. These new agreements, which supersede and replace the prior employment agreements, each provide that the named executive officer will continue to serve in his same role(s). The following table highlights certain items contained in the new employment agreements for the named executive officers.
| | | | | | | | | | | | | | | | | | | | | |
| | Initial Term
of
Employment
Agreements(1) | | Base
Salary
Effective as of
an IPO(2) | | Annual
Target
Bonus(3) | | Stock Options:
FY12 IPO
Grant
(Shares) | | Severance
Payments
Upon
"Qualifying
Termination" | | Severance
Payments
Upon
"Qualifying
Termination"
Within
LegalZoom
"Change in
Control"
Period | | Other | |
|---|
John Suh | | 2 years | | $ | 425,000 | | | 100 | % | | 433,332 | (4) | | (6) | | | (8) | | | (9)(10) | |
Fred Krupica | | 2 years | | $ | 310,000 | | | 50 | % | | 80,000 | (5) | | (7) | | | (8) | | | (9)(10) | |
Eddie Hartman | | 2 years | | $ | 235,000 | | | 40 | % | | 53,333 | (5) | | (7) | | | (8) | | | (9) | |
(1)On May 8, 2013, and on each subsequent May 8th through and including May 8, 2017, the term of the employment agreement is automatically extended by one additional year unless either party has
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previously provided written notice to not so extend the term, except that the agreement shall in all cases expire no later than (and cannot be extended beyond) May 8, 2019.
(2)On the effective date of this offering, the annual base salaries of the named executive officers will be increased to the figures reflected in this column. The current base salaries for each of the named executive officers which were unchanged and which are reflected in the employment agreements are: Mr. Suh: $340,000; Mr. Krupica: $255,000; Mr. Hartman: $225,000.
(3)Each named executive officer will be eligible for an annual incentive bonus based on attainment of performance objectives that are prescribed and established by the compensation committee. LegalZoom intends to administer this bonus under our 2012 Management Incentive Plan. Further details on the 2012 Management Incentive Plan can be found in "—Incentive Compensation Plans—2012 Management Incentive Plan". The employment agreements further provide for an annual target bonus amount as a percentage of his annual base salary with such target percentage reflected in this column. The actual bonus paid may be more or less than the target amount. The named executive officer must remain employed with LegalZoom through the date of each of the bonus payment(s) in order to earn any performance bonus and receive such payment(s).
(4)Mr. Suh's agreement provides that two nonstatutory stock options to purchase a total of 433,332 shares will be granted to Mr. Suh on or around the effective date of this offering. 266,666 shares will be subject to the first option and will have a per share exercise price equal to 115% of the price at which shares will be offered to be sold to the public in this offering. 166,666 shares will be subject to the second option and will have a per share exercise price equal to 125% of the price at which shares will be offered to be sold to the public in this offering. The stock options will be on other terms and conditions (including vesting) set forth in the stock option agreements evidencing the grants.
(5)The agreements provide that a nonstatutory stock option (to purchase the number of shares shown in this column) will be granted to each named executive officer on or around the effective date of this offering. Each stock option will have a per share exercise price equal to 115% of the price at which shares will be offered to be sold to the public in this offering. The stock options will be on other terms and conditions (including vesting) set forth in the stock option agreements evidencing the grants.
(6)Mr. Suh's agreement provides that if his employment is terminated by us without "cause" or by Mr. Suh for "good reason," as defined in the agreement, each a "Qualifying Termination", then Mr. Suh will receive: (a) cash payments in an aggregate amount equal to 100% of his annual base salary in effect on his termination date paid in monthly installments over a 12 month period after the termination, with the first installment paid on the 60th day after the named executive officer's termination date; (b) LegalZoom will continue to pay the cost (to the same extent it was doing so immediately prior to the termination) for COBRA health insurance benefits for up to 12 months, and (c) the vesting of any of his unvested equity-based compensation awards (excluding any portion of any performance-based vesting awards which are/were forfeited due to failure to achieve the requisite performance objectives) will accelerate as if his service terminated 12 months later. Payment of the severance benefits will be conditioned upon Mr. Suh providing a release of claims against us, our affiliates and related parties.
(7)The agreements provide that if there is a Qualifying Termination, then the named executive officer will receive: (a) cash payments in an aggregate amount equal to 50% of the named executive officer's annual base salary in effect on his termination date paid in monthly installments over a six month period after the termination, with the first installment paid on the 60th day after the named executive officer's termination date; and (b) LegalZoom will continue to pay the cost (to the same extent it was doing so immediately prior to the termination) for COBRA health insurance benefits for up to six months. Mr. Krupica will also receive an acceleration of the vesting of his unvested equity-based compensation awards (excluding any portion of any performance-based vesting awards which are/were forfeited due to failure to achieve the requisite performance objectives) as if his service terminated six
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months later. Payment of the severance benefits will be conditioned upon the named executive officer providing a release of claims against us, our affiliates and related parties.
(8)The employment agreements provide that if there is a Qualifying Termination during the time period that commences on the consummation of a change in control and extends through the date that is 24 months after a "change in control," as defined in the agreement, then the named executive officer will receive: (a) a lump-sum cash payment in an amount equal to a percentage of the named executive officer's annual base salary; (b) LegalZoom will continue to pay the cost (to the same extent it was doing so immediately prior to the termination) for COBRA health insurance benefits for up to nine months; and (c) any unvested equity-based compensation awards (excluding any portion of any performance-based vesting awards which are/were forfeited due to failure to achieve the requisite performance objectives) will fully vest. The cash severance shall be fully paid to the named executive officer in a single lump sum payment on the 60th day after his termination date. The amount in clause (a) above shall be equal to 100% of his then annual base salary for Mr. Krupica and equal to 75% of his then annual base salary for Mr. Hartman. For Mr. Suh, the amount in clause (a) above shall be equal to 150% of Mr. Suh's then annual base salary and the number of months in clause (b) shall be up to 18 months. Payment of the severance benefits will be conditioned upon the named executive officer providing a release of claims against us, our affiliates and related parties.
(9)In the event the named executive officer has received payments that are subject to golden parachute excise taxes, then such payments will be reduced to an amount which would result in no portion of the payments being subject to golden parachute excise taxes. Additionally, all compensation provided pursuant to the agreement is explicitly subject to our policy on recoupment of compensation, which policy is described above in "—Fiscal 2012 Compensation Decisions—Policy on Recoupment of Compensation", as adopted and/or modified from time to time and/or applicable law. Moreover, the agreement provides that the named executive officer is subject to, among other things, nondisparagement and nonsolicitation restrictions. Further, the agreements provide that the named executive officer is eligible to accrue up to 20 days of paid vacation per calendar year in accordance with LegalZoom's vacation policy.
(10)Under the new agreement, Mr. Suh will continue to be eligible to receive a one year acceleration of vesting for his then unvested equity-based compensation awards (and which were also outstanding as of the effective date of his new agreement) and a $100,000 cash bonus to be paid within 30 days of the completion of a public offering, such as this one, as provided in his prior agreement. Under the new agreement, Mr. Krupica will continue to be permitted to stay in LegalZoom's corporate apartment which is located near LegalZoom's headquarters, as provided in his prior agreement.
Incentive Compensation Plans
Our board of directors originally adopted the LegalZoom.com, Inc. 2007 Stock Option Plan on February 1, 2007 and such plan was approved by our stockholders in February 2007. On April 20, 2010, our board of directors amended and restated the 2007 Plan and renamed it the LegalZoom.com, Inc. 2010 Stock Incentive Plan, or the 2010 Plan. Effective with this offering, we will no longer make new grants under the 2010 Plan and will instead issue equity compensation awards under our new 2012 Equity Incentive Plan discussed below. The 2010 Plan shall terminate upon the completion of this offering, provided howeverwe may enter into an amended and restated employment agreement with Dan Wernikoff, our Chief Executive Officer. The amended and restated employment agreement will have no specific term and will provide that all awards currently outstanding under the 2010 Plan will continue to remain outstanding pursuantMr. Wernikoff is an at-will employee. Mr. Wernikoff’s current annual base salary is $800,000.
Agreement with Shrisha Radhakrishna
Prior to the terms of the 2010 Plan and applicable award agreements.
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The 2010 Plan is administered by the compensation committee which has the authority, among other things, to:
•determine eligibility to receive awards;
•determine the types and number of shares of stock subject to awards;
•determine the terms and conditions of awards;
•delegate administrative duties; and
•construe and interpret the terms of the plan, award agreements, and other related documents.
The 2010 Plan provides that we may grant awards to our employees, non-employee directors, consultants, agents, advisors, or independent contractors and those of our affiliates. We may, on a discretionary basis, award these individuals with either stock options, stock appreciation rights, restricted stock, and/or stock units.
Stock options may be granted under the 2010 Plan, including incentive stock options, as defined under Section 422 of the Code, and nonqualified stock options. A stock option gives the participant the right to buy a specified number of shares of our common stock for a fixed price during a fixed period of time. While we may grant incentive stock options only to employees, we may grant nonqualified stock options to any eligible participant. The option exercise price of all stock options granted under the 2010 Plan is determined by the compensation committee, except that every stock option will have a per share exercise price that is not less than 100% of the fair market value of a share on the date of grant. Stock options may be exercised as determined by the compensation committee, but in no event after the tenth anniversary of the date of grant. In addition, stock units may also be awarded under the 2010 Plan. A stock unit is a bookkeeping entry that represents the equivalent of a share of our common stock. A stock unit is similar to a restricted stock award except that participants holding stock units do not have any stockholder rights until the stock unit is settled with shares and certificates representing such shares have been issued by us to the holder. Stock units represent an unfunded and unsecured obligation for us and a holder of a stock unit has no rights other than those of a general creditor. Unvested equity awards are generally subject to forfeiture upon termination of a participant's employment. None of our named executive officers currently have any outstanding stock appreciation rights or restricted stock grants.
In the event that a change in control occurs and there is no assumption or continuation of awards, all awards shall vest and become exercisable as of immediately before such change in control. Under the 2010 Plan, a "change in control" is defined as:
•any consolidation or merger of LegalZoom with or into any other corporation or other entity or person in which the stockholders of LegalZoom prior to such consolidation or merger own, directly or indirectly, less than 50% of the continuing or surviving entity's voting power immediately after such consolidation or merger, excluding any consolidation or merger effected exclusively to change the domicile of LegalZoom; or
•a sale or other disposition of all or substantially all of the stock or assets of LegalZoom.
A total of 6,694,692 shares of common stock can be issued under the 2010 Plan. 616,331 shares remained available for issuance under the 2010 Plan as of December 31, 2011. 217,799 shares remained available for issuance under the 2010 Plan as of June 30, 2012 and there were 4,337,270 shares subject to outstanding awards on such date.
In April 2012, our board of directors unanimously approved a form of the 2012 Equity Incentive Plan, or the 2012 Plan, subject to later allocating a specific number of shares to the plan and obtaining stockholder approval of the plan. In July 2012, our board of directors determined the number of shares to
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be subject to the 2012 Plan and unanimously adopted the 2012 Plan. Our stockholders approved the 2012 Plan in July 2012. Effective upon the closingcompletion of this offering, the 2012 Planwe may enter into an amended and restated employment agreement with Shrisha Radhakrishna, our Chief Technology Officer. The amended and restated employment agreement will replacehave no specific term and supersede the 2010 Plan with respect to providing discretionary equity compensation or certain performance-based cash awards to our key employees, directorswill provide that Mr. Radhakrishna is an at-will employee. Mr. Radhakrishna’s current annual base salary is $400,000, and other service providers. Unless terminated earlier, the 2012 Plan will terminate in July 2022.
The 2012 Plan will be administered by the compensation committee or to a committee to whom our board of directors has delegated its authority, which has the authority, among other things, to:
•determine the fair market value;
•determine eligibility to receive awards;
•issue and administer awards granted under the 2012 Plan;
•approve forms of agreement for use under the 2012 Plan;
•determine the types and number of shares of stock subject to awards;
•determine the price and terms of awards and the acceleration or waiver of any vesting;
•determine performance goals or forfeiture restrictions and other terms and conditions;
•determine whether to offer to buy out a previously granted award and the terms and conditions of such and to re-price outstanding options or stock appreciation rights on terms and conditions that it determines;
•amend the 2012 Plan and any award granted thereunder; and
•construe and interpret the terms of the plan, award agreements and other related documents.
Any of our employees, directors and consultants, as determined by the committee, may be selected to participate in the 2012 Plan. We may award these individuals with one or more of the following types of awards and all awards will be evidenced by an executed written agreement between us and the grantee:
•stock options;
•stock appreciation rights;
•stock awards;
•stock units; or
•other equity or cash awards.
Stock options may be granted under the 2012 Plan, including incentive stock options, as defined under Section 422 of the Code, and nonstatutory stock options. A stock option gives the participant the right to buy a specified number of shares of our common stockMr. Radhakrishna is eligible for a fixed price during a fixed perioddiscretionary target annual bonus opportunity equal to 50% of time. The exercise price of all stock options granted under the 2012 Plan will be determined by the committee except that all stock options must have an exercise price that is not less than 100% of the fair market value of the underlying sharesannual base salary, based on the dateachievement of grant. Stock options may be exercised as determined by the committee, but in no event after the tenth anniversary of the date of grant.
Stock appreciation rights entitle a participant to receive a payment equal in value to the difference between the fair market value of a share of stock on the date of exercise of the stock appreciation right over the exercise price of the stock appreciation rights. We may pay that amount in cash, in shares of our common stock, or in a combination of both. The exercise price of all stock appreciation rights granted under the 2012 Plan will be determined by the committee, except that all stock appreciation rights must have an exercise price that is not less than 100% of the fair market value of the underlying shares on the
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date of grant. The committee may, in its discretion, subsequently reduce the exercise price of, or modify, a stock appreciation right.
A stock award is the grant of shares of our common stock at a price determined by the committee (including zero), and which may be subject to a substantial risk of forfeiture until specific conditions or goals are met. During the period of vesting, participants holding shares of restricted stock generally will have full voting and dividend rights with respect to such shares.
A stock unit is a bookkeeping entry that represents the equivalent of a share of our common stock. A stock unit is similar to a restricted stock award except that participants holding stock units do not have any stockholder rights until the stock unit is settled with shares and certificates representing such shares have been issued by us to the holder. Stock units represent an unfunded and unsecured obligation for us and a holder of a stock unit has no rights other than those of a general creditor.
The 2012 Plan also provides that other equity awards, which derive their value from the value of our shares or from increases in the value of our shares, may be granted. In addition, cash awards, which are intended to qualify as performance-based compensation under Code section 162(m), may be issued to certain executives. And, substitute awards may be issued under the 2012 Plan in assumption of or substitution for or exchange for awards previously granted by an entity which we (or an affiliate) acquire.
Subject to certain adjustments in the event of a change in capitalization or similar transaction, we may issue a maximum of 2,700,000 shares of our common stock under the 2012 Plan. Subject to certain adjustments in the event of a change in capitalization or similar transaction, the maximum aggregate number of shares that may be issued in connection with any type of award, including incentive stock options, under the 2012 Plan is 2,700,000 shares. Additionally, the maximum number of shares available for issuance under the 2012 Plan and that may be issued in connection with any type of award, including incentive stock options, under the 2012 Plan will automatically increase, without the need for further approval by our stockholders, on January 1, 2013 and on each subsequent January 1 through and including January 1, 2022, by a number of shares equal to the lesser of (i) 5% of the number of shares issued and outstanding on the immediately preceding December 31 or (ii) 2,700,000 shares or (iii) an amountperformance objectives determined by our board of directors. Shares subject to awards that expire or are canceled will again become available for issuance under the 2012 Plan.directors (or its compensation committee).
To the extent that an award is intended to qualify as performance-based compensation under Code section 162(m), then the maximum number of shares of common stock issuable in the form of each type of award under the 2012 Plan to any one participant during a fiscal year shall not exceed 2,000,000 shares, in each caseAgreement with such limit increased to 4,000,000 shares for grants occurring in a participant's year of hire or during the first fiscal year that a participant becomes a covered employee whose compensation is subjectNoel Watson
Prior to the tax deduction limitscompletion of Code section 162(m). Additionally,this offering, we may enter into an amended and restated employment agreement with Noel Watson, our Chief Financial Officer. The amended and restated employment agreement will have no participant shall receive in excess of $4.0 million with respectspecific term and will provide that Mr. Watson is an at-will employee. Mr. Watson’s current annual base salary is $450,000, and Mr. Watson is eligible for a discretionary target annual bonus opportunity equal to a cash award in any fiscal year or the aggregate amount of 2,000,000 shares pursuant to all awards issued under the 2012 Plan during any fiscal year, with such aggregate limit increased to 4,500,000 shares for awards occurring in a participant's fiscal year of hire or during the first fiscal year that a participant becomes a covered employee whose compensation is subject to the tax deduction limits of Code section 162(m).
The 2012 Plan provides that in the event there is a change in control and the applicable agreement of merger or reorganization provides for assumption or continuation of the awards, no acceleration of vesting shall occur. In the event that a change in control occurs and there is no assumption or continuation of awards, all awards shall vest and become exercisable as of immediately before such change in control.
Under the 2012 Plan, a "change in control" is defined as:
•any consolidation or merger of LegalZoom with or into any other corporation or other entity or person in which the stockholders of LegalZoom prior to such consolidation or merger own, directly or indirectly, less than 50% of annual base salary, based on the continuing or surviving entity's voting power
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The 2012 Plan provides our non-employee directors with the ability to receive restricted stock grants or stock units under the 2012 Plan in lieu of their annual cash retainer which is provided to them under our annual non-employee director compensation program, as described further in "—Compensation of Directors."
Under the 2012 Plan, we may cause the cancellation of any award, request reimbursement of any awardperformance objectives determined by a participant and effect any other right of recoupment of equity or other compensation provided under the 2012 Plan in accordance with our policies and/or applicable law. In addition, a participant in the 2012 Plan may be required to repay us certain previously paid compensation, whether provided under the 2012 Plan or an award agreement under the 2012 Plan, in accordance with any recoupment policy of LegalZoom.
Our board of directors may terminate, amend or modify the 2012 Plan at any time; however, stockholder approval will be obtained for any amendment to the extent necessary to comply with any applicable law, regulation or stock exchange rule.
In April 2012, our board of directors unanimously approved a 2012 performance-based bonus(or its compensation plan, subject to later determining an annual maximum bonus limit for participants under the plan,committee).
Potential Payments and Benefits upon Termination or Change in whichControl
We expect our named executive officers will be eligible to participate.receive potential termination or change of control payments pursuant to the amended and restated employment agreements that we expect to enter into with our named executive officers prior to the completion of this offering. In July 2012,addition, our board of directors unanimously approved an annual maximum bonus limit of $4.0 million. This bonus plan is named the 2012 Management Incentive Plan, or the 2012 MIP. The 2012 MIP is intended to be exempt from the compensation deduction limitations imposed by Code section 162(m) until the first meeting of our stockholders, in which our board of directors membersexecutive officers are elected, after the end of calendar year 2015. Our board of directors may amend or terminate the 2012 MIP at any time provided that any such amendment or termination will not adversely affect any outstanding bonus opportunity without the participant's written consent.
The compensation committee will administer the 2012 MIP. Guidelines, procedures and mechanics of the plan's administration may be promulgated by resolutions of the committee. Under the 2012 MIP, the compensation committee, in its discretion, shall:
•select the participants who will be eligible to earn a bonus under this plan;
•determine the bonus amounts and targets; and
•establish any performance goalsfor vesting acceleration benefits with respect to a bonus along with any associated performance period(s);certain of their equity awards as described in “—2020 Outstanding Equity Awards at Year-End.”
Health and prescribe all other termsWelfare and conditionsRetirement Benefits
All of a participant's bonus opportunity.
Any employee who is an officer of ours within the meaning of Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended, will beour current named executive officers are eligible to be selected to participate in our employee benefit plans, including our medical, dental and vision insurance plans, in each case on the 2012 MIP.same basis as all of our other employees. We generally do not provide perquisites or personal benefits to our named executive officers, except in limited circumstances.
Bonus amounts that have been earned will be paid in cash to a participant on any date designated by the compensation committee that occurs during the 21/2 month period immediately following the end of the performance period in which the applicable bonus amount was earned or upon an earlier change in control if such earlier-in-time payment would not cause the imposition of taxes under Code section 409A. No single participant may receive bonus payments under the 2012 MIP that in the aggregate exceed $4.0 million in any fiscal year.
On and after the date, if any, that compensation paid under the 2012 MIP is subject to the compensation deduction limits imposed by Code section 162(m), then any bonuses that are intended to qualify as performance-based compensation under Code section 162(m) shall be administered by the compensation committee to comply with the applicable requirements of Code section 162(m).
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Under the 2012 MIP, we may cause the cancellation of any bonus, request reimbursement of any bonus by a participant and effect any other right of recoupment of equity or other compensation provided under the 2012 MIP in accordance with our policies and/or applicable law. In addition, a participant in the 2012 MIP may be required to repay us certain previously paid compensation, in accordance with any recoupment policy of LegalZoom.
The 401(k) retirement savings plan isOur named executive officers are eligible to participate in a defined contribution retirement plan established in accordancethat provides eligible U.S. employees with Code section 401(a). Employeesan opportunity to save for retirement on a tax advantaged basis. Eligible employees may elect to defer between 1% and 100%up to 80% of their eligible compensation into the plan on a pre-tax basis, up to annual limits prescribed by the Internal Revenue ServiceCode, and we make an employer matching contribution to the plan in the amount of upequal to 50%100% of the first 8%4% of eligible compensation that eligible employees defer each year. In general, eligible compensation for purposes of the 401(k) retirement savings plan includes an employee'semployee’s wages, salaries, fees for professional services and other amounts received for personal services actually rendered in the course of employment with us to the extent the amounts are includible in gross income, and subject to certain adjustments and exclusions required under the Code.
In April 2012,, our board of directors unanimouslyadopted, and our stockholders approved, a Policyour 2021 Equity Incentive Plan, or 2021 Plan. We expect our 2021 Plan will become effective on Recoupmentthe date of Compensation,the underwriting agreement related to this offering. Our 2021 Plan came into existence upon its adoption by our board of directors, but no grants will be made under our 2021 Plan prior to its effectiveness. Once our 2021 Plan becomes effective, no further grants will be made under our 2016 Plan.
Awards. Our 2021 Plan provides for the grant of incentive stock options, or Recoupment Policy, primarilyISOs, within the meaning of Section 422 of the Code, to deter our currentemployees and former senior executivesour parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options, or NSOs, stock appreciation rights, restricted stock awards, RSU awards, performance awards and other key employees from taking actions that could potentially harm us and to deter any financial or accounting irregularities with respectforms of awards to our financial statements. We incorporated the Recoupment Policy into the 2012 Plan, the 2012 MIPemployees, directors and the new employment agreements. These plansconsultants and agreements provide that if we amend the Recoupment Policy from time to time, in our discretion, including to comply with applicable laws or stock exchange requirements or guidance, such amended policy will be incorporated into award agreements issued under these plans and/or the employment agreements, as applicable.
Pursuant to our Recoupment Policy, certain members of management, including all of the named executive officers (whether or not their employment has terminated), may be directed to return to us performance-based compensation that the executive had previously received if either:
(i)there is a restatement of any of our financial statements previously filedaffiliates’ employees and consultants.Authorized shares. Initially, the maximum number of shares of our common stock that may be issued under our 2021 Plan after it becomes effective will not exceed shares of our common stock, which is the sum of (i) new shares, plus (ii) an additional number of shares not to exceed shares, consisting of (a) shares that remain available for the issuance of awards under our 2016 Plan as of immediately prior to the time our 2021 Plan becomes effective and (b) any shares of our common stock subject to outstanding stock options or other stock awards granted under our 2016 Plan that, on or after our 2021 Plan becomes effective, terminate or expire prior to exercise or settlement; are not issued because the award is settled in cash; are forfeited because of the failure to vest; or are reacquired or withheld (or not issued) to satisfy a tax withholding obligation or the purchase or exercise price. In addition, the number of shares of our common stock reserved for issuance under our 2021 Plan will automatically increase on January 1 of each year for a period of ten years, beginning on January 1, 2022 and continuing through January 1, 2031, in an amount equal to (1) % of the total number of shares of our common stock outstanding on December 31 of the immediately preceding year, or (2) a lesser number of shares determined by our board of directors no later than December 31 of the immediately preceding year. The maximum number of shares of our common stock that may be issued on the exercise of ISOs under our 2021 Plan is shares.
Shares subject to stock awards granted under our 2021 Plan that expire or terminate without being exercised in full or that are paid out in cash rather than in shares will not reduce the number of shares available for issuance
under our 2021 Plan. Shares withheld under a stock award to satisfy the exercise, strike or purchase price of a stock award or to satisfy a tax withholding obligation will not reduce the number of shares available for issuance under our 2021 Plan. If any shares of our common stock issued pursuant to a stock award are forfeited back to or repurchased or reacquired by us (i) because of a failure to meet a contingency or condition required for the vesting of such shares; (ii) to satisfy the exercise, strike or purchase price of a stock award; or (iii) to satisfy a tax withholding obligation in connection with a stock award, the shares that are forfeited or repurchased or reacquired will revert to and again become available for issuance under our 2021 Plan.
Plan administration. Our board of directors, or a duly authorized committee of our board of directors, administers our 2021 Plan. Our board of directors may delegate to one or more of our officers the authority to (i) designate employees (other than officers) to receive specified stock awards; and (ii) determine the number of shares subject to such stock awards. Under our 2021 Plan, our board of directors has the authority to determine stock award recipients, the types of stock awards to be granted, grant dates, the number of shares subject to each stock award, the fair market value of our common stock, and the provisions of each stock award, including the period of exercisability and the vesting schedule applicable to a stock award.
Under our 2021 Plan, our board of directors also generally has the authority to effect, with the SEC (regardlessconsent of whetherany materially adversely affected participant, (i) the reduction of the exercise, purchase, or not there wasstrike price of any misconduct committed by an executive), other than those due to changes in accounting policy,outstanding option or stock appreciation right; (ii) the cancellation of any outstanding option or stock appreciation right and the restated financial results would have resultedgrant in substitution therefore of other awards, cash, or other consideration; or (iii) any other action that is treated as a lesser amount of performance-based compensation being paid torepricing under generally accepted accounting principles.
Stock options. ISOs and NSOs are granted under stock option agreements adopted by the named executive officer, or
(ii)administrator. The administrator determines the named executive officer's intentional misconduct, gross negligence or failure to report intentional misconduct or gross negligence by oneexercise price for stock options, within the terms and conditions of our employees (or2021 Plan, except the exercise price of a stock option generally will not be less than 100% of the fair market value of our common stock on the date of grant. Options granted under our 2021 Plan will vest at the rate specified in the stock option agreement as determined by the administrator.The administrator determines the term of stock options granted under our 2021 Plan, up to a maximum of 10 years. Unless the terms of an optionholder’s stock option agreement, or other written agreement between us and the optionholder, provide otherwise, if an optionholder’s service providers) either: (A) was a contributing factorrelationship with us or partial factor to having to restate any of our financial statements previously filedaffiliates ceases for any reason other than disability, death, or cause, the optionholder may generally exercise any vested options for a period of three months following the cessation of service. This period may be extended in the event that exercise of the option is prohibited by applicable securities laws. If an optionholder’s service relationship with the SEC or (B) constituted fraud, briberyus or any other unlawful act (or contributedof our affiliates ceases due to another person's fraud, briberydeath, or other unlawful act) which in each case adversely impactedan optionholder dies within a certain period following cessation of service, the optionholder or a beneficiary may generally exercise any vested options for a period of 18 months following the date of death. If an optionholder’s service relationship with us or any of our finances, business and/or reputation.
affiliates ceases due to disability, the optionholder may generally exercise any vested options for a period of 12 months following the cessation of service. In the event of a restatementtermination for cause, options generally terminate upon the termination date. In no event may an option be exercised beyond the expiration of its term.
Acceptable consideration for the purchase of common stock issued upon the exercise of a stock option will be determined by the administrator and may include: (i) cash, check, bank draft or money order; (ii) a broker-assisted cashless exercise; (iii) the tender of shares of our financial statements,common stock previously owned by the compensation committeeoptionholder; (iv) a net exercise of the option if it is an NSO; or (v) other legal consideration approved by the administrator.
Unless the administrator provides otherwise, options or stock appreciation rights generally are not transferable except by will review performance-based compensation awarded or paidthe laws of descent and distribution. Subject to approval of the administrator or a duly authorized officer, an option may be transferred pursuant to a domestic relations order, official marital settlement agreement, or other divorce or separation instrument.
Tax limitations on ISOs. The aggregate fair market value, determined at the time of grant, of our common stock with respect to ISOs that are exercisable for the first time by an award holder during any calendar year
under all of our stock plans may not exceed $100,000. Options or portions thereof that exceed such limit will generally be treated as NSOs. No ISO may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power or that of any of our parent or subsidiary corporations unless (i) the option exercise price is at least 110% of the fair market value of the stock subject to the named executive officers that was attributable to performance duringoption on the applicable time periods. Todate of grant; and (ii) the extent permitted by applicable law,term of the compensation committee will make a determination as to whether, and how much, compensation will be recouped on an individual basis. If there has been no misconduct (as described in clause (ii) above), any recoupment of compensation will be limited to a three-year look-back periodISO does not exceed five years from the date we discoveredof grant.
Restricted stock unit awards. Restricted stock unit awards are granted under restricted stock unit award agreements adopted by the financial or accounting irregularity.
Tableadministrator. Restricted stock unit awards may be granted in consideration for any form of Contents
Moreover, if the compensation committee determineslegal consideration that one of the named executive officers has engaged in misconduct, the compensation committee may take actions with respectbe acceptable to such executive as it deems to be in our best interests and necessary to remedy the misconduct and prevent its recurrence. To the extent permitted by applicable law, such actions can include, among other things, recoupment of compensation (which would not be limited to the three-year look-back period) and/or disciplinary actions, including termination of employment. The compensation committee's power to determine the appropriate remedy is in addition to, and not in replacement of, remedies imposed by law enforcement agencies, regulators or other authorities.
The compensation provided to our non-employee directors in fiscal 2011 is enumerated in the table below. Directors who are also one of our employees, such as Mr. Suh or Mr. Liu, do not and will not receive any compensation for their services as a director. In the case of Mr. Suh, who is a named executive officer of LegalZoom for fiscal 2011, his compensation for fiscal 2011 is reported in the 2011 Summary Compensation Table above. Mr. Liu intends to resign his employment with us immediately upon the completion of this offering and will remain as a member of our board of directors and commence receiving compensationpermissible under applicable law. A restricted stock unit award may be settled by cash, delivery of stock, a combination of cash and stock as deemed appropriate by the administrator, or in any other form of consideration set forth in the restricted stock unit award agreement. Additionally, dividend equivalents may be credited in respect of shares covered by a non-employee director.
2011 Director Compensation
| | | | | | | |
Name | | Fees Earned or
Paid in Cash
($) | | Total
($) | |
|---|
Susan Decker | | | 20,000 | | | 20,000 | |
Kamran Pourzanjani(1) | | | 20,000 | | | 20,000 | |
Alan Spoon(2) | | | — | | | — | |
Jason Trevisan(2) | | | — | | | — | |
(1)Mr. Pourzanjani resigned from our board of directors effectiverestricted stock unit award. Except as of February 9, 2012.
(2)Messrs. Spoon and Trevisan did not receive compensation for their services as a director during fiscal 2011otherwise provided in the applicable award agreement, or prior fiscal years.
Directors have been and will continue to be reimbursed for travel, food, lodging and other expenses directly related to their activities as directors. Directors are also entitled to the protection provided by their indemnification agreementswritten agreement between us and the indemnification provisionsrecipient, restricted stock unit awards that have not vested will be forfeited once the participant’s continuous service ends for any reason.
Restricted stock awards. Restricted stock awards are granted under restricted stock award agreements adopted by the administrator. A restricted stock award may be awarded in our current certificateconsideration for cash, check, bank draft or money order, past or future services to us, or any other form of incorporation and bylaws, as well as the certificate of incorporation and bylawslegal consideration that will become effective immediately upon the completion of this offering. Two of our directors, Ms. Decker and Mr. Pourzanjani, were partiesmay be acceptable to offer letter agreements with LegalZoom which were effective in fiscal 2011 as discussed below.
Susan Decker and LegalZoom entered into an agreement, dated October 14, 2010, that provided that she would receive (i) $20,000 for each 12 month period of service on our board of directors and (ii)permissible under applicable law. The administrator determines the terms and conditions of restricted stock awards, including vesting and forfeiture terms. If a participant’s service relationship with us ends for any reason, we may receive any or all of the shares of common stock held by the participant that have not vested as of the date the participant terminates service with us through a forfeiture condition or a repurchase right.
Stock appreciation rights. Stock appreciation rights are granted under stock appreciation right agreements adopted by the administrator. The administrator determines the purchase price or strike price for a stock option grant, issued under the 2010 Plan, to purchase up to 100,000 common shares with a $2.10 per share exercise price (which wasappreciation right, which generally will not be less than 100% of the fair market value of aour common sharestock on the grant date). Subject to her continued service, thisdate of grant. A stock option vested as to 33,333 shares on October 14, 2011 andappreciation right granted under our 2021 Plan will vest at the remaining 66,667 shares vest pro-rata over the ensuing 24 months with any unvested portion ofrate specified in the stock option vestingappreciation right agreement as determined by the administrator. Stock appreciation rights may be settled in full upon a change in control of LegalZoom.
Kamran Pourzanjani and LegalZoom entered into an agreement, dated February 9, 2007, that provided that he would receive (i) $2,500 for each regularcash or special board of directors meeting, (ii) $5,000 annually for representation on any board of directors committee and (iii) a stock option grant, issued under the 2010 Plan, to purchase up to 200,000 shares of our common stock with a $1.789950 per share exercise price (which was the fair market valueor in any other form of a common share on the grant date). Subject to his continued service, this stock option vested in monthly pro-rata increments over a four year period and was
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fully vested in February 2011. This stock option was fully vested and exercisable at the end of fiscal 2011 and Mr. Pourzanjani timely exercised the remaining outstanding shares subject to this stock option following his resignation in fiscal 2012. In November 2010, (i) Mr. Pourzanjani's agreement with LegalZoom was amended to provide that he would receive quarterly payments of $5,000 in exchange for his services onpayment as determined by our board of directors and (ii) Mr. Pourzanjani was awarded an additionalspecified in the stock option grant, issuedappreciation right agreement.
The administrator determines the term of stock appreciation rights granted under the 2010our 2021 Plan, to purchase up to 40,000a maximum of 10 years. If a participant’s service relationship with us or any of our affiliates ceases for any reason other than cause, disability, or death, the participant may generally exercise any vested stock appreciation right for a period of three months following the cessation of service. This period may be further extended in the event that exercise of the stock appreciation right following such a termination of service is prohibited by applicable securities laws. If a participant’s service relationship with us, or any of our affiliates, ceases due to disability or death, or a participant dies within a certain period following cessation of service, the participant or a beneficiary may generally exercise any vested stock appreciation right for a period of 12 months in the event of disability and 18 months in the event of death. In the event of a termination for cause, stock appreciation rights generally terminate upon the termination date. In no event may a stock appreciation right be exercised beyond the expiration of its term.
Performance awards. Our 2021 Plan permits the grant of performance awards that may be settled in stock, cash or other property. Performance awards may be structured so that the stock or cash will be issued or paid only following the achievement of certain pre-established performance goals during a designated performance period. Performance awards that are settled in cash or other property are not required to be valued in whole or in part by reference to, or otherwise based on, our common stock.
The performance goals may be based on any measure of performance selected by our board of directors. The performance goals may be based on company-wide performance or performance of one or more business units, divisions, affiliates, or business segments, and may be either absolute or relative to the performance of one or more comparable companies or the performance of one or more relevant indices. Unless specified otherwise by our board of directors at the time the performance award is granted, our board will appropriately make adjustments in the method of calculating the attainment of performance goals as follows: (i) to exclude restructuring or other nonrecurring charges; (ii) to exclude exchange rate effects; (iii) to exclude the effects of changes to generally accepted accounting principles; (iv) to exclude the effects of any statutory adjustments to corporate tax rates; (v) to exclude the effects of items that are “unusual” in nature or occur “infrequently” as determined under generally accepted accounting principles; (vi) to exclude the dilutive effects of acquisitions or joint ventures; (vii) to assume that any business divested by us achieved performance objectives at targeted levels during the balance of a performance period following such divestiture; (viii) to exclude the effect of any change in the outstanding shares of our common stock by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common stockholders other than regular cash dividends; (ix) to exclude the effects of stock based compensation and the award of bonuses under our bonus plans; (x) to exclude costs incurred in connection with potential acquisitions or divestitures that are required to be expensed under generally accepted accounting principles; and (xi) to exclude the goodwill and intangible asset impairment charges that are required to be recorded under generally accepted accounting principles.
Other stock awards. The administrator may grant other awards based in whole or in part by reference to our common stock. The administrator will set the number of shares under the stock award (or cash equivalent) and all other terms and conditions of such awards.
Non-employee director compensation limit. The aggregate value of all compensation granted or paid to any non-employee director with respect to any calendar year, including awards granted and cash fees paid by us to such non-employee director, will not exceed $ in total value, except such amount will increase to $ for the first year for newly appointed or elected non-employee directors.
Changes to capital structure. In the event there is a $2.10specified type of change in our capital structure, such as a stock split, reverse stock split, or recapitalization, appropriate adjustments will be made to (i) the class and maximum number of shares reserved for issuance under our 2021 Plan, (ii) the class and maximum number of shares by which the share reserve may increase automatically each year, (iii) the class and maximum number of shares that may be issued on the exercise of ISOs, and (iv) the class and number of shares and exercise price, strike price, or purchase price, if applicable, of all outstanding stock awards.
Corporate transactions. In the event of a corporate transaction (as defined in the 2021 Plan), unless otherwise provided in a participant’s stock award agreement or other written agreement with us or one of our affiliates or unless otherwise expressly provided by the administrator at the time of grant, any stock awards outstanding under our 2021 Plan may be assumed, continued or substituted for by any surviving or acquiring corporation (or its parent company), and any reacquisition or repurchase rights held by us with respect to the stock award may be assigned to the successor (or its parent company). If the surviving or acquiring corporation (or its parent company) does not assume, continue or substitute for such stock awards, then (i) with respect to any such stock awards that are held by participants whose continuous service has not terminated prior to the effective time of the corporate transaction, or current participants, the vesting (and exercisability, if applicable) of such stock awards will be accelerated in full (or, in the case of performance awards with multiple vesting levels depending on the level of performance, vesting will accelerate at 100% of the target level) to a date prior to the effective time of the corporate transaction (contingent upon the effectiveness of the corporate transaction), and such stock awards will terminate if not exercised (if applicable) at or prior to the effective time of the corporate transaction, and any reacquisition or repurchase rights held by us with respect to such stock awards will lapse (contingent upon the effectiveness of the corporate transaction); and (ii) any such stock awards that are held by
persons other than current participants will terminate if not exercised (if applicable) prior to the effective time of the corporate transaction, except that any reacquisition or repurchase rights held by us with respect to such stock awards will not terminate and may continue to be exercised notwithstanding the corporate transaction.
In the event a stock award will terminate if not exercised prior to the effective time of a corporate transaction, the administrator may provide, in its sole discretion, that the holder of such stock award may not exercise such stock award but instead will receive a payment equal in value to the excess (if any) of (i) the value of the property the participant would have received upon the exercise of the stock award, over (ii) any per share exercise price. Mr. Pourzanjani fully exercised thisprice payable by such holder, if applicable. In addition, any escrow, holdback, earn out or similar provisions in the definitive agreement for the corporate transaction may apply to such payment to the same extent and in the same manner as such provisions apply to the holders of our common stock.
Change in control. Stock awards granted under our 2021 Plan may be subject to acceleration of vesting and exercisability upon or after a change in control (as defined in the 2021 Plan) as may be provided in the applicable stock optionaward agreement or in 2010any other written agreement between us or any affiliate and the acquired shares were subjectparticipant, but in the absence of such provision, no such acceleration will automatically occur.
Plan amendment or termination. Our board of directors has the authority to repurchase by LegalZoomamend, suspend, or terminate our 2021 Plan at a $0.001 per share price upon terminationany time, provided that such action does not materially impair the existing rights of Mr. Pourzanjani's service. This repurchase right lapsed in monthly pro-rata increments until it had fully lapsed on February 9, 2012.
We did not grant any equity awards toparticipant without such participant’s written consent. Certain material amendments also require the approval of our non-employee directors during fiscal 2011. Asstockholders. No ISOs may be granted after the tenth anniversary of December 31, 2011, our non-employee directors who served onthe date our board of directors in fiscal 2011, held the following number ofadopted our 2021 Plan. No stock options and restricted shares and no other equity compensation awards:
| | | | | | | | | | |
Name | | Restricted
Shares | | Vested
Stock Options
(shares) | | Unvested
Stock Options
(shares) | |
|---|
Susan Decker | | | — | | | 38,884 | | | 61,116 | |
Kamran Pourzanjani | | | 6,666 | | | 8,338 | | | — | |
Alan Spoon | | | — | | | — | | | — | |
Jason Trevisan | | | — | | | — | | | — | |
2012 Director Compensationawards may be granted under our 2021 Plan while it is suspended or after it is terminated.
2021 Employee Stock Purchase Plan
In February 2012, in preparation for this offering, the compensation committee retained FWCook & Co. to provide compensation analysis and information for the committee and, our board of directors adopted, and our stockholders approved, our 2021 Employee Stock Purchase Plan, or ESPP. Our ESPP will become effective immediately prior to and contingent upon the date of the underwriting agreement related to this offering. The purpose of our ESPP is to secure the services of new employees, to retain the services of existing employees, and to provide incentives for such individuals to exert maximum efforts toward our success and that of our affiliates. Our ESPP includes two components. One component is designed to allow eligible U.S. employees to purchase our common stock in a manner that may qualify for favorable tax treatment under Section 423 of the Code. The other component permits the grant of purchase rights that do not qualify for such favorable tax treatment in order to allow deviations necessary to permit participation by eligible employees who are foreign nationals or employed outside of the U.S. while complying with respectapplicable foreign laws.
Share reserve. Our ESPP authorizes the issuance of shares of our common stock under purchase rights granted to future compensationour employees or to employees of any of our designated affiliates. The number of shares of our common stock reserved for issuance will automatically increase on January 1 of each year for a period of ten years, beginning on January 1, 2022 and continuing through January 1, 2031, by the non-employee memberslesser of (i) % of the total number of shares of our common stock outstanding on December 31 of the immediately preceding year; and (ii) shares, except before the date of any such increase, our board of directors as we approached an initial public offering. FWCook & Co. providedmay determine that such increase will be less than the compensation committeeamount set forth in clauses (i) and (ii).
Administration. Our board of directors withadministers our ESPP and may delegate its authority to administer our ESPP to our compensation committee. Our ESPP is implemented through a written report that summarized its findings. In April 2012, the boardseries of directors, utilizing the data from the non-employee director compensation report provided by FWCook & Co., unanimously adopted a compensation program for fiscal 2012 for non-employee directors in connection with this offering. This fiscal 2012 non-employee director compensation program supersedes and replaces the previous compensation agreement between LegalZoom and Ms. Decker.
The following table presents our non-employee director compensation program that will generally become effective upon consummation of this offering:
| | | | | | | | | | |
Elements: | | Cash
Retainer/Fees ($) | | Stock Unit
Award ($) | | Option Award
(shares) | |
|---|
Annual retainer | | | 25,000 | | | 55,000 | | | 10,000 | |
Newly-elected director one-time inducement equity grant | | | — | | | 18,000 | | | 3,333 | |
Audit committee chair | | | 15,000 | | | — | | | — | |
Compensation committee chair | | | 7,500 | | | — | | | — | |
Nominating and governance committee chair | | | 5,000 | | | — | | | — | |
Attendance at board and committee meetings: | | | 1,000 per meeting | | | — | | | — | |
Continuing non-employee directorsofferings under which eligible employees are provided an annual stock unit award and nonstatutory stock option award in additiongranted purchase rights to a cash retainer to encourage directors to have a direct and material cash investment inpurchase shares of our common stock. It is expected that westock on specified dates during such offerings. Under our ESPP, our board of directors may specify offerings with durations of not more than 27 months and to specify shorter purchase periods within each offering. Each offering will generally issue the annual stock unit and stock option awards athave one or around the datemore purchase dates on which shares of our annual stockholders meeting. The number ofcommon stock units under each stock unit award will be purchased for employees participating in the offering. Our ESPP provides that an offering may be terminated under certain circumstances.
Payroll deductions. Generally, all regular employees, including executive officers, employed by us or by any of our designated affiliates, may participate in our ESPP and contribute, normally through payroll deductions, up to 15% of their earnings (as defined in our ESPP) for the purchase of our common stock under our ESPP. Unless otherwise determined usingby our board of directors, common stock will be purchased for the closingaccounts of employees participating in our ESPP at a price per share that is not less than the lesser of (i) 85% of the fair market value of a share of our common stock on the datefirst day of the annual stockholders meeting. The annual stock unit award will become 100% vested, and the shares underlying such stock unit awards will be distributed, become salable and create
Tablean offering; or (ii) 85% of Contents
taxable income, on the first anniversary of the grant date. The annual stock option award will typically have a per share exercise price equal to the fair market value of a share of our common stock on the date of grant and willpurchase.
Limitations. Employees may have a ten-year term. The annual stock option award will vest at the rate of 1/12th per month on the first day of eachto satisfy one or more of the 12 months following the month of the grant date, subject to continued service. In addition, the vesting of a director's stock unit and stock option awards will fully accelerate upon the occurrence of a changeservice requirements before participating in control of LegalZoom. In the event of a director's separation fromour ESPP, as determined by our board of directors, hisdirectors: (i) being customarily employed for more than 20 hours per week; (ii) being customarily employed for more than five months per calendar year; or her outstanding(iii) continuous employment with us or one of our affiliates for a period of time (not to exceed two years). No employee may purchase shares under our ESPP at a rate in excess of $25,000 worth of our common stock options will remain exercisable for the lesser of three years or the remaining term of such stock option award(s). The annual stock unit and stock option awards will be pro-rated (based on months remaining until the next annual grant) for service if a director joins mid-year, which is measured from annual stockholder meeting to annual stockholder meeting.
Continuing non-employee directors are also provided an annual cash retainer (including an additional annual cash retainer if he or she is a chair of a committee as specified in the table above) that will be paid in arrears in equal installments on a quarterly basis. Thefair market value per meeting attendance fee (specified in the table above) will also be paid in arrears on a quarterly basis. Each director may defer payment of all or a portion of his or her annual cash retainer, into a stock unit account, which units would be vested as of the date of grant. The election must be made in writing prior to the start of the new calendar year for subsequent elections or within 30 days of joining our board of directors for new directors. Such election may also need to be made earlier as necessary to comply with Code section 409A. The number of stock units to be credited to each director's account will be granted under the 2012 Plan, or other company equity compensation plan as determined by the board of directors, and is determined based on dividing the dollar amount of the deferred compensation by the closing price of a share of our common stock onat the applicable retainer payment date. The shares underlying these stock unitsbeginning of an offering) for each calendar year such a purchase right is outstanding. Finally, no employee will be distributed ateligible for the soonergrant of any purchase rights under our ESPP if immediately after such rights are granted, such employee has voting power over 5% or more of our outstanding capital stock measured by vote or value under Section 424(d) of the Code.
Changes to occurcapital structure. Our ESPP provides that in the event there occurs a change in our capital structure through such actions as a stock split, merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend, liquidating dividend, combination of five years from the dateshares, exchange of grantshares, change in corporate structure, or separation from thesimilar transaction, our board of directors unlesswill make appropriate adjustments to: (i) the director made an electionclass(es) and maximum number of shares reserved under our ESPP; (ii) the class(es) and maximum number of shares by which the share reserve may increase automatically each year; (iii) the class(es) and number of shares subject to, holdand purchase price applicable to, outstanding offerings and purchase rights; and (iv) the stock units for longer than five years.class(es) and number of shares that are subject to purchase limits under ongoing offerings.
In addition to the annual stock unit and stock option awards and cash retainer referencedCorporate transactions. Our ESPP provides that in the above table,event of a newly elected non-employee director will also receive a special one-time stock unit award valued at $18,000 and a special one-time stock option awardcorporate transaction (as defined in the ESPP), any then-outstanding rights to purchase upour common stock under our ESPP may be assumed, continued, or substituted for by any surviving or acquiring entity (or its parent company). If the surviving or acquiring entity (or its parent company) elects not to 3,333assume, continue, or substitute for such purchase rights, then the participants’ accumulated payroll contributions will be used to purchase shares of our common stock in connection with hiswithin 10 business days before such corporate transaction, and such purchase rights will terminate immediately after such purchase.
Plan amendment or her commencement of service on ourtermination. Our board of directors. The one-time stock unit awarddirectors has the authority to amend or terminate our ESPP, except in certain circumstances such amendment or termination may not materially impair any outstanding purchase rights without the holder’s consent. We will have similar termsobtain stockholder approval of any amendment to those of the annual stock unit award except that it will vest in two equal annual installments on the first and second anniversaries of the grant date, subject to continued service. The one-time stock option award will have similar terms to those of the annual stock option award except that it will vest at the rate of 1/24th per month on the first day of each of the 24 months following the month of the grant date, subject to continued service. In addition, the vesting of a newly elected director's one-time stock unit and stock option awards will fully accelerate upon the occurrence of a change in control of LegalZoom.our ESPP as required by applicable law or listing requirements.
Ms. Decker became eligible to earn an annual cash retainer under this director compensation program effective April 1, 2012. However, Messrs. Spoon and Trevisan, who are each partners with our principal investor, Polaris Venture Partners, shall not receive any annual cash retainer before the effective date of this offering and shall only commence being eligible for such annual cash retainer after this offering if they are still then providing services on our2016 Stock Incentive Plan
Our board of directors. Each ofdirectors originally adopted the non-employee directors who are servingLegalZoom.com, Inc. 2007 Stock Option Plan, or 2007 Plan, on February 1, 2007 and such plan was approved by our stockholders in February 2007. On April 20, 2010, our board of directors asamended and restated the 2007 Plan and renamed it the LegalZoom.com, Inc. 2010 Stock Incentive Plan, or 2010 Plan. On August 17, 2016, our board of directors amended and restated the effective date2010 Plan and renamed it the LegalZoom.com, Inc. 2016 Stock Incentive Plan, or 2016 Plan. Our 2016 Plan permits the grant of this offering shallISOs, NSOs, stock awards, RSUs, and stock appreciation rights. ISOs may be granted ononly to our employees and to any of our parent or around the effective date of this offering, a pro-rated annual stock unit award and stock option award with the same vesting schedule as described above. This pro-rated annual stock unit award shall be in a value equal to the product of $55,000 multiplied by the quotient of (x) the number of months during the period of time commencing from the effective date of this offering until the 2013 annual stockholder meeting, divided by (y) 12. The stock options tosubsidiary corporation’s employees. All other awards may be granted to Messrs. Cooperman, McBrideemployees, directors and Zucker will have a per share exercise price equalconsultants of ours and to the price at which sharesany of our parent or subsidiary corporation’s employees or consultants. Our 2016 Plan will be offered to be sold to the public in this offering. Stock options to be granted (in connection with this offering) to new directors who join the board of directors after the commencement of this offering will have a per share exercise price equal to the closing
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trading price of one of our shares on the date of grant of such stock options. This pro-rated stock option award shall be in a number of shares equal to the product of 10,000 multiplied by the quotient of (x) the number of months during the period of time commencing from the effective date of this offering until the 2013 annual stockholder meeting, divided by (y) 12. Any new non-employee director who joins our board of directorsterminated prior to the completion of this offering, and thereafter we will have hisnot grant any
additional awards under our 2016 Plan. However, our 2016 Plan will continue to govern the terms and conditions of the outstanding awards previously granted thereunder.
Share reserve. At March 31, 2021, options to purchase 14,952,784 shares of our common stock with a weighted-average exercise price of $8.93 per share and RSUs covering 3,308,780 shares of our common stock were outstanding under our 2016 Plan, and 4,899,218 shares of our common stock remained available for future awards under our 2016 Plan.
Administration. Our board of directors or her pro-rated annual stock unit award and stock option award augmenteda committee delegated by the number of months he or she served on our board of directors administers our 2016 Plan. Subject to the terms of our 2016 Plan, the administrator has the power to, among other things, determine who will be granted awards, to determine the terms and conditions of each award (including the number of shares subject to the award, the exercise price of the award, if any, and when the award will vest and, as applicable, become exercisable), to lower or reduce the exercise price of outstanding options, to accelerate the time(s) at which an award may vest or be exercised, and to construe and interpret the terms of our 2016 Plan and awards granted thereunder.
Option and restricted stock unit terms. Options and restricted stock units granted under our 2016 Plan are subject to terms and conditions generally similar to those described above with respect to options and restricted stock units that may be granted under our 2021 Plan, except vested options will generally remain exercisable following a participant ceasing to be a service provider other than for cause for 30 days (or 12 months in the case of death or disability) following such termination.
Capital structure changes. In the event of certain changes in our capital structure, such as a stock split or recapitalization, equitable and proportionate adjustments will be made to (i) the number and kind of shares with respect to which awards may be granted under our 2016 Plan, (ii) the number and kind of shares and price per share, if applicable, of all outstanding awards, and (iii) the number and kind of outstanding securities issued under our 2016 Plan. In addition, in the event of certain changes in our capital structure, the administrator will take certain other actions described in the 2016 Plan to the extent it determines such action is appropriate to prevent dilution or enlargement of the benefits or potential benefits intended by us to be made available under the 2016 Plan or with respect to any award granted under the 2016 Plan or to facilitate the applicable transaction or event.
Acquisition. Our 2016 Plan provides that in the event of an acquisition (as defined in the 2016 Plan), any surviving/acquiring corporation or entity (or affiliate thereof) may assume or substitute similar stock awards for awards outstanding under our 2016 Plan. If awards are not assumed or substituted then (i) awards held by participants in our 2016 Plan whose status as an employee, director, or consultant of ours has not terminated prior to such event will become fully vested and, as applicable, exercisable and all restrictions on such awards will lapse, and such awards will terminate if not exercised, as applicable, immediately prior to the completionclosing of this offering. If a new non-employee director joinsthe acquisition, and (ii) any other awards outstanding under our 2016 Plan will terminate if not exercised immediately prior to the closing of the acquisition.
Plan amendment or termination. Our board of directors may amend, alter, suspend or terminate our 2016 Plan at any time, subject to stockholder approval where such approval is required by applicable law. No amendment to our 2016 Plan may impair the rights of any award holder unless mutually agreed otherwise between the award holder and us. As discussed above, we will terminate our 2016 Plan prior to the completion of this offering then Ms. Decker's pro-rated annual stock unit award and stock option awardno new awards will be similarly augmented bygranted thereunder following such termination.
Non-Employee Director Compensation
We have not historically had a formal compensation policy with respect to service on our board of directors. However, we paid fees to certain of our non-employee directors for their service on our board of directors during 2020, as set forth in the number of months commencing from the time that such new table below, and we have reimbursed our non-employee director first became a member directors for direct expenses
incurred in connection with attending meetings of our board of directors throughor its committees, and occasionally granted stock options. We expect that our board of directors will adopt a director compensation policy for non-employee directors to be effective following the effective datecompletion of this offering.
Additionally, in order to promote long-term alignment of directors and stockholder interests, a non-employee2020 director is required to hold five times his or her annual cash retainer (excluding any cash retainercompensation table
The following table sets forth information regarding the compensation earned for service on a committee orour board of directors by our non-employee directors during 2020. Mr. Wernikoff also served on our board of directors, but did not receive any additional compensation for his service as a committee chairdirector and therefore is not included in the table below. Mr. Murphy joined our board of directors in June 2021 and therefore is not included in the table below. The compensation for Mr. Wernikoff as an executive officer is set forth above under “—Summary Compensation Table.”
| | | | | | | | |
Name(1) | | Fees Earned or
Paid in Cash
($) | | | Total
($) | |
Jeffrey Stibel | | | 75,000 | | | | 75,000 | |
Dipanjan “DJ” Deb | | | — | | | | — | |
Khai Ha | | | — | | | | — | |
Dipan Patel | | | — | | | | — | |
Brian Ruder | | | — | | | | — | |
Rob Singer(2) | | | 75,000 | | | | 75,000 | |
Christine Wang | | | — | | | | — | |
David Yuan | | | — | | | | — | |
| (1) | The following table provides information regarding the number of shares of common stock underlying stock options granted to our non-employee directors that were outstanding as of December 31, 2020. |
| | | | |
Name | | Option Awards
Outstanding at
Year-End
(#) | |
Jeffrey Stibel | | | 75,696 | (a) |
Dipanjan “DJ” Deb | | | — | |
Khai Ha | | | — | |
Dipan Patel | | | — | |
Brian Ruder | | | — | |
Rob Singer | | | 116,000 | |
Christine Wang | | | — | |
David Yuan | | | — | |
| (a) | Includes an option to purchase 13,584 shares of common stock held by Bryant-Stibel Fund I, LLC. |
| (2) | Mr. Singer resigned from our board of directors on June 1, 2021. |
Rule 10b5-1 Sales Plans
Our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or other service-related fees). Each non-employeesell our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director will be expectedor officer when entering into the plan, without further direction from them. The director or officer may amend a Rule 10b5-1 plan in some circumstances and may terminate a plan at any time. Our directors and executive officers may also buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material nonpublic information subject to attain or exceedcompliance with the stock ownership guideline amount within five yearsterms of the later ofour insider trading policy. Prior to 180 days after the date of this offering, subject to early release or termination, the datesale of any shares under such director's election to our board of directors, and to remain atplan would be prohibited by the lock-up agreement that the director or aboveofficer has entered into with the guideline.underwriters.
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CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
Other than compensation arrangements, we describe belowThe following includes a summary of transactions since January 1, 2018 and series of similarany currently proposed transactions, during our last three fiscal years, to which we were a party or willare to be a party,participant, in which:
•- which (1) the
amountsamount involved exceeded or will exceed $120,000;$120,000, and
•- (2) any of our directors, executive officers or holders of more than 5% of our
commoncapital stock, or any affiliate or member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest.
Compensationinterest, other than compensation and other arrangements for our directors and named executive officersthat are described elsewhere in this prospectus.under the section titled “Executive and Director Compensation.”
Relationships with Robert Shapiro
Robert L. Shapiro, a co-founder and stockholder of LegalZoom, is a partner in Glaser, Weil, Fink, Jacobs, Howard & Shapiro, LLP,We believe the terms obtained or Glaser Weil. For legal services rendered by Glaser Weil for the years ended December 31, 2009, 2010 and 2011,consideration that we incurred approximately $12,000, $315,000 and $195,000 in expenses, respectively.
On May 31, 2005, LegalZoom authorized Mr. Shapiro to exercise a fully vested warrant for 4,000,000 shares of common stock (after giving effect to a 3-for-1 forward stock split effected in July 2011 and a 2-for-3 reverse stock split effected on July 31, 2012) for $50,000 through the issuance of a non-recourse promissory note. The warrant was initially issued on November 1, 2000 for public relations and consultancy services. The promissory note bore an annual interest rate of 5% and was due on May 31, 2010. On May 31, 2010, the principal and interest outstanding on the note totaling approximately $62,000 was applied in full in exchange for services rendered by Mr. Shapiro during the year ended December 31, 2010.
We expensed consultancy fees of $188,000, $250,000 and $125,000 for the years ended December 31, 2009, 2010 and 2011, respectively, to Mr. Shapiro. Fees paid to Mr. Shapiro for the year ended December 31, 2010 includes the $62,000 of services rendered in exchange for the repayment of the non-recourse note previously issuedor received, as applicable, in connection with the exercise of warrants for common stock on May 31, 2005transactions described above.below were comparable to terms available or the amounts that we would pay or receive, as applicable, in arm’s-length transactions.
Loans to Executive Officers
Castling GroupRelationships with Bryant Stibel Growth, LLC issuedand Jeffrey Stibel
Jeffrey Stibel, a full recourse promissory note to us for $310,470 on February 1, 2010 to Castling Group LLC, or Castling. John Suh, our Chief Executive Officer and member of our board of directors and a stockholder, is a partner of Bryant Stibel Growth, LLC, or BSG. In October 2017, we (1) issued to BSG and its affiliates 15,400,000 shares of common stock in consideration for services rendered by BSG, subject to certain forfeiture events as set forth in restricted stock award agreements, and (2) entered into the managing memberServices Agreement, pursuant to which BSG agreed to provide certain one-time consulting and other services to our board of Castling.directors and executive officers in exchange for a cash fee of $13.8 million, which we paid in March 2018. In November 2017, we amended the Services Agreement with BSG, which terminated on December 31, 2018. The note bore interest atcash fee was expensed over the rate per annumservice period in 2018. Additionally, in connection with this transaction, we entered into a side letter with BSG providing for secondary piggyback registration rights following this offering.
Secondary Sale Transactions
In August 2018, pursuant to two separate Common Stock Purchase Agreements, certain existing stockholders of 4% compounded annually and superseded an original note issued by Castling to us for $255,000, dated as of February 1, 2005, which was initially issued by Castling to us as part of the total purchase price of 680,000LegalZoom sold shares of our common stock (after giving effect to new investors, which series of transactions we refer to as the Secondary Sale. We agreed to waive certain transfer restrictions in connection with the Secondary Sale. The shares of common stock were sold by our stockholders to the new investors at a 3-for-1 forward stock split effected in July 2011 and a 2-for-3 reverse stock split effected on July 31, 2012) pursuant to our 2000 Stock Option Plan. The balanceprice of $321,954, including principal and total accrued interest of $66,954 was repaid in full by Castling on December 31, 2010.
Frank Monestere, our President and Chief Operating Officer, issued three full recourse promissory notes to us$10.48 per share for $5,174, $36,526 and $91,315, on February 1, 2010. The notes each bore interest at the rate per annum of 4% compounded annually and superseded three original note issued by Mr. Monestere to us for $4,250, $30,000 and $75,000, dated as of February 1, 2005, which were issued by Mr. Monestere to us as part of the totalan aggregate purchase price of 85,000, 600,000 and 200,000approximately $500 million.
The table below sets forth the number of shares of our common stock (after giving
Tablesold by holders of Contentsmore than 5% of our capital stock in the Secondary Sale and the approximate proceeds each stockholder received for the sale of such shares.
effect
| | | | | | | | |
Name | | Common
Stock Sold
(#) | | | Aggregate
Proceeds
($) | |
LucasZoom, LLC(1) | | | 38,903,036 | | | | 407,703,817 | |
Institutional Venture Partners XIII, L.P. | | | 6,081,312 | | | | 63,732,149 | |
KPCB Holdings Inc., as nominee | | | 2,725,224 | | | | 28,560,348 | |
| (1) | Dipan Patel and Brian Ruder are each a member of our board of directors and each serve as partners at subsidiaries of Permira Holdings Limited. Permira Holdings Limited is the ultimate controlling entity of the fund that indirectly owns LucasZoom, LLC, or LucasZoom. |
The table below sets forth the number of shares of our common stock acquired by new investors who became holders of more than 5% of our capital stock as a result of the Secondary Sale and the approximate purchase price each stockholder paid for such shares.
| | | | | | | | |
Name | | Common Stock
Purchased
(#) | | | Aggregate
Purchase Price
($) | |
Entities affiliated with Francisco Partners(1) | | | 28,625,744 | | | | 299,997,797 | |
GPI Capital Gemini HoldCo LP(2) | | | 9,541,916 | | | | 99,999,280 | |
| (1) | Dipanjan Deb is a member of our board of directors and a member of the investment committee of Francisco Partners Management LP and may be deemed to beneficially own the shares held by entities affiliated with Francisco Partners. Christine Wang is a member of our board of directors and a principal at Francisco Partners. |
| (2) | Khai Ha is a member of our board of directors and a member of the investment committee at GPI Capital, LLC and may be deemed to beneficially own the shares held by GPI Capital Gemini HoldCo LP. |
Common Stock Financing
In August 2018, we entered into a Common Stock Purchase Agreement pursuant to which we agreed to issue and sell up to 23,854,980 shares of our common stock at a price of $10.48 per share to new investors, contingent upon the closing of a tender offer as described below. We refer to this transaction as the Common Stock Financing. Prior to the settlement of the tender offer, in October 2018, we issued and sold an aggregate of 18,430,684 shares of our common stock, pursuant to the Common Stock Financing for cash proceeds of $193.2 million.
The table below sets forth the number of shares of our common stock acquired by new investors who became holders of more than 5% of our capital stock as a result of the Common Stock Financing and the approximate purchase price such stockholder paid for such shares.
| | | | | | | | |
Name | | Common Stock
Purchased
(#) | | | Aggregate
Purchase Price
($) | |
Entities affiliated with TCV(1) | | | 8,587,788 | | | | 90,000,018 | |
| (1) | David Yuan is a member of our board of directors and is a general partner at TCV and may be deemed to beneficially own the shares held by TCV and its affiliates. |
Tender Offer
In September 2018, in connection with the Common Stock Financing, we launched an offer to purchase up to 23,854,980 shares of our common stock (including shares issuable upon exercise of vested stock options and the conversion of our redeemable convertible preferred stock) from certain of our eligible stockholders and optionholders at a price of $10.48 per share, less transaction costs, pursuant to an offer to purchase. We refer to this transaction as the Company Tender Offer.
The table below sets forth the number of shares of our common stock sold by our executive officers, directors, holders of more than 5% of our capital stock and their affiliated entities or immediate family members in the Company Tender Offer and the approximate proceeds, before transaction costs, each seller received for the sale of such shares. In October 2018, an aggregate of 18,430,684 shares of our capital stock were tendered pursuant to the Company Tender Offer and repurchased by us, including the shares sold by the individuals and entities in the table below.
| | | | | | | | |
Name | | Common
Stock Sold
(#) | | | Proceeds
($) | |
John Suh(1) | | | 1,130,000 | | | | 11,842,400 | |
Rob Singer(2) | | | 76,000 | | | | 796,480 | |
Entities affiliated with BSG(3) | | | 4,998,524 | | | | 52,384,532 | |
Jeffrey Stibel(4) | | | 73,400 | | | | 769,651 | |
Chas Rampenthal(5) | | | 104,684 | | | | 1,097,088 | |
Frank Monestere(6) | | | 788,584 | | | | 8,264,360 | |
Peter Oey(7) | | | 165,000 | | | | 1,729,200 | |
Sham Telang(8) | | | 130,000 | | | | 1,362,400 | |
Craig Holt(9) | | | 165,000 | | | | 1,729,200 | |
Dorian Quispe(10) | | | 86,000 | | | | 901,280 | |
Nicolette Quispe(11) | | | 43,000 | | | | 450,640 | |
Laura Goldberg(12) | | | 70,000 | | | | 733,600 | |
| (1) | Mr. Suh was our Chief Executive Officer until October 1, 2019 and a member of our board of directors until September 19, 2019. Includes shares that were held by various estate planning trusts. |
| (2) | Mr. Singer was a member of our board of directors until June 1, 2021. |
| (3) | BSG is a holder of more than 5% of our capital stock. Mr. Stibel, a member of our board of directors, is the manager of Stibel Investments, LLC, which is a co-manager of Bryant-Stibel Fund I, LLC, or BS Fund, and the manager of Stibel & Company, which is the manager of Bryant Stibel Growth, or BSG. |
| (4) | Mr. Stibel is a member of our board of directors. |
| (5) | Mr. Rampenthal was our General Counsel until June 15, 2020. |
| (6) | Mr. Monestere was our President until September 15, 2020. Includes shares that were held by irrevocable trusts for the benefit of Mr. Monestere’s children. |
| (7) | Mr. Oey was our Chief Financial Officer until March 13, 2020. |
| (8) | Mr. Telang was our Chief Technology Officer and Chief Operating Officer until February 28, 2020. |
| (9) | Mr. Holt was our Global Chief Product Officer until November 20, 2019. |
| (10) | Mr. Quispe was our Chief Digital Officer until February 28, 2020. Includes shares that were held with Mr. Quispe’s wife, Nicolette Quispe, through a joint tenancy with a right of survivorship. |
| (11) | Ms. Quispe is the wife of Mr. Quispe, our former Chief Digital Officer. |
| (12) | Ms. Goldberg was our Chief Marketing Officer until December 14, 2018. |
John Suh Line of Credit
On September 19, 2019, John Suh, our former Chief Executive Officer, and his spouse entered into a $50,000,000 line of credit, or Suh Credit Line, with J.P. Morgan, or the Lender. The Suh Credit Line is to be repaid by the borrowers upon the initial public offering of our securities. As collateral security for the Suh Credit Line, (i) Mr. Suh and his spouse pledged to the Lender, pursuant to a 3-for-1 forwardCollateral Agreement dated September 19, 2019, among other things, their interests in a securities account held with the Lender holding up to $30,000,000 in marketable securities and 5,405,036 shares of our common stock, split effectedor the Pledged Stock, and (ii) LZ Financial Services, LLC, one of our wholly owned subsidiaries pledged to the Lender, pursuant to a Collateral Agreement dated September 19, 2019, $25,000,000 of cash, or Cash Collateral. Pursuant to a Letter Agreement by and among us, Mr. Suh, his spouse and LZ Financial Services LLC, or Side Letter, the parties agreed that if the Cash Collateral is applied to the obligations under the Suh Credit Line, Mr. Suh and his spouse will reimburse us the amount by which the Cash Collateral was applied to repay such obligations. In the event Mr. Suh and his spouse do not comply with this reimbursement obligation, we have, per the Side Letter (i) recourse to the Pledged Stock under a Pledge Agreement dated September 19, 2019 between us and Mr. Suh and his spouse pursuant to which
Mr. Suh and his spouse pledged to us their interests in July 2011the Pledged Stock and (ii) full recourse against any and all property of Mr. Suh and his spouse in certain other specific situations. Mr. Suh and his spouse’s reimbursement obligations to us under the Side Letter and pledge of the Pledged Stock under the Pledge Agreement in our favor are subject to a 2-for-3 reversesubordination agreement dated September 19, 2019 with the Lender pursuant to which we agreed to subordinate such obligations and security interests to the Lender until Mr. Suh and his spouse’s obligations under the Suh Credit Line are repaid in full. Additionally, the Side Letter provides that, prior to our initial public offering filing, Mr. Suh and his spouse have the right to sell to us up to $25,000,000 of LegalZoom common stock, split effectedincluding the Pledged Stock, at the fair market value of the shares as determined by our Board of Directors. On June 3, 2021 the Collateral Agreement between LZ Financial Services, LLC and Lender was terminated and the Lender released the Cash Collateral to LZ Financial Services, LLC. Additionally, Mr. Suh’s right to sell up to $25,000,000 of LegalZoom stock to us has expired.
Repurchase Agreement with Chas Rampenthal
In October 2020, we entered into a Stock Repurchase Agreement pursuant to which we agreed to repurchase 170,000 shares of our common stock at a price of $9.82 per share from Chas Rampenthal, our former General Counsel, for an aggregate purchase price of $1.7 million.
Investors’ Rights, Management Rights, Voting and Co-Sale Agreements
In connection with our redeemable convertible preferred stock financing and as amended in connection with our Secondary Sale and Common Stock Financing and this offering, we entered into investors’ rights, management rights, voting and right of first refusal and co-sale agreements containing registration rights, information rights, rights of first offer, voting rights and rights of first refusal, among other things, with certain holders of our capital stock. The holders of more than 5% of our capital stock that are party to these agreements are LucasZoom, Institutional Venture Partners XIII, L.P., KPCB Holdings, Inc., as nominee, GPI Capital Gemini HoldCo LP, the TCV entities, the BSG entities and entities affiliated with Francisco Partners.
These stockholder agreements will terminate upon the closing of this offering, except for the registration rights granted under our investors’ rights agreement, which will terminate upon the completion of a deemed liquidation event, or with respect to any particular holder, on the date such holder, together with its permitted transferees, affiliates and co-investors, beneficially owns less than 1% of our outstanding Common Stock and such holder can sell its shares under Rule 144 of the Securities Act, or Rule 144. For a description of the registration rights, see the section titled “Description of Capital Stock—Registration Rights.”
Director Nomination Agreement
On , we entered into a Director Nomination Agreement with each of Permira and FP to provide certain rights with respect to their ability to designate members of our board of directors. See the section titled “Management—Board Composition” for additional information regarding the Director Nomination Agreement.
Agreements with Dun & Bradstreet Credibility Corp.
In 2013, we entered into an amended and restated affiliate agreement, or the Affiliate Agreement, and an amended and restated small business resource agreement, or the Resource Agreement, with Dun & Bradstreet Credibility Corp., which was acquired by The Dun & Bradstreet Corporation, or Dun & Bradstreet, in 2015. Jeffrey Stibel, a member of our board of directors, was the president and chief executive officer of Dun & Bradstreet Credibility Corp. until the acquisition, at which time he became the Vice Chairman of Dun & Bradstreet, a position he held until March 2018. We submitted a letter of termination on July 31, 2012) pursuant12, 2020 and these agreements terminated on October 12, 2020, except for a twelve-month wind down period as required by the agreement. See Note 19 to our 2000 Stock Option Plan. The balance of $137,724, including principalconsolidated financial statements included elsewhere in this prospectus for each of the three notes and total accrued interest for each of the three notes of $28,474 was repaid in full by Mr. Monestere on December 17, 2010.additional information.
Compensation Arrangements, Stock Option Grants and Indemnification for Executive Officers and Directors
Other Transactions
We have entered into offer letter agreements with our named executive officers that, among other things, provide for certain compensatory and change in control benefits, as well as severance benefits for our named executive officers.benefits. For a description of these agreements see "Executive Compensation—Executive Employment Agreements."
We have entered into agreements with our named executive officers, regarding cash bonuses. For a description of these bonuses, see "Executivethe section titled “Executive and Director Compensation—Components of Executive Compensation— Annual Performance-based Cash Bonus Opportunity."Employment Agreements.”
We have also granted stock options and restricted stock unitsRSUs to our executive officers and certain of our directors. For a description of these equity awards, see "Executive Compensation—2011 Outstanding Equity Awards at Year-end"the section titled “Executive and "Executive Compensation—Incentive Compensation Plans—Compensation of Directors."Director Compensation.”
Indemnification Agreements
We will have entered into indemnification agreements with eachcertain of our current directors and executive officers before the completion of this offering.officers. Our amended and restated certificate of incorporation and our amended and restated bylaws provide that we will indemnify our directors and officers to the fullest extent permitted under Delaware law.the DGCL. See "Description of Capital Stock—the section titled “Management—Limitations of Liability and Indemnification."Indemnification Matters.”
Other than as described above under this section "Certain“Certain Relationships and Related Person Transactions,"” since January 1, 2009,2018, we have not entered into any transactions, nor are there any currently proposed transactions, between us and a related person where the amount involved exceeds, or would exceed, $120,000, and in which any related person had or will have a direct or indirect material interest. We believe the terms of the transactions described above were comparable to terms we could have obtained in arm's lengtharm’s-length dealings with unrelated third parties.
Policies and Procedures for Related Person Transactions
We plan to adopt aOur current related party transactions policy, thatwhich was adopted in June 2017, does not permit our executive officers, directors, nominees for election as a director, beneficial owners of more than 5% of any class of our common stock and any members of the immediate family of any of the foregoing persons are not permitted to enter into a related person transaction with us without the prior consent of our audit committee. Anyboard of directors or a duly authorized committee of our board of directors, subject to certain pre-approved exceptions. In connection with this offering, we intend to adopt an amended written related party transactions policy that sets forth that any request for us to enter into a transaction with an executive officer, director, nominee for election as a director, beneficial owner of more than 5% of any class of our common stock or any member of the immediate family of any of the foregoing persons, in which the amount involved exceeds $120,000 and pursuant to which such person would have a direct or indirect interest, must first be presented to our board of directors or our audit committee for review, consideration and approval. In approving or rejecting any such proposal, our board of directors or our audit committee is to consider the material facts of the transaction, including but not limited to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related person'sparty’s interest in the transaction.
All of the transactions described abovein this section were entered into prior to the adoption of this amended policy. Our board of directors has historically reviewed and approved any transaction where a director or ratified byofficer had a financial interest, including the transactions described above. Prior to approving such a transaction, the material facts as to a director’s or officer’s relationship or interest in the agreement or transaction were disclosed to our board of directors. Our board of directors considered this information when evaluating the transaction and in determining whether such transaction was fair to us and in the best interest of all our stockholders.
Table of ContentsPRINCIPAL STOCKHOLDERS
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of June 30, 2012,, 2021, information regarding beneficial ownership of our capital stock by:
•each person, or group of affiliated persons, known by us to beneficially own more than 5% of our common stock;
•each of our named executive officers;
•each of our directors;
•- and
all of our executive officers and directors as a group; and
•each of the selling stockholders.Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power of that security, includingsecurity. In addition, the rules include shares of common stock issuable upon the exercise of stock options or warrants that are currently exercisable or exercisable within 60 days of June 30, 2012. Except as indicated, 2021. These shares are deemed to be outstanding and beneficially owned by the footnotes below, we believe, based onperson holding those options or warrants for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. The information furnished to us, thatcontained in the following table does not necessarily indicate beneficial ownership for any other purpose. Unless otherwise indicated, the persons namedor entities identified in thethis table below have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.
The percentage ownership information under the column titled “Before Offering” is based on shares of common stock shown that they beneficially own, subject to community property laws where applicable.outstanding as of , 2021 assuming the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 46,162,160 shares of common stock upon the completion of this offering. The percentage ownership information does not necessarily indicate beneficial ownership for any other purpose. No selling stockholder is a broker-dealer or an affiliate of a broker-dealer.
Our calculation ofunder the percentage of beneficial ownership prior to this offeringcolumn titled “After Offering” is based on 36,488,846shares outstanding as of , 2021, after giving effect to (i) the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 46,162,160 shares of common stock upon the completion of this offering, (ii) the vesting and settlement of RSUs outstanding as of , 2021, net of shares surrendered for withholding taxes (based on an assumed % tax withholding rate), that will vest and settle within 30 days of the completion of this offering, and (iii) the vesting of RSUs outstanding as of , 2021, net of shares surrendered for withholding taxes (based on an assumed % tax withholding rate), that will vest and settle upon expiration of the restricted period pursuant to the lockup agreements with the underwriters, and (iv) the sale of shares of common stock by us in this offering (assuming an initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus). The percentage ownership information assumes no exercise of the underwriters’ option to purchase additional shares from us. We have included shares of our common stock (including preferred stock on an as converted basis) outstanding as of June 30, 2012. We have based our calculation of the percentage of beneficial ownership after this offering on 40,328,846 shares of our common stock outstanding immediately after the completion of this offering (assuming no exercise of the underwriters' over-allotment option).
Common stock subject to stock options currently exercisableRSUs for which the service-based vesting condition has been satisfied or exercisablewould be satisfied within 60 days of June 30, 2012, are deemed, 2021 in the calculation of shares to be outstandingbeneficially owned by the person holding the RSUs for the purpose of computing the percentage ownership of the person holding these options and the percentage ownership of any group of which the holder is a member but are not deemed outstanding for computing the percentage of any otherthat person.
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Unless otherwise noted below, the address for each of the stockholdersbeneficial owner listed in the table below is c/o LegalZoom.com, Inc., 101 North Brand Boulevard, 11th Floor, Glendale, California 91203.
| | | | | | | | | | | | | | | | |
| | | | | | | | Percentage of
Shares Beneficially
Owned | |
Name of Beneficial Owner | | Number of
Shares
Beneficially
Owned
(#) | | | Number of
Shares
Offered
Hereby
(#) | | | Before
Offering
(%) | | | After
Offering
(%) | |
5% Stockholders | | | | | | | | | | | | | | | | |
LucasZoom, LLC(1) | | | | | | | | | | | | | | | | |
Entities affiliated with Francisco Partners(2) | | | | | | | | | | | | | | | | |
Entities affiliated with BSG(3) | | | | | | | | | | | | | | | | |
Institutional Venture Partners XIII, L.P.(4) | | | | | | | | | | | | | | | | |
KPCB Holdings, Inc., as Nominee(5) | | | | | | | | | | | | | | | | |
GPI Capital Gemini HoldCo LP(6) | | | | | | | | | | | | | | | | |
Entities affiliated with TCV(7) | | | | | | | | | | | | | | | | |
Named Executive Officers and Directors | | | | | | | | | | | | | | | | |
Dan Wernikoff(8) | | | | | | | | | | | | | | | | |
Shrisha Radhakrishna(9) | | | | | | | | | | | | | | | | |
Noel Watson(10) | | | | | | | | | | | | | | | | |
Jeffrey Stibel(11) | | | | | | | | | | | | | | | | |
Dipanjan Deb(12) | | | | | | | | | | | | | | | | |
Khai Ha(13) | | | | | | | | | | | | | | | | |
John Murphy | | | | | | | | | | | | | | | | |
Dipan Patel(14) | | | | | | | | | | | | | | | | |
Brian Ruder(15) | | | | | | | | | | | | | | | | |
Christine Wang | | | | | | | | | | | | | | | | |
David Yuan | | | | | | | | | | | | | | | | |
All executive officers and directors as a group (15 persons)(16) | | | | | | | | | | | | | | | | |
| * | Represents beneficial ownership of less than 1%. |
| (1) | Consists of (i) shares of common stock and (ii) shares of common stock issuable upon conversion of redeemable convertible preferred stock. LucaZoom S.A.R.L., a Luxembourg private company, or LZoom, is the sole member of LucasZoom. Permira V L.P.2 is the controlling shareholder of LZoom. Permira V L.P.2 acts through its general partner, Permira V GP L.P., which acts through its general partner, Permira V GP Limited. Permira V GP Limited’s board of directors consists of Thomas Lister, Christopher Crozier, Alistair Boyle, Julie Preece, Simon Holden and Nigel Carey. Permira V GP Limited has indirect voting and investment power over the shares held by LucasZoom, LLC. The address for LucasZoom, LLC is 3000 Sand Hill Road, Building 1, Suite 170, Menlo Park, CA 94025. |
| (2) | Consists of (i) shares of common stock held by FPLZ I, L.P. and (ii) shares of common stock held by FPLZ II, L.P., which are managed by Francisco Partners Management, L.P. Dipanjan Deb, a member of our board of directors, David Golob, Ezra Perlman Keith Geeslin, and Megan Karlen are members of Francisco Partners Management, L.P.’s investment committee and share voting and dispositive power over the shares held by FPLZ I, L.P. and FPLZ II, L.P. The address for the entities affiliated with Francisco Partners is One Letterman Drive, Building C—Suite 410, San Francisco, CA 94129. |
| (3) | Consists of (i) shares of common stock held by BSG, (ii) shares of common stock held by Bryant Stibel Fund, I, LLC, and together with BSG, Bryant Stibel, and (iii) shares of common stock underlying stock options that are exercisable within 60 days of , 2021 held by Bryant Stibel Fund, I, LLC. Stibel & Company LLC is the manager of BSG. Jeffrey Stibel is the manager of Stibel & Company LLC and has sole voting and dispositive power over the shares held by BSG. Carbon Investments, LLC and Kobe Investments, LLC are the co-managers of BS Fund. Mr. Stibel, the manager of Carbon Investments, LLC, and Kobe Investments, LLC have shared voting and dispositive power over the shares held by Bryant Stibel Fund I, LLC. The address for Bryant Stibel is 22761 Pacific Coast Highway, Garden Level, Malibu, CA 90265. |
| (4) | Consists of (i) shares of common stock and (ii) shares of common stock issuable upon conversion of redeemable convertible preferred stock. Institutional Venture Management XIII, LLC is the general partner of Institutional Venture Partners XIII, L.P., or IVP. Todd C. Chaffee, Norman A. Fogelsong, Stephen J. Harrick, J. Sanford Miller and Dennis B. Phelps are the managing |
| directors of Institutional Venture Management XIII, LLC and share voting and dispositive power over the shares held by IVP. The address for these entities is c/o Institutional Venture Partners, 3000 Sand Hill Road, Building 2, Suite 250, Menlo Park, CA 94025. |
| (5) | Consists of (i) shares of common stock held by KPCB Digital Growth Fund, LLC, or KPCB DGF, and (ii) shares of common stock held by KPCB Digital Growth Founders Fund, LLC, or KPCB DGF FF. All shares are held for convenience in the name of “KPCB Holdings, Inc., as nominee” for the accounts of such entities. The managing member of KPCB DGF and KPCB DGF FF is KPCB DGF Associates, LLC, or KPCB DGF Associates. L. John Doerr, Brook Byers, Mary Meeker, William “Bing” Gordon and Theodore E. Schlein, the managing members of KPCB DGF Associates, exercise shared voting and dispositive power over the shares held by KPCB DGF and KPCB DGF FF. Such managing members disclaim beneficial ownership of all shares held by KPCB DGF and KPCB DGF FF except to the extent of their pecuniary interest therein. The principal address for all entities and individuals affiliated with Kleiner Perkins Caufield & Byers is c/o Kleiner Perkins Caufield & Byers, LLC, 2750 Sand Hill Road, Menlo Park, CA 94025. |
| (6) | Consists of shares of common stock held by GPI Capital Gemini HoldCo LP, or GPI. GPI Capital LLC is the sole member of GPI GP Limited, which is the general partner of GPI GP LP, which is the general partner of GPI. William T. Royan, Khai Ha, a member of our board of directors, Francois-Bernard Poulin and Aleksander Migon are members of the Investment Committee of GPI Capital, LLC and may be deemed to have shared voting, investment and dispositive power with respect to the shares held by GPI. The address for GPI is 437 Madison Avenue, 28th Floor, New York, NY 10022. |
| (7) | Consists of (i) shares of common stock held by TCV IX, L.P., or TCV IX, (ii) shares of common stock held by TCV IX (A), L.P., or TCV IX (A), (iii) shares of common stock held by TCV IX (B), L.P., or TCV IX (B), and (iv) shares of common stock held by TCV Member Fund, L.P., or Member Fund and together with TCV IX, TCV IX (A) and TCV IX (B), the TCV Entities. The general partner of TCV Member Fund, L.P. (the “Member Fund”) is Technology Crossover Management IX, Ltd. (“Management IX”), and the general partner of each of TCV IX, L.P., TCV IX (A), L.P., TCV IX (A) Opportunities, L.P. and TCV IX (B), L.P. (together with the Member Fund, the “TCV IX Funds”) is Technology Crossover Management IX L.P. (“TCM IX”). The general partner of TCM IX is Management IX. Management IX may be deemed to have the sole voting and dispositive power over the shares held the TCV IX Funds. Management IX may be deemed to beneficially own the securities held by the TCV IX Funds but disclaims beneficial ownership of such shares except to the extent of its pecuniary interest therein. Jay C. Hoag, Jon Q. Reynolds Jr., Timothy P. McAdam and Christopher P. Marshall are the Class A Directors of Management IX, and each disclaims beneficial ownership of the securities held by the TCV IX Funds except to the extent of his pecuniary interest therein. The address for these entities is 250 Middlefield Road, Menlo Park, CA 94025. |
| (8) | Consists of (i) shares held of record by , and (ii) shares subject to options that are exercisable within 60 days of , 2021. |
| (9) | Consists of (i) shares held of record by , and (ii) shares subject to options that are exercisable within 60 days of , 2021. Mr. Radhakrishna also holds RSUs, of which will become vested within 60 days of , 2021. |
| (10) | Consists of (i) shares held of record by , and (ii) shares subject to options that are exercisable within 60 days of , 2021. Mr. Watson also holds RSUs, of which will become vested within 60 days of , 2021. |
| (11) | Consists of (i) the shares held by BSG and BS Fund disclosed in footnote (3) above, (ii) shares of common stock held directly by Mr. Stibel, (iii) shares of common stock underlying stock options held by Mr. Stibel that are exercisable within 60 days of , 2021 and (iv) shares of common stock underlying stock options that are exercisable within 60 days of , 2021 held by BS Fund. Mr. Stibel is the manager of Stibel & Company LLC, which is the manager of BSG, and he is the manager of Carbon Investments, LLC, which is a co-manager of BS Fund, and may be deemed to beneficially own the shares held by Bryant Stibel as disclosed in footnote (3). |
| (12) | Consists of the shares held by Francisco Partners disclosed in footnote (2) above. Mr. Deb is a partner of Francisco Partners and may be deemed to beneficially own the shares held by Francisco Partners as disclosed in footnote (2). Mr. Deb has a direct and indirect interest in Francisco Partners GP V, L.P., which is the General Partner of Francisco Partners Management, L.P., which is the investment manager of, FPLZ I, L.P. and FPLZ II, L.P. In such capacities, if the General Partner or investment manager is deemed to be a beneficial owner, Mr. Deb disclaims any beneficial ownership, except to the extent of any pecuniary interest therein. |
| (13) | Consists of the shares held by GPI disclosed in footnote (6) above. Mr. Ha is a member of the investment committee of GPI Capital, LLC and may be deemed to beneficially own the shares held by GPI as disclosed in footnote (6). |
| (14) | Consists of the shares held by LucasZoom, LLC disclosed in footnote (1) above. Mr. Patel is a member of the investment committee of Permira and may be deemed to beneficially own the shares held by LucasZoom, LLC as disclosed in footnote (1). In such capacity if Permira is deemed to be a beneficial owner, Mr. Patel disclaims any beneficial ownership, except to the extent of any pecuniary interest therein. |
| (15) | Consists of the shares held by LucasZoom, LLC disclosed in footnote (1) above. Mr. Ruder is a member of the investment committee of Permira and may be deemed to beneficially own the shares held by LucasZoom, LLC as disclosed in footnote (1). In such capacity if Permira is deemed to be a beneficial owner, Mr. Ruder disclaims any beneficial ownership, except to the extent of any pecuniary interest therein. |
| (16) | Consists of (i) shares beneficially owned by our current executive officers and directors, and (ii) shares subject to options exercisable within 60 days of , 2021, all of which are vested as of such date. Some of our current directors and executive officers also hold RSUs, of which will become vested within 60 days of , 2021. |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| |
| |
| |
| |
| | Number of
Shares
Being
Offered
in Over-
Allotment | |
| |
| |
|---|
| | Shares Beneficially
Owned Prior to
this Offering(1) | |
| | Shares Beneficially
Owned After
Offering | | Shares Beneficially
Owned After
Over-Allotment | |
|---|
| | Number of
Shares
Being
Offered | |
|---|
Name of Beneficial Owner | | Shares | | %(2) | | Shares | | %(3) | | Shares | | % | |
|---|
5% Stockholders | | | | | | | | | | | | | | | | | | | | | | | | | |
Entities affiliated with Polaris Venture Partners(4) | | | 12,798,370 | | | 35.1 | | | 3,500,000 | | | 9,298,370 | | | 23.1 | | | 500,000 | | | 8,798,370 | | | 21.8 | |
Institutional Venture Partners XIII, L.P.(5) | | | 5,361,754 | | | 14.7 | | | — | | | 5,361,754 | | | 13.3 | | | — | | | 5,361,754 | | | 13.3 | |
KPCB Holdings, Inc., as Nominee(6) | | | 2,336,642 | | | 6.4 | | | — | | | 2,336,642 | | | 5.8 | | | — | | | 2,336,642 | | | 5.8 | |
Brian Liu(7) | | | 3,123,922 | | | 8.6 | | | 320,770 | | | 2,803,152 | | | 7.0 | | | 55,152 | | | 2,748,000 | | | 6.8 | |
Executive Officers and Directors | | | | | | | | | | | | | | | | | | | | | | | | | |
John Suh(8) | | | 1,617,109 | | | 4.4 | | | 137,774 | | | 1,479,335 | | | 3.6 | | | 23,559 | | | 1,455,776 | | | 3.6 | |
Frank Monestere(9) | | | 634,827 | | | 1.7 | | | 22,772 | | | 612,055 | | | 1.5 | | | 3,894 | | | 608,161 | | | 1.5 | |
Edward Hartman(10) | | | 1,271,998 | | | 3.5 | | | 39,761 | | | 1,232,237 | | | 3.1 | | | 6,799 | | | 1,225,438 | | | 3.0 | |
Fred Krupica(11) | | | 530,000 | | | 1.4 | | | 34,159 | | | 495,841 | | | 1.2 | | | 5,841 | | | 490,000 | | | 1.2 | |
Sheila Tan | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Tracy Terrill(12) | | | 272,500 | | | * | | | 10,248 | | | 262,252 | | | * | | | 1,752 | | | 260,500 | | | * | |
Chas Rampenthal(13) | | | 188,000 | | | * | | | — | | | 188,000 | | | * | | | — | | | 188,000 | | | * | |
Brian Liu(7) | | | 3,123,922 | | | 8.6 | | | 320,770 | | | 2,803,152 | | | 7.0 | | | 55,152 | | | 2,748,000 | | | 6.8 | |
Susan Decker(14) | | | 61,108 | | | * | | | — | | | 61,108 | | | * | | | — | | | 61,108 | | | * | |
Alan Spoon(15)
c/o Polaris Venture Partners | | | 12,798,370 | | | 35.1 | | | 3,500,000 | | | 9,298,370 | | | 23.1 | | | 500,000 | | | 8,798,370 | | | 21.8 | |
Jason Trevisan(16)
c/o Polaris Venture Partners | | | 12,798,370 | | | 35.1 | | | 3,500,000 | | | 9,298,370 | | | 23.1 | | | 500,000 | | | 8,798,370 | | | 21.8 | |
Nehemia (Hemi) Zucker | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Daniel Cooperman(17) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Kenneth McBride(18) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
All executive officers and directors as a group (14 persons) | | | 20,497,834 | | | 56.2 | | | 4,065,484 | | | 16,432,350 | | | 40.8 | | | 596,997 | | | 15,835,353 | | | 39.3 | |
Other Selling Stockholders | | | | | | | | | | | | | | | | | | | | | | | | | |
Robert Shapiro(19) | | | 1,222,106 | | | 3.3 | | | 104,275 | | | 1,117,831 | | | 2.8 | | | 17,832 | | | 1,099,999 | | | 2.7 | |
Thomas Newby | | | 33,412 | | | * | | | 28,533 | | | 4,879 | | | * | | | 4,879 | | | — | | | — | |
Daniel Williams | | | 3,342 | | | * | | | 1,708 | | | 1,634 | | | * | | | 292 | | | 1,342 | | | * | |
*Represents beneficial ownership of less than 1%.
(1)The amounts in this table give effect to the conversion of all shares of Series A into common stock on that will occur immediately prior to the completion of this offering after giving effect to the 3-for-1 forward stock split effected in July 2011 and the 2-for-3 reverse stock split effected on July 31, 2012.
(2)The percentage of shares beneficially owned was determined based on a fraction, the numerator of which is the sum of (i) the number of outstanding shares of common stock beneficially owned by such owner and (ii) the number of shares issuable upon exercise of options beneficially owned by such owner and exercisable within 60 days of June 30, 2012, and the denominator of
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which is the sum of (a) the aggregate number of shares of common stock outstanding on June 30, 2012 and (b) the aggregate number of shares of common stock issuable upon exercise of options beneficially owned by such owner and exercisable within 60 days of June 30, 2012.
(3)The percentage of shares beneficially owned was determined based on a fraction, the numerator of which is the sum of (i) the number of outstanding shares of common stock beneficially owned by such owner and (ii) the number of shares issuable upon exercise of options beneficially owned by such owner and exercisable within 60 days of June 30, 2012, and the denominator of which is the sum of (a) the aggregate number of shares of common stock outstanding after completion of this offering and (b) the aggregate number of shares of common stock issuable upon exercise of options beneficially owned by such owner and exercisable within 60 days of June 30, 2012.
(4)Consists of: (i) 12,349,586 shares of common stock issuable upon conversion of Series A held by Polaris Venture Partners V, L.P. (Polaris V); (ii) 240,694 shares of common stock issuable upon conversion of Series A held by Polaris Venture Partners Entrepreneurs' Fund V, L.P. (Polaris EFund V); (iii) 84,594 shares of common stock issuable upon conversion of Series A held by Polaris Venture Partners Founders' Fund V, L.P. (Polaris FFund); and (iv) 123,496 shares of common stock issuable upon conversion of Series A held by Polaris Venture Partners Special Founders' Fund V, L.P. (Polaris SFFV V, and collectively with Polaris V, Polaris EFund V and Polaris FFund V, the Polaris Funds). Polaris Venture Management Co., V, L.L.C. (Polaris M) is the General Partner of the Polaris Funds and has sole voting and investment power of the shares held by the Polaris Funds. Alan G. Spoon, Jason Trevisan, Jonathan A. Flint and Terrance G. McGuire are members of Polaris M and Messrs. Flint and McGuire are the Managing Members, and may be deemed to share voting and investment power over the securities held by the Polaris Funds. Messrs. Spoon, Trevisan, Flint and McGuire disclaim beneficial ownership of the shares held by the Polaris Funds, except to the extent of any pecuniary interest therein. The address of the Polaris Funds is 1000 Winter Street, Waltham, Massachusetts 02451.
(5)Consists of: (i) 3,022,460 existing shares of common stock and (ii) 2,339,294 shares of common stock issuable upon conversion of Series A. Institutional Venture Management XIII, LLC (IVM XIII) is the sole General Partner of Institutional Venture Partners XIII, L.P. (IVP XIII), has sole voting and investment control over the shares held by IVP XIII and may be deemed to beneficially own the shares held by IVP XIII. Todd C. Chaffee, Norman A. Fogelsong, Stephen J. Harrick, J. Stanford Miller and Dennis B. Phelps are the Managing Directors of IVM XIII and share voting and investment power over the shares held by IVP XIII. The address for IVP XIII is 3000 Sand Hill Road, Building 2, Suite 250, Menlo Park, California 94025. Pursuant to certain contractual agreements between certain of our stockholders, which we are not a party to, under certain circumstances up to 1,511,230 shares of common stock could be transferred to IVP XIII.
(6)Consists of: (i) 2,202,518 shares of common stock held by KPCB Digital Growth Fund, LLC (KPCB DGF) and (ii) 134,123 shares of common stock held by KPCB Digital Growth Founders Fund, LLC (KPCB DGFF) and held for convenience in the name of "KPCB Holdings, Inc. as nominee," for the accounts of such entities, each of whom exercise their own voting and investment power over such shares. The Managing Member for KPCB DGF and KPCB DGFF is KPCB DGF Associates, LLC. Brook Byers, L. John Doerr, Raymond Lane, Theodore Schlein, William Joy and Bing Gordon, the Managing Directors of KPCB DGF Associates, LLC, exercise shared voting and investment power over the shares directly held by KPCB DGF and KPCB DGFF. The address for KPCB Holding, Inc., as Nominee, is 2750 Sand Hill Road, Menlo Park, California 94025. Pursuant to certain contractual agreements between certain of our stockholders, which we are not a party to, under certain circumstances up to 1,168,321 shares of common stock could be transferred to KPCB Holdings, Inc., as Nominee.
(7)Pursuant to certain contractual agreements between certain of our stockholders, which we are not a party to, under certain circumstances Mr. Liu could transfer up to 192,038 shares of common stock to IVP XIII, up to 148,463 shares of common stock to KPCB Holdings, Inc., as Nominee, and up to 24,756 shares of common stock to certain other stockholders.
(8)Consists of: (i) 780,172 shares of common stock held by Mr. Suh; (ii) 333,333 shares of common stock held by John Hyunjeck Suh and Steven Keirn, Trustees of The John Hyunjeck Suh Grantor Retained Annuity Trust dated December 29, 2011 (Suh GRAT); and (iii) 503,604 shares of common stock underlying options that are exercisable within 60 days of June 30, 2012. Mr. Suh and Steven Keirn are co-trustees of the Suh GRAT and share voting and investment power over the shares held by the Suh GRAT. Pursuant to certain contractual agreements between certain of our stockholders, which we are not a party to, under certain circumstances Mr. Suh could transfer up to 99,894 shares of common stock to IVP XIII, up to 77,227 shares of common stock to KPCB Holdings, Inc., as Nominee, and up to 12,876 shares of common stock to certain other stockholders.
(9)Consists of: (i) 559,292 shares of common stock held by Mr. Monestere; (ii) 25,535 shares of common stock held by Francis C. Monestere, Trustee of the FRANCIS C. MONESTERE 2010 GRAT; and (iii) 50,000 shares of common stock underlying options that are exercisable within 60 days of June 30, 2012. Pursuant to certain contractual agreements between certain of our stockholders, which we are not a party to, under certain circumstances Mr. Monestere could transfer up to 28,916 shares of common stock to IVP XIII, up to 22,355 shares of common stock to KPCB Holdings, Inc., as Nominee, and up to 3,726 shares of common stock to certain other stockholders.
(10)Consists of: (i) 1,233,666 shares of common stock held by Mr. Hartman; (ii) 13,332 shares of common stock held by Mr. Hartman's minor children. Mr. Hartman and his wife, Risha Henry, share voting and investment power over the shares held
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by their minor children; and (iii) 25,000 shares of common stock underlying options exercisable within 60 days of June 30, 2012. Pursuant to certain contractual agreements between certain of our stockholders, which we are not a party to, under certain circumstances Mr. Hartman could transfer up to 43,900 shares of common stock to IVP XIII, up to 33,939 shares of common stock to KPCB Holdings, Inc., as Nominee, and up to 5,656 shares of common stock to certain other stockholders.
(11)Consists of: (i) 480,000 shares of common stock underlying options that are exercisable within 60 days of June 30, 2012; and (ii) 50,000 shares of common stock underlying restricted stock units that are exercisable within 60 days of June 30, 2012.
(12)Consists of: (i) 60,000 shares of common stock held by The Terrill Living Trust (Terrill Trust); and (ii) 212,500 shares of common stock underlying options that are exercisable within 60 days of June 30, 2012. Mr. Terrill is the sole trustee of the Terrill Trust and has sole voting and investment power over the shares held by the Terrill Trust.
(13)Consists of: (i) 185,000 shares of common stock held by Mr. Rampenthal; and (ii) 3,000 shares of common stock underlying options exercisable within 60 days of June 30, 2012. Pursuant to certain contractual agreements between certain of our stockholders, which we are not a party to, under certain circumstances Mr. Rampenthal could transfer up to 2,628 shares of common stock to IVP XIII, up to 2,032 shares of common stock to KPCB Holdings, Inc., as Nominee and up to 337 shares of common stock to certain other stockholders.
(14)Consists of 61,108 shares of common stock underlying options that are exercisable within 60 days of June 30, 2012.
(15)All shares of common stock indicated as owned by Mr. Spoon are included because of his affiliation with the Polaris Funds. See footnote 4 above. Mr. Spoon disclaims beneficial ownership of all shares owned by the Polaris Funds except to the extent of any indirect pecuniary interest therein.
(16)All shares of common stock indicated as owned by Mr. Trevisan are included because of his affiliation with the Polaris Funds. See footnote 4 above. Mr. Trevisan disclaims beneficial ownership of all shares owned by the Polaris Funds except to the extent of any indirect pecuniary interest therein.
(17)Mr. Cooperman has been nominated to become a director effective immediately after this registration statement is declared effective by the SEC.
(18)Mr. McBride has been nominated to become a director effective immediately after this registration statement is declared effective by the SEC.
(19)Pursuant to certain contractual agreements between certain of our stockholders which we are not a party to, under certain circumstances Mr. Shapiro could transfer up to 315,454 shares of common stock to IVP XIII, up to 243,875 shares of common stock to KPCB Holdings, Inc., as Nominee and up to 40,667 shares of common stock to certain other stockholders.
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DESCRIPTION OF CAPITAL STOCK
General
The following descriptionsdescription of our capital stock and certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws are summaries and are qualified by referencesummaries. You should also refer to the amended and restated certificate of incorporation, and the amended and restated bylaws that will be in effect upon completion of this offering. Copies of these documents will beand the third amended and restated investors’ rights agreement, which are filed with the SEC as exhibits to ourthe registration statement of which this prospectus formsis a part. The descriptions of the common stock and preferred stock reflect changes to our capital structure that will occurbe in effect immediately after the closing of this offering.
General
Upon the completion of this offering and the filing of our amended and restated certificate of incorporation, our authorized capital stock will consist of 1,000,000,000 shares of common stock, par value $0.001 per share, and 100,000,000 shares of preferred stock, par value $0.001 per share.
Common Stock
Outstanding shares
At March 31, 2021, we had shares of common stock outstanding, held of record by 538 stockholders, assuming the automatic conversion of all 23,081,080 shares of our outstanding redeemable convertible preferred stock into 46,162,160 shares of common stock upon the completion of this offering.
UponVoting rights
Each holder of common stock is entitled to one vote for each share on all matters submitted to a vote of the completionstockholders. The affirmative vote of this offering,holders of at least 66 2/3% of the voting power of all of the then-outstanding shares of capital stock, voting as a single class, will be required to amend certain provisions of our amended and restated certificate of incorporation, will provide for one class of common stock. In addition,including provisions relating to amending our amended and restated certificatebylaws, the classified board, the size of incorporation will authorize sharesour board, removal of undesignateddirectors, director liability, vacancies on our board, special meetings, stockholder notices, actions by written consent and exclusive jurisdiction.
Dividend rights
Subject to preferences that may apply to any outstanding preferred stock, the rights, preferences and privileges of which may be designated from time to time by our board of directors.
Upon the completion of this offering, our authorized capital stock will consist of 200,000,000 shares, all with a par value of $0.001 per share, of which:
•150,000,000 shares are designated as common stock; and
•50,000,000 shares are designated as preferred stock.
As of June 30, 2012, we had outstanding 36,488,846 shares of common stock, which assumes the conversion of all outstanding shares of our Series A into shares of common stock immediately prior to the completion of this offering. Our outstanding capital stock was held by 255 stockholders of record as of June 30, 2012. As of June 30, 2012, we also had outstanding options to acquire 4,953,653 shares of common stock held by current or former employees, directors and consultants outstanding granted under our 2000 Stock Option Plan and our 2010 Stock Incentive Plan and 50,000 restricted stock units to be settled in shares of our common stock granted under our 2010 Stock Incentive Plan.
Common Stock
Holdersholders of our common stock are entitled to one vote per share onreceive ratably any matter to be voted upon by our stockholders. All shares of common stock rank equally as to voting and all other matters. The shares of common stock have no preemptive or conversion rights, no redemption or sinking fund provisions, and are not liable for further call or assessment and are not entitled to cumulative voting rights.
Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of common stock are entitled to share equally, on a per share basis, with respect to any dividend or distribution of cash, property or shares of our capital stock paid or distributed by LegalZoom, out of funds legally available if our board of directors, in its discretion, determines to issue dividends and only then at the times and in the amounts that our board of directors may determine. See "Dividend Policy".declare out of funds legally available for that purpose on a non-cumulative basis.
UponIn the event of our liquidation, dissolution or winding-up, thewinding up, holders of our common stock will be entitled to share ratably in allthe net assets remaininglegally available for distribution to stockholders after the payment of anyall of our debts and other liabilities, and subject to preferences that may applythe satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock outstanding at the time.stock.
Preferred StockRights and preferences
As of June 30, 2012, there were 7,628,000 sharesHolders of our Series A outstanding. A majoritycommon stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of the holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of our Series A have consented topreferred stock that we may designate and issue in the automatic conversionfuture.
Preferred Stock
Upon the completion of this offering, all outstanding shares of
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Series A our redeemable convertible preferred stock will convert into an aggregate of 15,256,000 shares of our common stock which will occur immediately prior toon a one-for-two basis. At March 31, 2021, we had 23,081,080 shares of redeemable convertible preferred stock outstanding, held of record by four stockholders. Immediately after the completion of this offering.
Uponoffering, our certificate of incorporation will be amended and restated to delete all references to such shares of redeemable convertible preferred stock. Under the amended and restated certificate of incorporation that will be effective immediately after the completion of this offering, our board of directors may,will have the authority, without further action by ourthe stockholders, fix the rights, preferences, privileges and restrictions ofto issue up to an aggregate of 50,000,000100,000,000 shares of preferred stock in one or more series, and authorize their issuance. Theseto establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund termsthe shares of each wholly unissued series and any qualifications, limitations or restrictions thereon and to increase or decrease the number of shares constitutingof any such series, orbut not below the designationnumber of shares of such series any or allthen outstanding.
Our board of whichdirectors may be greater thanauthorize the rights of our common stock. The issuance of our preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of ourthe common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, thestock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in our control that may otherwise benefit holders of control orour common stock and may adversely affect the market price of the common stock and the voting and other corporate action. Uponrights of the completionholders of common stock. On and immediately after the closing of this offering, no shares of preferred stock will be outstanding, and weoutstanding. We have no present plancurrent plans to issue any shares of preferred stock.
Stock Options and Restricted Stock Units
At March 31, 2021, (1) 14,952,784 shares of common stock were issuable upon the exercise of outstanding stock options, at a weighted-average exercise price of $8.93 per share, pursuant to our 2016 Plan, and (2) RSUs covering 3,308,780 shares of our common stock were outstanding pursuant to our 2016 Plan. For additional information regarding terms of our equity incentive plans, see the section titled “Executive and Director Compensation—Equity Incentive Plans.”
Registration Rights
After our initial publicUpon the completion of this offering, certain holders of shares of our common stock, including those shares of our common stock that werewill be issued upon the conversion of our Series A,redeemable convertible preferred stock in connection with this offering, will initially be entitled to certain rights with respect to registration of such shares under the Securities Act. These shares are referred to as registrable securities. The holders of these registrable securities possess registration rights pursuant to the terms of our Investors' Rights Agreement dated as of February 9, 2007, or the IRA,fourth amended and arerestated investors’ rights agreement which is described in additional detail below. We, along with Institutional Venture Partners XIII, L.P., entities affiliated with Polaris Venture Partners, as well as certain other parties, are parties to the IRA. We entered into the IRA in connection with the issuance of our Series A in 2007.
The registration of shares of our common stock pursuant to the exercise of the registration rights described below would enable the holders to trade these shares without restriction under the Securities Act when the applicable registration statement is declared effective. We will pay the registration expenses, other than underwriting discounts and selling commissions, and stock transfer taxes, of the shares registered pursuant to the demand, piggyback and Form S-3 registrations described below.
Generally, in an underwritten offering, the managing underwriter, if any, has the right, subject to specified conditions and limitations, to limit the number of shares the holders may include. The demand, piggyback and Form S-3 registration rights described below will expire five years afterupon the effective datecompletion of the registration statement, of which this prospectus forms a part,deemed liquidation event, or with respect to any particular holder, aton the date such time thatholder, together with its permitted transferees, affiliates and co-investors, beneficially owns less than 1% of our outstanding Common Stock and such holder can sell its shares under Rule 144 of the Securities Act during any three month period.144.
Demand Registration Rightsregistration rights
UnderUpon the completion of this offering, holders of 76,180,648 shares of our IRA,common stock, including 36,537,688 of our common stock issuable upon the written requestconversion of 18,268,844 shares of our redeemable convertible preferred stock in connection with this offering, will be entitled to certain demand registration rights. At any time following the effectiveness of this registration statement, certain holders of registrable securities have the right to make up to four requests that we register all or a majorityportion of their shares, subject to certain specified exceptions. If any of these holders exercises its demand registration rights, then holders of 130,761,984 shares of our common stock, including 46,162,160 shares of our common stock issuable upon the conversion of 23,081,080 shares of our redeemable convertible preferred stock in connection with this offering, will be entitled to register their shares, subject to specified conditions and limitations, in the corresponding offering.
Piggyback registration rights
In connection with this offering, holders of 130,761,984 shares of our common stock, including 46,162,160 shares of our common stock issuable upon the conversion of 23,081,080 shares of our redeemable convertible preferred stock in connection with this offering, are entitled to rights to notice of this offering and to include their shares of registrable securities then outstandingin this offering, which the requisite percentage of holders have waived. In the event that we file a registration statement under the Securities Act, we are obligatedpropose to use our reasonable best efforts to register the sale of all registrable securities that the holders may request in writing to be registered within 20 days of the mailing of a notice by us to all holders of such registration. We are required to effect no more than two registration statements that are declared or ordered effective. We may postpone the filing of a registration statement for up to 60 days twice in a 12-month period if in the good faith judgment of our board of directors such registration would be materially detrimental to us.
If we register any of our securities for public sale,under the Securities Act in another offering, either for our own account or for the account of other security holders, we will also have to register allholders of 130,761,984 registrable securities, that the holdersincluding 46,162,160 shares of such securities request in writing be registered within 20 days of mailing of notice by us to such holders of the proposed registration; however, we have no obligation to effect the registration of registrable securities held by the holders if the registrable securities sought to be included by the holders exceeds 67% of the
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total number of securities proposed to be offered and sold in connection with such registration. This piggyback registration right does not apply to a registration relating to any of our stock plans, stock purchase or similar plan, a transaction under Rule 145 of the Securities Act, a registration on any registration form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the registrable securities or a registration in which the only common stock being registered is common stock issuable upon the conversion of debt securities which are also being registered. The managing underwriter23,081,080 shares of any underwrittenour redeemable convertible preferred stock in connection with this offering, will have the rightbe entitled to limit, duecertain “piggyback” registration rights allowing them to marketing reasons, the number of shares registered by these holders to 30% of the total shares covered by the registration statement, unless such offering is our initial public offering, in which case, these holders may be excluded if the underwriters determine that the sale ofinclude their shares may jeopardizein such registration, subject to specified conditions and limitations.
Form S-3 registration rights
Upon the successcompletion of thethis offering, and noneholders of 130,761,984 shares of our other stockholder's securities are included in the offering.
The holderscommon stock, including 46,162,160 shares of our registrable securities cancommon stock issuable upon the conversion of 23,081,080 shares of our redeemable convertible preferred stock in connection with this offering, may request that we register all orof a portion of their shares on Form S-3 if we are eligiblequalified to file a registration statement on Form S-3, subject to specified exceptions. Such request for registration on Form S-3 must cover securities with an aggregate offering price which equals or exceeds $7.5 million, net of selling expenses. The right to have such shares registered on Form S-3 is further subject to other specified conditions and the aggregate price to the publiclimitations.
Anti-Takeover Provisions of Delaware Law and Our Charter Documents
Section 203 of the shares offered is in excess of $7.5 million (net underwriting discounts and commissions, if any). We may postpone the filing of a registration statement for up to 90 days once in a 12-month period if in the good faith judgment of our board of directors such registration would be materially detrimental to us.
Anti-takeover Provisions
Upon the completion of this offering, our amended and restated certificate of incorporation will provide for a board of directors comprised of three classes of directors, with each class serving a three-year term beginning and ending in different years than those of the other two classes. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Because our stockholders do not have cumulative voting rights, our stockholders holding a majority of the shares of common stock outstanding will be able to elect all of our directors. Our amended and restated certificate of incorporation and amended and restated bylaws to be effective upon the completion of this offering will provide that all stockholder actions must be effected at a duly called meeting of stockholders and not by a consent in writing, and that only the majority of our whole board of directors, the Chairman of our board of directors or our Chief Executive Officer may call a special meeting of stockholders.
Our amended and restated certificate of incorporation and amended and restated bylaws will provide that our directors may be removed only for cause and require an 80% supermajority stockholder vote for the rescission, alteration, amendment or repeal of the certificate of incorporation or bylaws by stockholders. Our amended and restated certificate of incorporation and amended and restated bylaws will also provide that vacancies occurring on our board of directors for any reason and newly created directorships resulting from an increase in the authorized number of directors may be filled only by vote of a majority of the remaining members of our board of directors. Our amended and restated bylaws will establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors. The combination of the classification of our board of directors, the lack of cumulative voting, supermajority stockholder voting requirements, the ability of the board to fill vacancies and the advance notice provisions will make it more difficult for our existing stockholders to replace our board of directors as well as for another party to obtain control of us by replacing our board of directors. Since our board of directors has the power to retain and discharge our officers, these provisions could also make it more difficult for existing stockholders or another party to effect a change in management. In addition, the authorization of
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undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change our control.
These provisions may have the effect of deterring hostile takeovers or delaying changes in our control or management. These provisions are intended to enhance the likelihood of continued stability in the composition of our board of directors and its policies and to discourage certain types of transactions that may involve an actual or threatened acquisition of us. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our stock that could result from actual or rumored takeover attempts.
We are subject to Section 203 of the Delaware General Corporation Law,DGCL, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years after the date that such stockholder became an interested stockholder, with the following exceptions:
•before such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;
•upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction began, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned (i)(1) by persons who are directors and also officers and (ii)(2) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
•
on or after such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of the stockholders, and not by written consent, by the affirmative vote of at least 662/3% 2/3% of the outstanding voting stock that is not owned by the interested stockholder.
In general, Section 203 defines business combinationa “business combination” to include the following:
•any merger or consolidation involving the corporation and the interested stockholder;
•any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;
•subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;
•any transaction involving the corporation that has the effect of increasing the proportionate share of the stock or any class or series of the corporation beneficially owned by the interested stockholder; or
•- and
the receipt by the interested stockholder of the benefit of any losses,loans, advances, guarantees, pledges or other financial benefits by or through the corporation.
In general, Section 203 defines an "interested stockholder"“interested stockholder” as an entity or person who, together with the person'sperson’s affiliates and associates, beneficially owns, or within a period of three years prior to the time of determination of interested stockholder status did own, 15% or more of the outstanding voting stock of the corporation.
TableThe statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.
Amended and restated certificate of Contents
incorporation and amended and restated bylawsChoiceBecause our stockholders do not have cumulative voting rights, stockholders holding a majority of Forum
the voting power of our shares of common stock will be able to elect all of our directors. Our amended and restated certificate of incorporation and amended and restated bylaws to be effective immediately prior to the completion of this offering will require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent or electronic transmission.
A special meeting of stockholders may be called by a majority of our board of directors, the chair of our board of directors, our chief executive officer or our lead independent director. Our amended and restated bylaws to be effective immediately prior to the completion of this offering will establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors.
In accordance with our amended and restated certificate of incorporation to be effective immediately prior to the completion of this offering, immediately after this offering, our board of directors will be divided into three classes with staggered three-year terms.
The foregoing provisions will make it more difficult for another party to obtain control of us by replacing our board of directors. Since our board of directors has the power to retain and discharge our officers, these provisions could also make it more difficult for existing stockholders or another party to effect a change in management. In addition, the authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change our control.
These provisions are intended to preserve our existing control structure after completion of this offering, facilitate our continued product innovation and the risk-taking that it requires, permit us to continue to prioritize
our long-term goals rather than short-term results, enhance the likelihood of continued stability in the composition of our board of directors and its policies and to discourage certain types of transactions that may involve an actual or threatened acquisition of us. These provisions are also designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage certain tactics that may be used in proxy fights.
However, such provisions could have the effect of discouraging others from making tender offers for our shares and may have the effect of deterring hostile takeovers or delaying changes in our control or management. As a consequence, these provisions may also inhibit fluctuations in the market price of our stock that could result from actual or rumored takeover attempts.
Choice of Forum
Our amended and restated certificate of incorporation to be effective immediately prior to the completion of this offering will provide that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will(or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) and any appellate court therefrom shall be the sole and exclusive forum for the following claims or causes of action under Delaware statutory or common law: (A) any derivative actionclaim or proceedingcause of action brought on our behalf; (B) any claim or cause of action asserting afor breach of a fiduciary duty;duty owed by any of our current or former directors, officers or other employees to us or our stockholders; (C) any claim or cause of action asserting a claim against us or any of our current or former directors, officers or other employees arising out of or pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or amended and restated bylaws (as each may be amended from time to time); (D) any claim or cause of action seeking to interpret, apply, enforce or determine the validity of our amended and restated bylaws;certificate of incorporation or amended and restated bylaws (as each may be amended from time to time, including any right, obligation, or remedy thereunder); (E) any claim or cause of action as to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware; and (F) any claim or cause of action against us or any action asserting a claim against us that isof our current or former directors, officers or other employees governed by the internal-affairs doctrine or otherwise related to our internal affairs, doctrine. The enforceability of similar choice of forum provisions in other companies' certificates of incorporation has been challenged in legal proceedings, and a court could find these types of provisionsall cases to be inapplicable or unenforceable.
Limitations of Liability and Indemnification
Asthe fullest extent permitted by law and subject to the court having personal jurisdiction over the indispensable parties named as defendants; provided, that, this Delaware law, provisionsforum provision set forth in our amended and restated certificate of incorporation andto be effective immediately prior to the completion of this offering shall not apply to claims or causes of action brought to enforce a duty or liability created by the Securities Act or the Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction.
Further, our amended and restated bylaws that will becomecertificate of incorporation to be effective immediately uponprior to the completion of this offering will limitprovide that unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, including all causes of action asserted against any defendant named in such complaint. For the avoidance of doubt, this provision is intended to benefit and may be enforced by us, our officers and directors, the underwriters for any offering giving rise to such complaint, and any other professional entity whose profession gives authority to a statement made by that person or eliminateentity and who has prepared or certified any part of the personal liabilitydocuments underlying the offering.
Additionally, our amended and restated certificate of incorporation to be effective immediately prior to the completion of this offering will provide that any person or entity holding, owning or otherwise acquiring any interest in any of our directors. Consequently,securities shall be deemed to have notice of and consented to these provisions.
Corporate Opportunity Doctrine
Delaware law permits corporations to adopt provisions renouncing any interest or expectancy in certain opportunities that are presented to the corporation or its officers, directors or stockholders. Our amended and
restated certificate of incorporation will, notto the fullest extent permitted from time to time by Delaware law, renounce any interest or expectancy that we otherwise would have in, all rights to be personally liableoffered an opportunity to us participate in, any business opportunity that are from time to time may be presented to LucasZoom, LLC, Permira Advisers LLC, FPLZ I, L.P., FPLZ II, L.P., GPI Capital Gemini Holdco, LP, TCV IX, L.P., TCV IX (A), L.P., TCV IX (B), L.P., TCV Member Fund, L.P., Bryant Stibel Growth, LLC and Bryant-Stibel Fund, I LLC, in each case together with their respective affiliates, and its and their affiliates’ directors, partners, principals, officers, members, managers and/or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for:
•any breach of the director's duty of loyalty to us or our stockholders;
•any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
•any unlawful payments related to dividends or unlawful stock repurchases, redemptions or other distributions; or
•any transaction from which the director derivedemployees (each such person, an improper personal benefit.
These limitations of liability do not alter director liability under the federal securities laws and do not affect the availability of equitable remedies, such as an injunction or rescission.
“exempt person”). Our amended and restated certificate of incorporation will provide that, to the fullest extent permitted by law and amendedin accordance with Section 122(17) of the DGCL, (1) no exempt person will have any duty to refrain from (x) engaging in a corporate opportunity in the same or similar business activities or lines of business in which we or our subsidiaries from time to time are engaged or proposes to engage or (y) otherwise competing, directly or indirectly, with the us or any of our subsidiaries; and restated bylaws that will become effective immediately upon(2) if any exempt person acquires knowledge of a potential transaction or other business opportunity which may be a corporate opportunity both for such exempt person or any of its, his or her respective affiliates, on the completion of this offering also requireone hand, and for us or our subsidiaries, on the other hand, such exempt person shall have no duty to indemnifycommunicate or offer such transaction or business opportunity to us or our directorssubsidiaries and officerssuch exempt person may take any and all such transactions or opportunities for itself or offer such transactions or opportunities to any other person. To the fullest extent permitted by Delaware law, no potential transaction or business opportunity may be deemed to be a corporate opportunity of us or our subsidiaries unless (1) we or our subsidiaries would be permitted to undertake such transaction or opportunity in accordance with the amended and as described under "Certain Relationships and Related Person Transactions,"restated certificate of incorporation, (2) we or our subsidiaries, at such time have entered into indemnification agreements with eachsufficient financial resources to undertake such transaction or opportunity, (3) we or our subsidiaries have an interest or expectancy in such transaction or opportunity, (4) such transaction or opportunity would be in the same or similar line of our directorsor our subsidiaries’ business in which we or our subsidiaries are engaged or a line of business that is reasonably related to, or a reasonable extension of, such line of business and officers.(5) such transaction or opportunity would be of practical advantage to us or our subsidiaries.
These provisions may discourage stockholders from bringing a lawsuit against our directors for breachLimitations of their fiduciary duty. These provisions may also haveLiability and Indemnification
See the effectsection titled “Management—Limitations of reducing the likelihood of derivative litigation against directorsLiability and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, your investment in our stock may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. We believe that these provisions, the indemnification agreements and the insurance are necessary to attract and retain talented and experienced directors and officers.Indemnification Matters.”
At present, there is no pending litigation or proceeding involving any of our directors or officers where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification.
Market Listing
We have applied for listing of our common stock on the NYSEThe Nasdaq Global Select Market under the symbol "LGZ."“LZ.”
Transfer Agent and Registrar
Upon the completion of this offering, theThe transfer agent and registrar for our common stock will be Wells Fargo BankComputershare Trust Company, N.A. The transfer agent and registrar’s address is 250 Royall Street, Canton, Massachusetts 02021, and its telephone number is (800) 962-4284.
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SHARES ELIGIBLE FOR FUTURE SALE
Before our initial publicPrior to this offering, there has not been ano public market for shares of our common stock.stock, and a liquid trading market for our common stock may not develop or be sustained after this offering. Future sales of substantial amounts of shares of our common stock, including shares issued upon the exercise of outstanding options or settlement of restricted stock units, and exercise of outstanding options, in the public market after our initial publicthe completion of this offering, or the possibility of theseperception that those sales occurring,may occur, could causeadversely affect the prevailing market price for our common stock from time to falltime or impair our ability to raise equity capital in the future.
After our initial public offering, we will have outstanding 40,328,846 As described below, only a limited number of shares of our common stock basedwill be available for sale in the public market for a period of several months after the completion of this offering due to contractual and legal restrictions on resale described below. Future sales of our common stock in the public market either before (to the extent permitted) or after restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price of our common stock at such time and our ability to raise equity capital at a time and price we deem appropriate.
Sale of Restricted Shares
Based on the number of shares of our common stock outstanding as of June 30, 2012. This includes 8,000,000March 31, 2021, upon the closing of this offering and assuming (1) the automatic conversion of all 23,081,080 shares thatof our outstanding redeemable convertible preferred stock into an aggregate of 46,162,160 shares of our common stock upon the completion of this offering, (2) no exercise of the underwriters’ option to purchase additional shares of common stock from us and (3) no exercise of outstanding options or vesting of outstanding restricted stock units, we andwill have outstanding an aggregate of approximately shares of common stock. Of these shares, all of the selling stockholders are sellingshares of common stock to be sold in our initial publicthis offering which shares maywill be resoldfreely tradable in the public market immediately followingwithout restriction or further registration under the Securities Act, unless the shares are held by any of our initial public offering, and assumes no additional exercise of outstanding options.
The 32,328,846 shares of common stock that were not offered and sold in our initial public offering“affiliates” as well as 4,963,653 shares of common stock underlying outstanding stock options and restricted stock units will be upon issuance, "restricted securities," as thatsuch term is defined in Rule 144 underor subject to lock-up agreements. All remaining shares of common stock held by existing stockholders immediately prior to the Securities Act.consummation of this offering will be “restricted securities,” as such term is defined in Rule 144. These restricted securities were issued and sold by us in private transactions and are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under the Securities Act, including the exemptions provided by Rule 144 or Rule 701 of the Securities Act, or Rule 701, which rules are summarized below.
As a result of the lock-up agreements referred to below and the provisions of Rule 144 and Rule 701 under the Securities Act, which are summarized below.
As a resultbased on the number of shares of our common stock outstanding as of March 31, 2021, the lock-up agreements described under "Underwriting" and subject toshares of our common stock (excluding the provisions of Rules 144 and 701 under the Securities Act, these restricted securitiesshares sold in this offering) that will be available for sale in the public market are as follows:
•on | | |
Approximate Number of Shares | | First Date Available for Sale into Public Market |
| shares | | days after the date of this prospectus, upon expiration of the lock-up agreements referred to below, subject in some cases to applicable volume, manner of sale and other limitations under Rule 144 and Rule 701. |
We may issue shares of common stock from time to time as consideration for future acquisitions, investments or other corporate purposes. In the dateevent that any such acquisition, investment or other transaction is significant, the number of this prospectus, 733,311 shares willof common stock that we may issue may in turn be availablesignificant. We may also grant registration rights covering those shares of common stock issued in connection with any such acquisition and investment.
In addition, the shares of common stock reserved for sale in the public market without restriction; and
•beginning 181 days after the date of this prospectus, subject to extension as described in "Underwriting," 31,595,535 shares (subject, in some cases, to volume limitations)future issuance under our 2021 Plan will become eligible for sale in the public market.
market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements, a registration statement under the Securities Act or an exemption from registration, including Rule 144 and Rule 701.
Rule 144
In general, persons who have beneficially owned restricted shares of our common stock for at least six months, and any affiliate of the company who owns shares of our common stock, are entitled to sell their securities without registration with the SEC under an exemption from registration provided by Rule 144.
Under Rule 144, as currently in effect, once we have been subject to the public company reporting requirements of the Exchange Act for at least 90 days, and we are current in our Exchange Act reporting at the time of sale, a person (or persons whose shares are required to be aggregated) who is not deemed to have been one of our affiliates“affiliates” for purposes of the Securities ActRule 144 at any time during the 90 days preceding a sale and who has beneficially owned restricted securities within the shares proposed to be soldmeaning of Rule 144 for at least six months, including the holding period of any prior owner other than one of our affiliates,“affiliates,” is entitled to sell those shares in the public market (subject to the lock-up agreement referred to below, if applicable) without complying with the manner of sale, volume limitationlimitations or notice provisions of Rule 144, but subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates,“affiliates,” then thatsuch person is entitled to sell thosesuch shares in the public market without complying with any of the requirements of Rule 144.
144 (subject to the lock-up agreement referred to below, if applicable). In general, under Rule 144, as currently in effect, once we have been subject to the public company reporting requirements of the Exchange Act for at least 90 days, our affiliates or persons selling“affiliates,” as defined in Rule 144, who have beneficially owned the shares on behalf of our affiliatesproposed to be sold for at least six months, are entitled to sell in the public market, upon the expiration of the any applicable lock-up agreements described below,and within any three-month period, beginning 90 days after the date of this prospectus, a number of those shares of our common stock that does not exceed the greater of:
•1% of the number of shares of common stock then outstanding, which will equal approximately 402,564 shares of common stock immediately after our initial publicupon the completion of this offering (calculated as of March 31, 2021 on the basis of the assumptions described above and assuming no exercise of the underwriter’s option to purchase additional shares from us and no exercise of outstanding options); or
•the average weekly trading volume of theour common stock on The Nasdaq Stock Market LLC during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.
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SalesSuch sales under Rule 144 by our affiliates“affiliates” or persons selling shares on behalf of our affiliates“affiliates” are also subject to certain manner of sale provisions, and notice requirements and to the availability of current public information about us. Notwithstanding the availability of Rule 144, the holders of substantially all of our restricted securities have entered into lock-up agreements as referenced below and their restricted securities will become eligible for sale (subject to the above limitations under Rule 144) upon the expiration of the restrictions set forth in those agreements.
Rule 701
In general, under Rule 701 as currently in effect, any of our employees, directors, officers, consultants or advisors who purchase sharesacquired common stock from us in connection with a written compensatory stock or option plan or other written agreement in a transactioncompliance with Rule 701 before the effective date of the registration statement of which this prospectus is a part (to the extent such common stock is not subject to a lock-up agreement) and who are not our initial public offering that was completed“affiliates” as defined in relianceRule 144 during the immediately preceding 90 days, is entitled to rely on Rule 701 and complied with the requirements of Rule 701 will, subject to the lock-up restrictions described under "Underwriting," be eligible to resell such shares beginning 90 days after the date of this prospectus in reliance on Rule 144, but without compliancecomplying with certain restrictions, including the holding period, contained innotice, manner of sale, public information requirements or volume limitation provisions of Rule 144.
Lock-up Agreements
All of Persons who are our directors and executive officers and the holders of approximately 98% of our securities have signed lock-up agreements under which they have agreed not to sell, transfer or dispose of, directly or indirectly, any“affiliates” may resell those shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock without the prior written consent of Morgan Stanley & Co. LLC and Merrill Lynch, Pierce, Finner & Smith Incorporated or LegalZoom for a period of 180 days, subject to possible extension under certain circumstances, after the date of this prospectus. These agreements are described below under "Underwriting."
Registration Rights
On the date beginning 18090 days after the date of this prospectus without compliance with minimum holding period requirements under Rule 144 (subject to the terms of the lock-up agreement referred to below, if applicable).
Lock-Up Agreements
We and our directors, our executive officers and substantially all of the holders of approximately 11,725,759our outstanding shares of common stock or securities convertible into or exchangeable into shares of our common stock outstanding upon the completion of this offering (the “lock-up parties”), have agreed, subject to certain exceptions, with the underwriters not to, during the period ending 180 days following the date of this prospectus (the “lock-up period”):
| (i) | offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock (including without limitation, common stock or such other securities which may be deemed to be beneficially owned by the lock-up party in accordance with the rules and regulations of the SEC and securities which may be issued upon exercise of a stock option or warrant), or publicly disclose the intention to make any offer, sale, pledge or disposition; |
| (ii) | enter into any hedging, swap or other agreement or transaction that transfers, in whole or in part, any of the economic consequences of ownership of the common stock or such other securities, whether any such transaction described in this clause (ii) or clause (i) above is to be settled by delivery of common stock or such other securities, in cash or otherwise; or |
| (iii) | make any demand for or exercise any right with respect to the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock. |
The lock-up party acknowledges and agrees in the lock-up agreement that the lock-up party is precluded from engaging in any hedging or their transferees,other transactions or arrangements (including, without limitation, any short sale or the purchase or sale of, or entry into, any put or call option, or combination thereof, forward, swap or any other derivative transaction or instrument, however described or defined) designed or intended, or which could reasonably be expected to lead to or result in, a sale or disposition or transfer (whether by the lock-up party or any other person) of any economic consequences of ownership, in whole or in part, directly or indirectly, of any common stock or any securities convertible or exercisable or exchangeable into common stock, whether any such transaction or arrangement (or instrument provided for thereunder) would be settled by delivery of such securities, in cash or otherwise. The lock-up party further confirms in the lock-up agreements that it has furnished J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC with the details of any transaction that the lock-up party, or any of its affiliates, is a party to as of the date of the relevant lock-up agreement, which transaction would have been restricted by such lock-up agreement.
Notwithstanding the foregoing, if (a) at least 130 days have elapsed since the date of the public offering, (b) we have issued quarterly earnings releases for the two quarters following the most recent period for which financial statements are included in this prospectus, in each case announced by press release through a major news service, or on a report on Form 8-K, which earnings releases, for this purpose, may not include the reporting of “flash” numbers or preliminary or partial earnings and (c) the lock-up period is scheduled to end during a blackout period (as defined below) or within ten trading days prior to a blackout period, the lock-up period shall end immediately prior to the opening of trading on the tenth trading day prior to the commencement of the blackout period. For this purpose, “blackout period” means a broadly applicable and regularly scheduled period during which trading in our securities would not be permitted under our insider trading policy. For the avoidance of doubt, notwithstanding anything to the contrary, in no event will the lock-up period end earlier than 130 days after the commencement of this public offering.
In addition, if (a) we have issued a quarterly earnings release for the first quarter following the most recent period for which financial statements are included in this prospectus by press release through a major news service, or on a report on Form 8-K, which earnings release, for this purpose, may not include the reporting of “flash” numbers or preliminary or partial earnings and (b) the last reported closing price of our common stock on the exchange on which our common stock is listed is at least 30% greater than the initial public offering price per share set forth on the cover page of this prospectus for at least 10 trading days (including the date on which these
conditions are satisfied) in any 15-day consecutive trading day period, then 10% of the aggregate number of shares of common stock owned by the lock-up party or issuable upon exercise of vested equity awards owned by the lock-up party, which percentage shall be calculated based on the lock-up party’s ownership as of the date of this prospectus, will be automatically released from such restrictions immediately prior to the opening of trading on the exchange on which the common stock is listed on the third trading day following the date on which the above conditions are satisfied; provided that if such early release date occurs during a blackout period, such early release date will be delayed until the opening of trading on the first trading day immediately following such blackout period. For the purposes of the lock-up agreements, a “trading day” is a day on which the NYSE or Nasdaq is open for buying and selling securities.
In addition to the restrictions contained in the lock-up agreements described above, we have entered into agreements with certain security holders, including the third amended and restated investors’ rights agreement and our standard forms of option agreement and restricted stock unit award agreement, that contain market stand-off provisions or incorporate market stand-off provisions from our equity incentive plans, imposing restrictions on the ability of such security holders to offer, sell or transfer our equity securities for a period of 180 days following the date of this prospectus.
Registration Rights
Upon the completion of this offering, the holders of up to 130,761,984 shares of our common stock will be entitled to certain rights with respect to the registration of thosetheir shares under the Securities Act. For a descriptionAct, subject to the lock-up agreements described under “—Lock-Up Agreements” above. Registration of these registration rights, please see "Description of Capital Stock—Registration Rights." If these shares are registered, they will beunder the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act.Act, except for shares purchased by affiliates, immediately upon the effectiveness of the registration statement of which this prospectus is a part. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock. The requisite percentage of these stockholders have waived all such stockholders’ rights to notice of this offering and to include their shares of registrable securities in this offering. See the section titled “Description of Capital Stock—Registration Rights.”
Stock OptionsEquity Incentive Plans
AsWe intend to file with the SEC a registration statement on Form S-8 under the Securities Act covering the shares of common stock reserved for issuance under our 2016 Plan, 2021 Plan and ESPP. The registration statement is expected to be filed and become effective as soon as practicable after the completion of this offering, we intend to file a Form S-8 registration statementoffering. Accordingly, shares registered under the Securities Act to register shares of our common stock subject to options outstanding or reserved for issuance under our 2000 Stock Option Plan, our 2010 Stock Incentive Plan and our 2012 Equity Incentive Plan. This registration statement will become effective immediately upon filing, and shares covered by that registration statement will thereupon be eligibleavailable for sale in the public markets,open market following its effective date, subject to vesting restrictions,Rule 144 volume limitations and the lock-up agreements described under "Underwriting" and Rule 144 limitations applicable to affiliates. For a more complete discussion of our stock plans, see "Executive Compensation—Incentive Compensation Plans."above, if applicable.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
FOR CONSEQUENCES TO NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certainsummary describes the material U.S. federal income tax consequences of the acquisition, ownership, and disposition of our common stock purchased pursuant toacquired in this offering by "Non-U.S.Non-U.S. Holders (as defined below). This discussion is not a summary for general information purposes only andcomplete analysis of all potential U.S. federal income tax consequences relating thereto, does not consider all aspects of federal taxationdeal with non-U.S., state, and local consequences that may be relevant to particular Non-U.S. Holders in light of their individual investmentparticular circumstances, orand does not address U.S. federal tax consequences (such as gift and estate taxes) other than income taxes. Special rules different from those described below may apply to certain types of Non-U.S. Holders that are subject to special tax rules, including partnerships or other pass-through entities, banks,treatment under the Code, such as financial institutions, or other financial services entities, broker-dealers, insurance companies, tax-exempt organizations, regulated investment companies, real estate investment trusts, controlledtax-qualified retirement plans, governmental organizations, broker- dealers and traders in securities, U.S. expatriates, “controlled foreign corporations, passive” “passive foreign investment companies,” corporations that accumulate earnings to avoid U.S. federal income tax, persons who usecorporations organized outside of the United States, any state thereof, or the District of Columbia that are required to use mark-to-market accounting,nonetheless treated as U.S. taxpayers for U.S. federal income tax purposes, persons that hold our sharescommon stock as part of a "straddle," a "hedge"“straddle,” “hedge,” “conversion transaction,” “synthetic security,” or a "conversion transaction," certain former citizensintegrated investment or permanent residentsother risk reduction strategy, persons who acquire our common stock through the exercise of the United States, investors in pass-through entities,an option or otherwise as compensation, persons subject to the alternative minimum tax. In addition, this summary does not address any tax considerations that may applyor federal Medicare contribution tax on net investment income, persons subject to Non-U.S. Holdersspecial tax accounting rules under Section 451(b) of the Code, “qualified foreign pension funds” as defined in Section 897(l)(2) of the Code and entities all of the interests of which are held by qualified foreign pension funds, partnerships and other pass-through entities or arrangements and investors in such pass-through entities or arrangements, persons deemed to sell our common stock under state, local or non-U.S. tax laws, or, except to the extent discussed below, the effectsconstructive sale provisions of any applicable gift or estate tax.
This summary is based on the Internal Revenue Code of 1986, as amended, or the Code, and applicablepersons that own, or are deemed to own, our common stock. Such Non-U.S. Holders are urged to consult their own tax advisors to determine the U.S. federal, state, local, and other tax consequences that may be relevant to them. Furthermore, the discussion below is based upon the provisions of the Code and Treasury Regulations, rulings, administrative pronouncements and judicial decisions thereunder, each as of the date of this registration statement, all of which are subjecthereof, and such authorities may be repealed, revoked, or modified, perhaps retroactively, so as to change or differing interpretations at any time with possible retroactive effect.result in U.S. federal income tax consequences different from those discussed below. We have not sought, and will not seek, anyrequested a ruling from the U.S. Internal Revenue Service or IRS(the IRS) with respect to the tax consequences discussed herein,statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS will not take a position contrary to the tax consequences discussed below or that any position taken by the IRS would not be sustained.agree with such statements and conclusions. This discussion assumes that a the Non-U.S. Holder will holdholds our common stock as a capital asset“capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment).
This discussion is for informational purposes only and is not tax advice. Persons considering the purchase of our common stock pursuant to this offering should consult their own tax advisors concerning the U.S. federal income, gift, estate, and other tax consequences of acquiring, owning, and disposing of our common stock in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction, including any state, local, or foreign tax consequences, or under any applicable income tax treaty.
For the purposes of this discussion, the term "Non-U.S. Holder"a “Non-U.S. Holder” is a beneficial owner of common stock that is neither a U.S. Holder nor a partnership (or other entity treated as a partnership for U.S. federal income tax purposes regardless of its place of organization or formation). A “U.S. Holder” means a beneficial owner of our sharescommon stock that is not:for U.S. federal income tax purposes any of the following:
•an individual who is a citizen or resident of the United States;
•a corporation or other entity taxabletreated as a corporation for U.S. federal income tax purposes created or organized or treated as created or organized, in or under the laws of the United States, or any state thereof, or the District of Columbia;
•an estate the income of which is subject to U.S. federal income taxtaxation regardless of its source; or
•a trust if (i) it (1) is subject to the primary supervision of a court within the United States and one or more U.S.United States persons as defined under(within the meaning of Section 7701(a)(30) of the Code,Code) have the authority to control all substantial decisions of the trust;trust or (ii) it(2) has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S.United States person.
An individual that is not a U.S. citizen may, in many cases, be deemed to be a U.S. resident, as opposed to a nonresident alien, by virtue of being present
Distributions
As described in the United States for at least 31 dayssection titled “Dividend Policy,” we do not anticipate declaring or paying any cash dividends in the calendar year and for an aggregateforeseeable future. However, if we do make distributions of at least 183 days during a three-year period ending in the current calendar year. For these purposes, all the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year are counted. Resident aliens are generally subject to U.S. federal income tax as if they were U.S. citizens. Such an individual is urged to consult hiscash or her own tax advisor regarding the U.S. federal income tax consequences of the ownership or disposition of our common stock. If a partnership (or entity or arrangement treated as a partnership for U.S. federal income tax purposes) is a beneficial owner ofproperty on our common stock the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our shares,
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you should consult your tax advisor regarding the tax consequences of the purchase, ownership, and disposition of our common stock.
This discussion is not tax advice. Prospective investors are urged to consult their own tax advisor regarding the U.S. federal, state and local, and non-U.S. income and other tax considerations of acquiring, holding and disposing of shares of our common stock.
Dividends and Distributions
In general, dividends paid to a Non-U.S. Holder, (tosuch distributions, to the extent paidmade out of our current or accumulated earnings and profits as(as determined under U.S. federal income tax principles), generally will constitute dividends for U.S. tax purposes and will be subject to U.S. withholding tax at a rate equal to 30% of the gross amount of the dividend, or a lower rate prescribed by an applicable income tax treaty, unless the dividends are effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States. Any distribution not constituting a dividend will be treated first as reducing the Non-U.S. Holder's basis in its shares of common stock, and to the extent it exceeds the Non-U.S. Holders basis, as capital gain (see "Sale of Other Taxable Disposition of Common stock" below).
A Non-U.S. Holder who claims the benefit of an applicable income tax treaty generally will be required to satisfy certain certification and other requirements prior to the distribution date. Non-U.S. Holders must generally provide the withholding agent with a properly executed IRS Form W-8BEN claiming an exemption from or reduction in withholding under an applicable income tax treaty. If tax is withheld in an amount in excess of the amount applicable under an income tax treaty, a refund of the excess amount may generally be obtained by filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under an applicable income tax treaty.
Dividends that are effectively connected with a Non-U.S. Holder's conduct of a U.S. trade or business (and, if required by an applicable income tax treaty, attributable to a U.S. permanent establishment of the Non-U.S. Holder) generally will not be subject to U.S. withholding tax if the Non-U.S. Holder files the required forms, including IRS Form W-8ECI, or any successor form, with the payor of the dividend, but instead generally will be subject to U.S. federal income tax on a net income basis in the same manner as if the Non-U.S. Holder were a resident of the United States. A corporate Non-U.S. Holder that receives effectively connected dividends may be subject to an additional branch profits tax at a rate of 30%, or a lower rate prescribed by an applicable income tax treaty, on the repatriation from the United States of its "effectively connected earnings and profits" for the taxable year, as adjusted for certain items.
Sale or Other Taxable Disposition of Common Stock
In general, a Non-U.S. Holder will not be subject to U.S. federal income tax on any gain realized upon the sale or other taxable disposition of the Non-U.S. Holder's shares of common stock unless:
(i)the gain is effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States (and, if required by an applicable income tax treaty, attributable to a U.S. permanent establishment of the Non-U.S. Holder);
(ii)the Non-U.S. Holder is an individual who holds shares of common stock as a capital asset and is present in the United States for 183 days or more in the taxable year of disposition and certain other conditions are met; or
(iii)we are or have been a "United States real property holding corporation" for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the period that the Non-U.S. Holder held the common stock, and, in the case where shares of our common stock are regularly traded on an established securities market, the Non-U.S. Holder owns, or is treated as owning, more than five percent of our common stock.
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Net gain realized by a Non-U.S. Holder described in clause (i) above generally will be subject to U.S. federal income tax in the same manner as if the Non-U.S. Holder were a resident of the United States. Any gains of a corporate Non-U.S. Holder described in clause (i) above may also be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, subject to the discussions below regarding effectively connected income, backup withholding, and foreign accounts. To obtain a reduced rate of withholding under a treaty, a Non-U.S. Holder generally will be required to provide us with a properly executed IRS Form W-8BEN (in the case of individuals) or IRS Form W-8BEN-E (in the case of entities), or other appropriate form, certifying the Non-U.S. Holder’s entitlement to benefits under that treaty. We do not intend to adjust our withholding unless such certificates are provided to us or our paying agent before the payment of dividends and are updated as may be required by the IRS. In the case of a Non-U.S. Holder that is an entity, Treasury Regulations and the relevant tax treaty provide rules to determine whether, for purposes of determining the applicability of a tax treaty, dividends will be treated as paid to the entity or to those holding an interest in that entity. If a Non-U.S. Holder holds our common stock through a financial institution or other agent acting on the holder’s behalf, the holder will be required to provide appropriate documentation to such agent. The holder’s agent will then be required to provide certification to us or our paying agent, either directly or through other intermediaries. If you are eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty and you do not timely file the required certification, you may be able to obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for a refund with the IRS.
Gain realizedWe generally are not required to withhold tax on dividends paid to a Non-U.S. Holder that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an individual Non-U.S. Holder describedapplicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains in clause (ii) abovethe United States) if a properly executed IRS Form W-8ECI, stating that the dividends are so connected, is furnished to us (or, if our common stock is held through a financial institution or other agent, to such agent). In general, such effectively connected dividends will be subject to U.S. federal income tax on a flat 30 percentnet income basis at the regular rates applicable to U.S. residents. A corporate Non-U.S. Holder receiving effectively connected dividends may also be subject to an additional “branch profits tax,” which is imposed, under certain circumstances, at a rate of 30% (or such lower rate as may be offsetspecified by an applicable treaty) on the corporate Non-U.S. Holder’s effectively connected earnings and profits, subject to certain adjustments. Non-U.S. Holders should consult their tax advisors regarding any applicable income tax treaties that may provide for different rules.
To the extent distributions on our common stock, if any, exceed our current and accumulated earnings and profits, they will first reduce the Non-U.S. Holder’s adjusted basis in our common stock, but not below zero, and then will be treated as gain to the extent of any excess amount distributed, and taxed in the same manner as gain realized from a sale or other disposition of our common stock as described in the next section.
Gain on Disposition of Our Common Stock
Subject to the discussions below regarding backup withholding and foreign accounts, a Non-U.S. Holder generally will not be subject to U.S. source capital losses, even thoughfederal income tax with respect to gain realized on a sale or other disposition of our common stock unless (a) the gain is effectively connected with a trade or business of such holder in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains in the United States), (b) the Non-U.S. Holder is a nonresident alien individual and is not considered a residentpresent in the United States for 183 or more days in the taxable year of the United States.
For purposesdisposition and certain other conditions are met, or (c) we are or have been a “United States real property holding corporation” within the meaning of clause (iii) above, a corporation isSection 897(c)(2) of the Code at any time within the shorter of the five-year period preceding such disposition or such holder’s holding period in our common stock. In general, we would be a United States real property holding corporation if the fair market value of its United Statesour U.S. real property interests equals
or exceeds 50% of the sum of the fair market value of itsour worldwide real property interests plus itsour other assets used or held for use in a trade or business. We believe that we have not been and we are not, and we do not anticipate becoming, a United States real property holding corporation. Even if we are treated as a United States real property holding corporation, gain realized by a Non-U.S. Holder on a disposition of our common stock will not be subject to U.S. federal income tax so long as (1) the Non-U.S. Holder owned, directly, indirectly, and constructively, no more than 5% of our common stock at all times within the shorter of (i) the five-year period preceding the disposition or (ii) the holder’s holding period in our common stock and (2) our common stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market. There can be no assurance that our common stock will continue to qualify as regularly traded on an established securities market for purposes of these rules. If any gain on your disposition is taxable because we willare or become a United States real property holding corporation.
U.S. Federal Estate Tax
The estatecorporation and your ownership of a nonresident alien individual is generally are subject to U.S. federal estate tax on property having a U.S. situs. Because we are a U.S. corporation, our common stock exceeds 5%, you will be U.S. situs property and therefore will be includedtaxed on such disposition generally in the taxable estate of a nonresident alien decedent, unless an applicable estate tax treaty between the United States and the decedent's country of residence provides otherwise.
Information Reporting and Backup Withholding
Generally, we must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. These information reporting requirements apply even if withholding was not required because the dividends weremanner as gain that is effectively connected with the Non-U.S. Holder's conduct of a U.S. trade or business within(subject to the United Statesprovisions under an applicable income tax treaty), except that the branch profits tax generally will not apply.
If you are a Non-U.S. Holder described in (a) above, you will be required to pay tax on a net income basis at the U.S. federal income tax rates applicable to U.S. Holders, and corporate Non-U.S. Holders described in (a) above may be subject to the additional branch profits tax at a 30% rate or withholding was reducedsuch lower rate as may be specified by an applicable income tax treaty. UnderIf you are a Non-U.S. Holder described in (b) above, you will be subject to U.S. federal income tax at a flat 30% rate (or such lower rate as may be specified by an applicable income tax treaty) on the net gain derived from the disposition, which gain may be offset by certain U.S.-source capital losses (even though you are not considered a resident of the United States), provided that the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses. Non-U.S. Holders should consult their tax advisors regarding any applicable income tax treaties that may provide for different rules.
Information Reporting Requirements and Backup Withholding
Information returns are required to be filed with the IRS in connection with distributions on our common stock. Unless you comply with certification procedures to establish that you are not a U.S. person, information returns may also be filed with the IRS in connection with the proceeds from a sale or other agreements, the IRSdisposition of our common stock. You may make its reports available to the tax authorities in the Non-U.S. Holder's country of residence.
Dividends paid to a Non-U.S. Holder that is not an exempt recipient generally will be subject to backup withholding currently aton payments on our common stock or on the proceeds from a rate of 28% of the gross proceeds, unless the Non-U.S. Holder certifies as to its foreign status, which certification may generally be made on IRS Form W-8BEN.
Proceeds from the sale or other disposition of our common stock by a Non-U.S. Holder effected by or throughunless you comply with certification procedures to establish that you are not a U.S. officeperson or otherwise establish an exemption. Your provision of a brokerproperly executed applicable IRS Form W-8 certifying your non-U.S. status will generally be subjectpermit you to information reporting andavoid backup withholding, currently at a rate of 28% of the gross proceeds, unless the Non-U.S. Holder certifies to the payor under penalties of perjury as to, among other things, its name, address and status as a Non-U.S. Holder or otherwise establishes an exemption. Payment of disposition proceeds effected outside the United States by or through a non-U.S. office of a non-U.S. broker generally will not be subject to information reporting or backup withholding if the payment is not received in the United States. Information reporting, but generally not backup withholding, will apply to such a payment if the broker has certain connections with the United States unless the broker has documentary evidence in its records that the beneficial owner thereof is a Non-U.S. Holder and specified conditions are met or an exemption is otherwise established.
Backup withholding is not an additional tax. Any amountwithholding. Amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder that results in an overpayment ofare not additional taxes generally willand may be refunded or credited against the holder'syour U.S. federal income tax liability, if any, provided that the required information is timely furnished to the IRS.
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Sections 1471 through 1474 of Contents
Foreign Accounts
Athe Code (commonly referred to as FATCA) impose a U.S. federal withholding tax of 30% may apply toon certain payments, including dividends paid on, and the gross proceeds of a disposition of, our common stock paid to a "foreignforeign financial institution"institution (as speciallyspecifically defined under theseby applicable rules) unless such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding certain U.S. account holders of such institution (which includes certain equity holders of such institution, as well as certain account holders that are foreign entities with U.S. owners). This U.S.FATCA also generally imposes a federal withholding tax of 30% will also apply toon certain payments, ofincluding dividends paid on, and the gross proceeds of a disposition of, our common stock paid to a non-financial foreign entity unless such entity provides the withholding agent with either certifiesa certification that it does not have any substantial direct or indirect U.S. owners or provides the withholding agent with a certification identifyinginformation regarding substantial direct and indirect U.S. owners of the entity. An intergovernmental agreement between the United States and an applicable foreign country may modify these requirements. The withholding tax described above will also not apply if the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from the rules. Under certain circumstances,
The U.S. Treasury Department has released proposed regulations which, if finalized in their present form, would eliminate the federal withholding tax of 30% applicable to the gross proceeds of a Non-U.S. Holder might be eligible for refunds or creditsdisposition of our common stock. In its preamble to such taxes. Prospective investorsproposed regulations, the U.S. Treasury Department stated that taxpayers may generally rely on the proposed regulations until final regulations are issued. Non-U.S. Holders are encouraged to consult with their own tax advisors regarding the possible implications of this legislationFATCA on their investment in our common stock.
Although these rules currently apply to applicable payments made after December 31, 2012,EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PURCHASING, HOLDING, AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY RECENT OR PROPOSED CHANGE IN APPLICABLE LAW.
UNDERWRITING
We are offering the IRS has issued Proposed Treasury Regulations providing that the withholding provisions described above will generally apply to payments of dividends made on or after January 1, 2014 and to payments of gross proceeds from a sale or other dispositionshares of common stock on or after January 1, 2015.
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UNDERWRITING
Under the terms and subject to the conditionsdescribed in an underwriting agreement dated the date of this prospectus the underwriters named below, for whomthrough a number of underwriters. J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as joint book-running managers of the offering and as representatives of the underwriters. We have severally agreedentered into an underwriting agreement with the underwriters. Subject to purchase,the terms and we andconditions of the selling stockholdersunderwriting agreement, we have agreed to sell to them,the underwriters, and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares indicated below:of common stock listed next to its name in the following table:
| | | | |
| | | | Number of
of Shares | | |
|---|
J.P. Morgan Stanley & Co.Securities LLC | | | | |
Merrill Lynch, Pierce, FennerMorgan Stanley & Smith
IncorporatedCo. LLC
| | | | |
Barclays Capital Inc. | | | | |
BofA Securities, Inc. | | | | |
Citigroup Global Markets Inc. | | | | |
Credit Suisse Securities (USA) LLC | | | | |
Jefferies LLC | | | | |
JMP Securities LLC | | | | |
Raymond James & Associates, Inc. | | | | |
William Blair & Company, L.L.C. | | | | |
| | | | |
RBC Capital Markets, LLCTotal
| | | | |
| | |
Cantor Fitzgerald & Co.
| | | | |
Montgomery & Co., LLC
| | | | |
| | | |
Total:
| | | 8,000,000 | |
| | | |
The underwriters and the representatives are collectively referred to as the "underwriters" and the "representatives," respectively. The underwriters are offeringcommitted to purchase all the shares of common stock subject to their acceptance of the shares fromoffered by us and subject to prior sale.if they purchase any shares. The underwriting agreement also provides that if an underwriter defaults, the obligationspurchase commitments of non-defaulting underwriters may also be increased or the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. offering may be terminated.
The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of common stock directly to the public at the initial public offering price listedset forth on the cover page of this prospectus and part to certain dealers.dealers at that price less a concession not in excess of $ per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. After the initial offering of the shares to the public, if all of common stock,the shares are not sold at the initial public offering price, the underwriters may change the offering price and the other selling termsterms. Sales of any shares made outside of the United States may be made by affiliates of the underwriters.
The underwriters have an option to buy up to additional shares of common stock from timeus to time be variedcover sales of shares by the representatives.
We andunderwriters which exceed the selling stockholdersnumber of shares specified in the table above. The underwriters have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus to exercise this option to purchase upadditional shares. If any shares are purchased with this option to 1,200,000purchase additional shares, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of common stock atare purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.
The underwriting fee is equal to the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the sharesper share of common stock offeredless the amount paid by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subjectunderwriters to certain conditions, to purchase about the same percentage of the additional sharesus per share of common stock as the number listed next to the underwriter's name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table.
stock. The underwriting fee is $ per share. The following table shows the per share and total public offering price, underwriting discounts and commissions and proceeds before expenses to us andbe paid to the selling stockholders. These amounts are shown
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underwriters assuming both no exercise and full exercise of the underwriters'underwriters’ option to purchase up to an additional shares of common stock.shares.
| | | | | | | | |
| |
| Without
| | option to
| | Total | |
|---|
purchase
| | Per Share | | No Exercise | | Full Exercise | | additional shares
exercise | | With full
option to
purchase
additional shares
exercise | |
|---|
Public offering pricePer Share
| | $ | | | $ | | | $ | | |
Underwriting discounts and commissions to be paid by:Total
| | $ | | | | | | | | | | |
Us
| | | | | | | | | | |
The selling stockholders
| | | | | | | | | | |
Proceeds, before expenses, to us
| | | | | | | | | | |
Proceeds, before expenses, to selling stockholders
| | | | | | | | $ | | |
The estimatedWe estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, payable by us, exclusive ofbut excluding the underwriting discounts and commissions, arewill be approximately $3.4 million, which includes$ . We have agreed to reimburse the underwriters for certain other expenses in an amount up to $ . We estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and printing costs and various other fees associatedcommissions, will be approximately $ . We have agreed to reimburse the underwriters for expenses relating to clearance of this offering with the listing of our common stock.Financial Industry Regulatory Authority up to $ .
A prospectus in electronic format may be made available on the web sites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The underwriters have informed us that they do not intend salesmay agree to discretionary accounts to exceed 5% of the totalallocate a number of shares of common stock offeredto underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by them.
We have applied for listing of our common stockthe representatives to underwriters and selling group members that may make Internet distributions on the NYSE under the trading symbol "LGZ".same basis as other allocations.
We and all directors and officers and the holders of approximately 97% of our outstanding stock and stock options are subject to lock-up agreements with the underwriters or us. Pursuant to the lock-up agreements with the underwriters, such persons have agreed that without the prior written consent of Morgan Stanley & Co. LLC and Merrill, Lynch, Pierce, Fenner & Smith Incorporated on behalf of the underwriters, we and they will not, during the period ending 180 days after the date of this prospectus:
•- subject to certain exceptions, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, or submit to, or file with, the Securities and Exchange Commission a registration statement under the Securities Act relating to, any shares of our common stock or
any securities convertible into or exercisable or exchangeable for shares of common stock;
•file any registration statement with the SEC relating to the offering of any shares of our common stock, or publicly disclose the intention to make any securities convertible intooffer, sale, pledge, loan, disposition or exercisablefiling, or exchangeable for common stock; or
•- (ii) enter into any swap or other arrangement that transfers
to another, in wholeall or in part, anya portion of the economic consequences ofassociated with the ownership of theany shares of common stock.
The restrictions applystock or any such other securities (regardless of whether any such transaction described above isof these transactions are to be settled by the delivery of shares of common stock or such other securities, in cash or otherwise. In addition, we andotherwise), in each such person agrees that,case without the prior written consent of J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC for a period of 180 days after the date of this prospectus, other than the shares of our common stock to be sold in this offering.
We and Merrill, Lynch, Pierce, Fenner & Smith Incorporated on behalfour directors, our executive officers and substantially all of the holders of our outstanding shares of common stock or securities convertible into or exchangeable into shares of our common stock outstanding upon the completion of this offering (the “lock-up parties”), have agreed, subject to certain exceptions, with the underwriters we or such other person will not to, during the 180-day restricted period ending 180 days following the date of this prospectus (the “lock-up period”):
| (i) | offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock (including without limitation, common stock or such other securities which may be deemed to be beneficially owned by the lock-up party in accordance with the rules and regulations of the SEC and securities which may be issued upon exercise of a stock option or warrant), or publicly disclose the intention to make any offer, sale, pledge or disposition; |
| (ii) | enter into any hedging, swap or other agreement or transaction that transfers, in whole or in part, any of the economic consequences of ownership of the common stock or such other securities, whether any such transaction described in this clause (ii) or clause (i) above is to be settled by delivery of common stock or such other securities, in cash or otherwise; or |
| (iii) | make any demand for or exercise any right with respect to the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock. |
The lock-up party acknowledges and agrees in the lock-up agreement that the lock-up party is precluded from engaging in any hedging or other transactions or arrangements (including, without limitation, any short sale or the purchase or sale of, or entry into, any put or call option, or combination thereof, forward, swap or any other derivative transaction or instrument, however described or defined) designed or intended, or which could reasonably be expected to lead to or result in, a sale or disposition or transfer (whether by the lock-up party or any other person) of any economic consequences of ownership, in whole or in part, directly or indirectly, of any common stock or any securities convertible or exercisable or exchangeable into common stock, whether any such transaction or arrangement (or instrument provided for thereunder) would be settled by delivery of such securities, in cash or otherwise. The lock-up party further confirms in the lock-up agreements that it has furnished J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC with the details of any transaction that the lock-up party, or any of its affiliates, is a party to as of the date of the relevant lock-up agreement, which transaction would have been restricted by such lock-up agreement.
Notwithstanding the foregoing, if (a) at least 130 days have elapsed since the date of the public offering, (b) we have issued quarterly earnings releases for the two quarters following the most recent period for which financial statements are included in this prospectus, in each case announced by press release through a major news service, or on a report on Form 8-K, which earnings releases, for this purpose, may not include the reporting of “flash” numbers or preliminary or partial earnings and (c) the lock-up period is scheduled to end during a blackout period (as defined below) or within ten trading days prior to a blackout period, the lock-up period shall end immediately prior to the opening of trading on the tenth trading day prior to the commencement of the blackout period. For this purpose, “blackout period” means a broadly applicable and regularly scheduled period during which trading in our securities would not be permitted under our insider trading policy. For the avoidance of doubt, notwithstanding anything to the contrary, in no event will the lock-up period end earlier than 130 days after the commencement of this public offering.
In addition, if (a) we have issued a quarterly earnings release for the first quarter following the most recent period for which financial statements are included in this prospectus by press release through a major news service, or on a report on Form 8-K, which earnings release, for this purpose, may not include the reporting of “flash” numbers or preliminary or partial earnings and (b) the last reported closing price of our common stock on the exchange on which our common stock is listed is at least 30% greater than the initial public offering price per share set forth on the cover page of this prospectus for at least 10 trading days (including the date on which these conditions are satisfied) in any 15-day consecutive trading day period, then 10% of the aggregate number of shares of common stock owned by the lock-up party or issuable upon exercise of vested equity awards owned by the lock-up party, which percentage shall be calculated based on the lock-up party’s ownership as of the date of this prospectus, will be automatically released from such restrictions immediately prior to the opening of trading on the exchange on which the common stock is listed on the third trading day following the date on which the above conditions are satisfied; provided that if such early release date occurs during a blackout period, such early release date will be delayed until the opening of trading on the first trading day immediately following such blackout period. For the purposes of the lock-up agreements, a “trading day” is a day on which the NYSE or Nasdaq is open for buying and selling securities.
The restrictions described in (i)-(iii) above are subject to certain additional exceptions, including the following transfers of the lock-up party’s common stock or securities convertible into or exercisable or exchangeable for common stock. Pursuantstock (including without limitation, common stock or such other securities which may
be deemed to be beneficially owned by the lock-up agreementsparty in their incentiveaccordance with the rules and regulations of the SEC and securities which may be issued upon exercise of a stock option agreements, such persons have agreed not to directly or indirectly offer, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of or otherwise dispose of or transfer any shares of our common stock held by it without our prior written consent for a period of 180 days.warrant):
The restrictions
| (1) | as a bona fide gift or gifts; |
| (2) | by will or intestacy; provided that any such securities transferred or disposed of by directors or officers shall remain subject to the terms of the lock-up agreement; |
| (3) | to any trust for the direct or indirect benefit of the lock-up party or the immediate family of the lock-up party, or if a lock-up party is a trust, to a trustor or beneficiary of the trust or to the estate of a beneficiary of such trust in a transaction not including a disposition for value; provided that any shares of such securities transferred or disposed of shall remain subject to the terms of the lock-up agreement; for purposes of the lock-up agreements, “immediate family” shall mean any relationship by blood, current or former marriage, domestic partnership or adoption, not more remote than first cousin; |
| (4) | to a nominee or custodian of a person or entity to whom a disposition or transfer would be permissible under clauses (1) through (3) above, and in each such case, subject to the same conditions; |
| (5) | by operation of law pursuant to a final qualified domestic order, divorce settlement, divorce decree or separation agreement or other final court order; |
| (6) | to us pursuant to agreements under which we have (A) the option to repurchase such shares or (B) a right of first refusal with respect to transfers of such shares upon termination of service of the lock-up party; |
| (7) | if the lock-up party is a corporation, partnership, limited liability company, trust or other business entity, (A) to another corporation, partnership, limited liability company, trust or other business entity that is an affiliate (as defined in Rule 405 promulgated under the Securities Act) of the lock-up party, or to any investment fund or other entity controlling, controlled by, managing or managed by or under common control with the lock-up party or affiliates of the lock-up party (including, for the avoidance of doubt, where the lock-up party is a partnership, to its general partner or a successor partnership or fund, or any other funds managed by such partnership), or (B) as part of a distribution, transfer or disposition without consideration by the lock-up party to its stockholders, partners, members or other equity holders; |
| (8) | that the lock-up acquired (A) in this public offering if the lock-up party is not an officer or director or (B) in open market transactions after the completion of this public offering; |
| (9) | (A) to us for the purposes of exercising (including for the payment of tax withholdings or remittance payments due as a result of such exercise) on a “net exercise” or “cashless” basis options, warrants or other rights to purchase shares of common stock and (B) in connection with the vesting or settlement of restricted stock units, by way of any transfer to us for the payment of tax withholdings or remittance payments due as a result of the vesting or settlement of such restricted stock units, and/or if the lock-up party is not an officer or director, any transfer of shares of common stock necessary to generate such amount of cash needed for the payment of taxes, including estimated taxes, due as a result of the vesting or settlement of restricted stock units; provided that in all such cases under clause (A) or (B), any such options, warrants, rights or restricted stock units were issued pursuant to equity awards granted under a stock incentive plan or other equity award plan; provided further that any shares of such securities received as a result of such exercise, vesting or settlement shall be subject to the terms of the lock-up agreement; |
| (10) | pursuant to a bona fide third-party tender offer, merger, consolidation or other similar transaction that is approved by our board of directors involving a change of control of the Company in which the acquiring party becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 of the Exchange Act) of more than 50% of total voting power of our voting stock following such transaction; provided that all of the securities subject to the lock-up agreement that are not so transferred, sold, tendered or otherwise disposed of remain subject to the lock-up agreement; provided further, that in the event that |
| such tender offer, merger, consolidation or other similar transaction is not completed, the lock-up party’s securities shall remain subject to the provisions of lock-up agreement; or |
| (11) | in connection with the conversion of outstanding shares of our preferred stock into common stock as described herein relating to this public offering, or any reclassification or conversion of the common stock, provided that any common stock received upon such conversion or reclassification will be subject to the restrictions set forth in this paragraph; |
provided that: (i) in the immediately preceding paragraphcase of any transfer or distribution pursuant to do not apply to:
•the sale of sharesclause (1), (3), (4), (5), and (7), each donee, transferee or distributee must execute and deliver to the underwriters;
•transfersRepresentatives a lock-up agreement; (ii) in the case of any transfer or distribution pursuant to clause (1), (3) or (4), no filing by any party (donor, donee, transferor or transferee) under the Exchange Act, or other public announcement reporting a selling stockholderreduction in beneficial ownership of shares of common stock shall be required or shall be made voluntarily in connection with such transfer or distribution (other than a filing on a Form 5 made after the lock-up period); (iii) in the case of any security convertible into common stock astransfer or distribution pursuant to clause (7) and (8), no filing by any party (donor, donee, transferor or transferee) under the Exchange Act, or other public announcement shall be required or shall be made voluntarily in connection with such transfer or distribution (other than a bona fide gift;
Tablefiling on a Form 5 made after the lock-up period); and (iv) in the case of Contents
•distributions byany transfer or distribution pursuant to clause (5), (6), (9) and (11), it shall be a selling stockholdercondition to such transfer that any filing under Section 16 of the Exchange Act, or other public filing, report or announcement reporting a reduction in beneficial ownership of shares of common stock shall clearly indicate in the footnotes thereto the nature and conditions of such transfer.Furthermore, notwithstanding the foregoing, the lock-up party may exercise an option or any security convertible intoother equity award to purchase shares of common stock or exercise warrants, provided that the shares of common stock issued upon such exercise shall continue to limited partnersbe subject to the restrictions on transfer set forth in the lock-up agreement.
If the lock-up party is an officer or stockholdersdirector, (i) at least three business days before the effective date of any release or waiver of the selling stockholder;
•- foregoing restrictions in connection with a transfer of shares of common stock, J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC on behalf of the
issuanceunderwriters will notify us of the impending release or waiver, and (ii) we will announce the impending release or waiver by press release through a major news service at least two business days before the effective date of the release or waiver. Any release or waiver granted by J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC on behalf of the underwriters to any such officer or director shall only be effective two business days after the publication date of such press release. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer not for consideration and (b) the transferee has agreed in writing to be bound by the Companysame terms described herein to the extent and for the duration that such terms remain in effect at the time of optionsthe transfer.The lock-up agreements do not prevent the lock-up party from establishing any contract, instruction or other stock-based compensation pursuant to equity compensation plans in existence onplan meeting the date hereof and, in each case, described in this prospectus;
•the establishmentrequirements of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of shares of common stock, provided that (1) such contract, instruction or plan does not provide for the transfersale of common stocksecurities subject to the lock-up agreement during the 180-day restrictedlock-up period and (2) no public announcement or filing by any person under the Exchange Act regardingor other publicannouncement shall be required or shall be made voluntarily in connection with the establishment of such plan shall be requiredcontract, instruction or plan.
J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC, in their sole discretion, may release shares of or voluntarily made by or on behalf of the partyour common stock and other securities subject to the trading planlock-up agreements described above in whole or in part at any time.
We have agreed to indemnify the Company;
•- underwriters against certain liabilities, including liabilities under the
entry into an agreement providing for the issuance by the CompanySecurities Act of shares of1933.We have applied to have our common stock or any security convertible into or exercisableapproved for listing/quotation on The Nasdaq Global Select Market under the symbol “LZ”.
In connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and selling shares of common stock in connection with joint ventures, commercial relationshipsthe open market for the purpose of preventing or other strategicretarding a decline in the market price of the common stock while this offering is in progress. These stabilizing transactions ormay include making short sales of common stock, which involves the acquisitionsale by the Companyunderwriters of any of its subsidiaries of the securities, business, property or other assets of another person or entity or pursuant to an employee benefit plan assumed by the Company in connection with such acquisition, and the issuance of any such securities pursuant to any such agreement; provided that the aggregatea greater number of shares of common stock that the Company may sell or issue or agreethan they are required to sell or issue shall not exceed 5% of the total number of shares of our common stock issued and outstanding immediately following the completion ofpurchase in this offering, and provided further that any such securities issued pursuant to such agreement shall be subject to substantially similar restrictions described in the immediately preceding paragraph, and the Company shall enter stop transfer instructions with the Company's transfer agent and registrar on such securities, which the Company agrees it will not waive or amend without the prior written consentpurchasing shares of Morgan Stanley & Co. LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated; or
•the filing of one or more registration statements on Form S-8 with respect to the issuance, vesting, exercise or settlement of options, restrictedcommon stock units or other equity awards granted or to be granted by the Company pursuant to any equity compensation plan described in this prospectus. The 180-day restricted period in the lock-up agreements with the underwriters described in the second preceding paragraph will be extended if:
•during the last 17 days of the 180-day restricted period we issue an earnings release or material news event relating to us occurs, or
•prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day restricted period,
open market to cover positions created by short sales. Short sales may be “covered” shorts, which are short positions in which case the restrictions described in the second preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is noan amount not greater than the numberunderwriters’ option to purchase additional shares referred to above, or may be “naked” shorts, which are short positions in excess of shares available for purchase by the underwriters under the over-allotment option.that amount. The underwriters canmay close out aany covered short saleposition either by exercising the over-allotmenttheir option to purchase additional shares, in whole or in part, or by purchasing shares in the open market. In determining the source of shares to close out a covered short sale,making this determination, the underwriters will consider, among other things, the open market price of shares available for purchase in the open market compared to the price available underat which the over-allotment
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option. The underwriters may also sellpurchase shares in excess ofthrough the over-allotment option creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market.to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering. As an additional means of facilitating this offering,To the extent that the underwriters may bid for, andcreate a naked short position, they will purchase shares in the open market to cover the position.
The underwriters have advised us that, pursuant to Regulation M of the Securities Act of 1933, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the common stock, including the imposition of penalty bids. This means that if the representatives of the underwriters purchase common stock in the open market in stabilizing transactions or to stabilizecover short sales, the pricerepresentatives can require the underwriters that sold those shares as part of this offering to repay the common stock. underwriting discount received by them.
These activities may raisehave the effect of raising or maintainmaintaining the market price of the common stock above independent market levels or preventpreventing or retardretarding a decline in the market price of the common stock.stock, and, as a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters are not required to engagemay carry out these transactions on The Nasdaq Global Select Market, in these activities and may end any of these activities at any time.the over-the-counter market or otherwise.
We, the selling stockholders and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.
A prospectus in electronic format may be made available on websites maintained by one or more underwriters, or selling group members, if any, participating in this offering. The representatives may agree to allocate a number of shares of common stock to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters that may make Internet distributions on the same basis as other allocations.
Pricing of the Offering
Prior to this offering, there has been no public market for our common stock. The initial public offering price waswill be determined by negotiations betweenamong us and the representatives. Amongrepresentatives of the factors considered inunderwriters. In determining the initial public offering price, were we and the representatives of the underwriters expect to consider a number of factors including:
the information set forth in this prospectus and otherwise available to the representatives;
our future prospects and thosethe history and prospects for the industry in which we compete;
an assessment of our industry inmanagement;
our prospects for future earnings;
the general our sales, earnings and certain other financial and operating information incondition of the securities markets at the time of this offering;
the recent periods, and the price-earnings ratios, price-sales ratios, market prices of, securities, and certain financialdemand for, publicly traded common stock of generally comparable companies; and operating information of companies engaged in activities similar to ours.
Directed Share Program
At our request,
other factors deemed relevant by the underwriters have reserved up to 250,000and us.
Neither we nor the underwriters can assure investors that an active trading market will develop for our shares, or approximately 3.1%, ofthat the common stock offered by this prospectus for sale,shares will trade in the public market at or above the initial public offering price, to our directors, officers, employees and certain other persons who are otherwise associated with us. The number of shares of our common stock available for sale to the general public will be reduced to the extent these persons purchase such reserved shares. Any reserved shares of our common stock that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of our common stock offered by this prospectus. We have agreed to indemnify the underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with sales of the reserved shares.price.
Relationships
SomeCertain of the underwriters and their affiliates have engaged,provided in the past to us and our affiliates and may provide from time to time in the future engage, incertain commercial banking, financial advisory, investment banking and other commercial dealings in the ordinary course of business withservices for us or our affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions.
In addition,such affiliates in the ordinary course of their business, activities,for which they have received and
may continue to receive customary fees and commissions. An affiliate of J.P. Morgan Securities LLC is the administrative agent and a lender, and an affiliate of Morgan Stanley & Co. LLC is a lender, under our 2018 Credit Facility. In addition, from time to time, certain of the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans)effect transactions for their own account or the account of customers, and for the accountshold on behalf of themselves or their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or
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financial instruments and may hold, or recommend to customers, that they acquire, long and/or short positions in our debt or equity securities or loans, and may do so in the future.
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and instruments.regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
Notice to prospective investors in Canada
The shares may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument Selling Restrictions45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
Notice to prospective investors in the European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a "Relevant Member State"“Relevant State”) an, no offer toof securities which are the publicsubject of any shares of our common stockthe offering contemplated by this prospectus may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State, of any shares of our common stock may be made other than:
at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
(a)- to any legal entity which is a
qualified investor“qualified investor” as defined in the Prospectus Directive;
(b)- Regulation;
at any time to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150 natural or legal persons (other than qualified investors“qualified investors” as defined in the Prospectus Directive)Regulation), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives forunderwriters; or
at any such offer; or
(c)time in any other circumstances falling within Article 3(2)1(4) of the Prospectus Directive, Regulation,provided that no such offer of shares of our common stocksecurities referred to above shall result in a requirement for the publication by us or any underwriter ofto publish a prospectus pursuant to Article 3 of the Prospectus Directive.Regulation or a supplemental prospectus pursuant to Article 23 of the Prospectus Regulation.
For the purposes of this provision, the expression an "offer“offer of securities to the public"public” in relation to any shares of our common stocksecurities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares of our common stockthe securities to be offered so as to enable an investor to decide to purchase any shares of our common stock, asor subscribe for the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression "Prospectus Directive" means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State,securities, and the expression "2010 PD Amending Directive"“Prospectus Regulation” means Directive 2010/73/EU.Regulation (EU) 2017/1129.
This prospectus and any other material in relation to the shares described hereindocument is only being distributed to and is only directed at (i) persons inwho are outside the United Kingdom, that are qualified investors within the meaning of Article 2(1)(e) of the Prospective Directive ("qualified investors") that also (i) have professional experience in matters relating to investmentsor (ii) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 as amended,(the “Order”), or the Order, (ii) who fall within(iii) high net worth entities, and other persons to whom it may lawfully be communicated, falling with Article 49(2)(a) to (d) of the Order or (iii)(iv) persons to whom itan invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000, as amended (the “FSMA”)) in connection with the issue or sale of any securities may otherwise lawfully be communicated or be caused to be communicated (all such persons together being referred to as "relevant persons"“relevant persons”). The sharessecurities are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such sharessecurities will be engaged in only with, relevant persons. This prospectus and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other person in the United Kingdom. Any person in the United Kingdom thatwho is not a relevant person should not act or rely on this prospectusdocument or any of its contents.
SwitzerlandNo offer of securities which are the subject of the offering contemplated by this prospectus may be made to the public in the United Kingdom, other than:
The shares may not be publicly offered
at any time to any legal entity which is a “qualified investor” as defined in SwitzerlandArticle 2 of the UK Prospectus Regulation;
at any time to fewer than 150 natural or legal persons (other than “qualified investors” as defined in Article 2 of the UK Prospectus Regulation) in the United Kingdom subject to obtaining the prior consent of the underwriters; or
at any time in any other circumstances falling within Section 86 of the FSMA,
provided that no such offer of securities referred to above shall result in a requirement for us or any underwriter to publish a prospectus pursuant to Section 85 of the FSMA or supplement a prospectus pursuant to Article 23 of the UK Prospectus Regulation.
For the purposes of this provision, the expression “an offer of securities to the public” in relation to any securities means the communication in any form and will not be listedby any means of sufficient information on the SIX Swiss Exchange (SIX) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or
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art. 1156terms of the Swiss Codeoffer and the securities to be offered so as to enable an investor to decide to purchase or subscribe for the securities and the expression “UK Prospectus Regulation” means Regulation (EU) 2017/1129 as it forms part of Obligations or the disclosure standards for listing prospectuses under art. 27 ff.domestic law by virtue of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.European Union (Withdrawal) Act 2018.”
Neither this document nor any other offering or marketing material relating to the offering, the Company, or the shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (FINMA), and the offer of shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (CISA). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of the shares.
Dubai International Financial Centre
This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority (DFSA). This prospectus is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility for the prospectus. The shares to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares offered should conduct their own due diligence on the shares. If you do not understand the contents of this prospectus you should consult an authorized financial advisor.
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LEGAL MATTERS
Our counsel, Sheppard, Mullin, Richter & HamptonCooley LLP, Los Angeles, California, will pass on the validity of the issuance of shares of common stock offered by this prospectus. The underwriters have beenare being represented by Latham & Watkins LLP, Los Angeles, California.LLP.
EXPERTS
The financial statements as of December 31, 20112019 and 20102020 and for each of the three years in the periodthen ended December 31, 2011 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act that registers the shares of our common stock to be sold in this offering. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules filed as part of the registration statement. For further information with respect to us and our common stock, we refer you to the registration statement, andincluding the exhibits and schedules filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, we refer you to the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. The reports and other information we file with the SEC can be read and copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. Copies of these materials can be obtained at prescribed rates from the SEC's Public Reference Room at such address. You may obtain information regarding the operation of the public reference room by calling 1-800-SEC-0330. The SEC also maintains a web site (http://www.sec.gov)website (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers, like us, that file electronically with the SEC.
Upon completion of this offering, we will become subject to the information reporting and information requirements of the Exchange Act and, as a result, will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying atreview on the SEC's public reference room and the web sitewebsite of the SEC referred to above. We also maintain a corporate website at http://www.legalzoom.com. Upon completion of this offering, you may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC, free of charge, at our corporate website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information contained on, or that can be accessed through, our websitewebsites shall not be deemed incorporated into and is not part of this prospectus or the registration statement of which it forms a part.part, and the inclusion of our website address in this prospectus is an inactive textual reference only.
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LEGALZOOM.COM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2009, 2010 and 2011 and the Six Months Ended June 30, 2011 and 2012
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of LegalZoom.com, Inc.:
In our opinion,Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of LegalZoom.com, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, cash flows andof comprehensive income, of redeemable convertible preferred stock and stockholders'stockholders’ deficit and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of LegalZoom.com, Inc. and its subsidiaries atthe Company as of December 31, 20112020 and 2010,2019, and the results of theirits operations and theirits cash flows for each of the three years in the periodthen ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements
Change in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for multiple deliverable revenue arrangementsrevenues from contracts with customers in 2010.2019.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidatedfinancial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
April 5, 2012, except for6, 2021
We have served as the two-for-three reverse stock split described in Note 2 as to which the date is July 31, 2012Company’s auditor since 2006.
LegalZoom.com, Inc.
Consolidated Balance Sheets
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LEGALZOOM.COM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)values)
| | | | | | | | | | | | | |
| | December 31, | |
| |
| |
|---|
| | June 30,
2012 | | Pro Forma
June 30,
2012 | |
|---|
| | 2010 | | 2011 | |
|---|
| |
| |
| | (unaudited)
| | (unaudited)
| |
|---|
Assets | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 19,169 | | $ | 27,108 | | $ | 31,374 | | $ | 31,374 | |
Restricted cash | | | 502 | | | — | | | — | | | | |
Accounts receivable, net of allowance of $53, $214, $223 (unaudited) and $223 (unaudited), respectively | | | 2,163 | | | 3,652 | | | 5,144 | | | 5,144 | |
Prepaid expenses and other current assets | | | 2,940 | | | 3,302 | | | 3,802 | | | 3,802 | |
Deferred income taxes | | | — | | | 6,498 | | | 5,685 | | | 5,685 | |
| | | | | | | | | | |
Total current assets | | | 24,774 | | | 40,560 | | | 46,005 | | | 46,005 | |
Property and equipment, net | | |
10,617 | | |
12,211 | | |
12,130 | | |
12,130 | |
Deferred income taxes | | | — | | | 430 | | | 430 | | | 430 | |
Other assets | | | 238 | | | 300 | | | 3,330 | | | 3,330 | |
| | | | | | | | | | |
Total assets | | $ | 35,629 | | $ | 53,501 | | $ | 61,895 | | $ | 61,895 | |
| | | | | | | | | | |
Liabilities, redeemable convertible preferred stock and stockholders' equity (deficit) | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | |
Accounts payable | | $ | 2,496 | | $ | 1,738 | | $ | 1,955 | | $ | 1,955 | |
Accrued expenses and other current liabilities | | | 9,937 | | | 19,434 | | | 23,239 | | | 23,239 | |
Capital lease obligations | | | 19 | | | 202 | | | 6 | | | 6 | |
Deferred revenue | | | 18,227 | | | 21,502 | | | 25,256 | | | 25,256 | |
| | | | | | | | | | |
Total current liabilities | | | 30,679 | | | 42,876 | | | 50,456 | | | 50,456 | |
Deferred revenue, net of current portion | | |
6,979 | | |
3,277 | | |
1,702 | | |
1,702 | |
Deferred rent | | | 2,811 | | | 3,864 | | | 3,711 | | | 3,711 | |
Capital lease obligations, net of current portion | | | 15 | | | — | | | — | | | — | |
Other liabilities | | | 6,004 | | | 603 | | | 810 | | | 810 | |
| | | | | | | | | | |
Total liabilities | | | 46,488 | | | 50,620 | | | 56,679 | | | 56,679 | |
| | | | | | | | | | |
Commitments and contingencies (Note 6) | | | | | | | | | | | | | |
Series A redeemable convertible preferred stock, $0.001 par value; 7,628 shares authorized, issued and outstanding at December 31, 2010 and 2011 and June 30, 2012 (unaudited); no shares authorized, issued and outstanding pro forma (unaudited); liquidation preference of $57,064 at December 31, 2011 and June 30, 2012 (unaudited) | | |
58,649 | | |
62,691 | | |
64,708 | | |
— | |
Stockholders' equity (deficit): | | | | | | | | | | | | | |
Common stock, $0.001 par value; 66,180 shares authorized; 20,944, 21,186 and 21,412 shares issued; and 20,764, 21,006 and 21,232 (unaudited) shares outstanding at December 31, 2010 and 2011, and June 30, 2012 (unaudited); 36,488 shares outstanding pro forma (unaudited) | | | 21 | | | 21 | | | 22 | | | 37 | |
Treasury stock, at cost; 180 shares at December 31, 2010 and 2011 and June 30, 2012 (unaudited) | | | (519 | ) | | (519 | ) | | (519 | ) | | (519 | ) |
Additional paid-in capital | | | 202 | | | 331 | | | — | | | 64,693 | |
Accumulated deficit | | | (69,212 | ) | | (59,643 | ) | | (58,995 | ) | | (58,995 | ) |
| | | | | | | | | | |
Total stockholders' equity (deficit) | | | (69,508 | ) | | (59,810 | ) | | (59,492 | ) | | 5,216 | |
| | | | | | | | | | |
Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit) | | $ | 35,629 | | $ | 53,501 | | $ | 61,895 | | $ | 61,895 | |
| | | | | | | | | | |
| | | | | | | | |
| | | December 31, | |
| | | 2019 | | | 2020 | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 49,180 | | | $ | 114,470 | |
Accounts receivable, net of allowance of $2,461 and $5,256 | | | 10,175 | | | | 8,555 | |
Prepaid expenses and other current assets | | | 10,091 | | | | 10,536 | |
| | | | | | | | |
Total current assets | | | 69,446 | | | | 133,561 | |
Property and equipment, net | | | 60,059 | | | | 51,374 | |
Goodwill | | | 9,806 | | | | 11,404 | |
Intangible assets, net | | | 3,078 | | | | 815 | |
Deferred income taxes | | | 20,250 | | | | 22,807 | |
Restricted cash equivalent | | | 25,000 | | | | 25,000 | |
Available-for-sale debt securities | | | 5,528 | | | | 1,050 | |
Other assets | | | 6,839 | | | | 6,053 | |
| | | | | | | | |
Total assets | | $ | 200,006 | | | $ | 252,064 | |
| | | | | | | | |
Liabilities, redeemable convertible preferred stock and stockholders’ deficit | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 16,763 | | | $ | 28,734 | |
Accrued expenses and other current liabilities | | | 36,426 | | | | 41,028 | |
Deferred revenue | | | 102,570 | | | | 127,142 | |
Current portion of long-term debt | | | 2,999 | | | | 3,029 | |
| | | | | | | | |
Total current liabilities | | | 158,758 | | | | 199,933 | |
Long-term debt, net of current portion | | | 515,391 | | | | 512,362 | |
Deferred revenue | | | 4,170 | | | | 2,937 | |
Other liabilities | | | 7,772 | | | | 16,558 | |
| | | | | | | | |
Total liabilities | | | 686,091 | | | | 731,790 | |
| | | | | | | | |
Commitments and contingencies (Note 13) | | | | | | | | |
Series A redeemable convertible preferred stock, $0.001 par value; 30,512 shares authorized at December 31, 2019 and 2020; 23,081 issued and outstanding at December 31, 2019 and 2020 | | | 70,906 | | | | 70,906 | |
Stockholders’ deficit: | | | | | | | | |
Common stock, $0.001 par value; 264,720 shares authorized; 124,382 and 125,037 shares issued and outstanding at December 31, 2019 and 2020, respectively | | | 125 | | | | 126 | |
Additional paid-in capital | | | 92,916 | | | | 102,417 | |
Accumulated deficit | | | (644,305 | ) | | | (639,348 | ) |
Accumulated other comprehensive loss | | | (5,727 | ) | | | (13,827 | ) |
| | | | | | | | |
Total stockholders’ deficit | | | (556,991 | ) | | | (550,632 | ) |
| | | | | | | | |
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit | | $ | 200,006 | | | $ | 252,064 | |
| | | | | | | | |
See Notes to The accompanying notes are an integral part of these consolidated financial statements
LegalZoom.com, Inc.
Consolidated Financial Statements.
Statements of Operations
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LEGALZOOM.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Revenue | | $ | 408,380 | | | $ | 470,636 | |
Cost of revenue | | | 136,915 | | | | 154,563 | |
| | | | | | | | |
Gross profit | | | 271,465 | | | | 316,073 | |
Operating expenses: | | | | | | | | |
Sales and marketing | | | 115,913 | | | | 171,390 | |
Technology and development | | | 37,204 | | | | 41,863 | |
General and administrative | | | 57,762 | | | | 51,017 | |
Impairment of goodwill, long-lived and other assets | | | 14,321 | | | | 1,105 | |
Loss on sale of business | | | — | | | | 1,764 | |
| | | | | | | | |
Total operating expenses | | | 225,200 | | | | 267,139 | |
| | | | | | | | |
Income from operations | | | 46,265 | | | | 48,934 | |
Interest expense, net | | | (38,559 | ) | | | (35,504 | ) |
Other income, net | | | 2,577 | | | | 3,713 | |
Impairment of available-for-sale debt securities of $4,912, net of $94 loss recognized in other comprehensive loss | | | — | | | | (4,818 | ) |
| | | | | | | | |
Income before income taxes and income from equity method investment | | | 10,283 | | | | 12,325 | |
Provision for income taxes | | | 3,161 | | | | 2,429 | |
| | | | | | | | |
Income before income from equity method investment | | | 7,122 | | | | 9,896 | |
Income from equity method investment | | | 321 | | | | — | |
| | | | | | | | |
Net income | | $ | 7,443 | | | $ | 9,896 | |
| | | | | | | | |
Net income attributable to common stockholders—basic | | $ | 5,422 | | | $ | 7,223 | |
| | | | | | | | |
Net income attributable to common stockholders—diluted | | $ | 5,476 | | | $ | 7,262 | |
| | | | | | | | |
Net income per share attributable to common stockholders: | | | | | | | | |
Basic | | $ | 0.04 | | | $ | 0.06 | |
| | | | | | | | |
Diluted | | $ | 0.04 | | | $ | 0.06 | |
| | | | | | | | |
Weighted-average shares used to compute net income per share attributable to common stockholders: | | | | | | | | |
Basic | | | 123,826 | | | | 124,709 | |
| | | | | | | | |
Diluted | | | 128,546 | | | | 127,259 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements
LegalZoom.com, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Net income | | $ | 7,443 | | | $ | 9,896 | |
Other comprehensive loss, net of tax: | | | | | | | | |
Change in foreign currency translation adjustments: | | | (2,507 | ) | | | (1,296 | ) |
| | | | | | | | |
Change in available-for-sale debt securities: | | | | | | | | |
Unrealized gains | | | 565 | | | | 108 | |
Reclassifications of losses to net income | | | — | | | | (94 | ) |
Reclassification upon conversion into other equity security | | | (334 | ) | | | — | |
| | | | | | | | |
Total change in available-for-sale debt securities | | | 231 | | | | 14 | |
Change in unrealized losses on cash flow hedges: | | | | | | | | |
Unrealized loss on interest rate cap and swaps | | | (3,847 | ) | | | (9,578 | ) |
Reclassification of prior hedge effectiveness and losses from interest rate cap to net income | | | — | | | | 2,760 | |
| | | | | | | | |
Total net changes in cash flow hedges | | | (3,847 | ) | | | (6,818 | ) |
| | | | | | | | |
Total other comprehensive loss | | | (6,123 | ) | | | (8,100 | ) |
| | | | | | | | |
Total comprehensive income | | $ | 1,320 | | | $ | 1,796 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements
LegalZoom.com, Inc.
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
Income (loss) | | | Total
Stockholders’
Deficit | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
Balance at December 31, 2018 | | | 23,081 | | | $ | 70,906 | | | | 123,617 | | | $ | 124 | | | $ | 92,201 | | | $ | (649,256 | ) | | $ | 396 | | | $ | (556,535 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative-effect adjustment upon adoption of ASC 606 | | | — | | | | — | | | | — | | | | — | | | | — | | | | 996 | | | | — | | | | 996 | |
Issuance of common stock upon exercise of stock options | | | — | | | | — | | | | 1,029 | | | | 1 | | | | 193 | | | | — | | | | — | | | | 194 | |
Issuance of common stock upon vesting of restricted stock awards | | | — | | | | — | | | | 263 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Shares surrendered for settlement of minimum statutory tax withholdings | | | — | | | | — | | | | (357 | ) | | | — | | | | (3,784 | ) | | | — | | | | — | | | | (3,784 | ) |
Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | 5,287 | | | | — | | | | — | | | | 5,287 | |
Net issuance and repayments of full recourse notes receivable | | | — | | | | — | | | | — | | | | — | | | | (3 | ) | | | — | | | | — | | | | (3 | ) |
Repurchase and retirement of common stock | | | — | | | | — | | | | (170 | ) | | | — | | | | — | | | | (1,535 | ) | | | — | | | | (1,535 | ) |
Repurchase of vested stock options and restricted stock units | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,953 | ) | | | — | | | | (1,953 | ) |
Special dividends | | | — | | | | — | | | | — | | | | — | | | | (978 | ) | | | — | | | | — | | | | (978 | ) |
Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6,123 | ) | | | (6,123 | ) |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 7,443 | | | | — | | | | 7,443 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2019 | | | 23,081 | | | $ | 70,906 | | | | 124,382 | | | $ | 125 | | | $ | 92,916 | | | $ | (644,305 | ) | | $ | (5,727 | ) | | $ | (556,991 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock upon exercise of stock options | | | — | | | | — | | | | 1,270 | | | | 1 | | | | 599 | | | | — | | | | — | | | | 600 | |
Issuance of common stock upon vesting of restricted stock awards | | | — | | | | — | | | | 245 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | 12,940 | | | | — | | | | — | | | | 12,940 | |
Shares surrendered for settlement of minimum statutory tax withholdings | | | — | | | | — | | | | (371 | ) | | | — | | | | (3,825 | ) | | | — | | | | — | | | | (3,825 | ) |
Net issuance and repayments of full recourse notes receivable | | | — | | | | — | | | | — | | | | — | | | | (8 | ) | | | — | | | | — | | | | (8 | ) |
Repurchase and retirement of common stock | | | — | | | | — | | | | (489 | ) | | | — | | | | — | | | | (4,939 | ) | | | — | | | | (4,939 | ) |
Special dividends | | | — | | | | — | | | | — | | | | — | | | | (205 | ) | | | — | | | | — | | | | (205 | ) |
Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (8,100 | ) | | | (8,100 | ) |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 9,896 | | | | — | | | | 9,896 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2020 | | | 23,081 | | | $ | 70,906 | | | | 125,037 | | | $ | 126 | | | $ | 102,417 | | | $ | (639,348 | ) | | $ | (13,827 | ) | | $ | (550,632 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months Ended
June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| |
| |
| |
| | (unaudited)
| | (unaudited)
| |
|---|
Revenues | | $ | 103,299 | | $ | 120,771 | | $ | 156,066 | | $ | 78,959 | | $ | 96,459 | |
Costs and operating expenses: | | | | | | | | | | | | | | | | |
Cost of services | | | 53,082 | | | 60,643 | | | 80,437 | | | 41,805 | | | 46,571 | |
Sales and marketing | | | 32,673 | | | 36,322 | | | 41,891 | | | 22,189 | | | 31,198 | |
Technology and development | | | 4,686 | | | 7,509 | | | 8,117 | | | 3,961 | | | 4,474 | |
General and administrative | | | 13,154 | | | 20,024 | | | 19,343 | | | 9,447 | | | 11,717 | |
| | | | | | | | | | | | |
Total costs and operating expenses | | | 103,595 | | | 124,498 | | | 149,788 | | | 77,402 | | | 93,960 | |
| | | | | | | | | | | | |
Income (loss) from operations | | | (296 | ) | | (3,727 | ) | | 6,278 | | | 1,557 | | | 2,499 | |
Interest and other expense, net | | | (33 | ) | | (15 | ) | | (153 | ) | | (74 | ) | | (76 | ) |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | (329 | ) | | (3,742 | ) | | 6,125 | | | 1,483 | | | 2,423 | |
Income tax (provision) benefit | | | (311 | ) | | (282 | ) | | 5,998 | | | (143 | ) | | (1,166 | ) |
| | | | | | | | | | | | |
Net income (loss) | | $ | (640 | ) | $ | (4,024 | ) | $ | 12,123 | | $ | 1,340 | | $ | 1,257 | |
| | | | | | | | | | | | |
Accretion of redeemable convertible preferred stock | | | (4,035 | ) | | (4,038 | ) | | (4,042 | ) | | (2,005 | ) | | (2,017 | ) |
Net income attributable to participating securities | | | — | | | — | | | (3,407 | ) | | — | | | — | |
| | | | | | | | | | | | |
Net income (loss) attributable to common stockholders | | $ | (4,675 | ) | $ | (8,062 | ) | $ | 4,674 | | $ | (665 | ) | $ | (760 | ) |
| | | | | | | | | | | | |
Net income (loss) per share attributable to common stockholders: | | | | | | | | | | | | | | | | |
Basic | | $ | (0.25 | ) | $ | (0.42 | ) | $ | 0.22 | | $ | (0.03 | ) | $ | (0.04 | ) |
| | | | | | | | | | | | |
Diluted | | $ | (0.25 | ) | $ | (0.42 | ) | $ | 0.19 | | $ | (0.03 | ) | $ | (0.04 | ) |
| | | | | | | | | | | | |
Weighted-average shares used to compute net income (loss) per share attributable to common stockholders: | | | | | | | | | | | | | | | | |
Basic | | | 18,700 | | | 19,360 | | | 20,925 | | | 20,878 | | | 21,136 | |
| | | | | | | | | | | | |
Diluted | | | 18,700 | | | 19,360 | | | 24,195 | | | 20,878 | | | 21,136 | |
| | | | | | | | | | | | |
Pro forma net income per share (unaudited): | | | | | | | | | | | | | | | | |
Basic | | | | | | | | $ | 0.34 | | | | | $ | 0.03 | |
| | | | | | | | | | | | | | | |
Diluted | | | | | | | | $ | 0.31 | | | | | $ | 0.03 | |
| | | | | | | | | | | | | | | |
Pro forma weighted-average common shares outstanding (unaudited): | | | | | | | | | | | | | | | | |
Basic | | | | | | | | | 36,181 | | | | | | 36,392 | |
| | | | | | | | | | | | | | | |
Diluted | | | | | | | | | 39,451 | | | | | | 40,598 | |
| | | | | | | | | | | | | | | |
LegalZoom.com, Inc.
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Cash flows from operating activities | | | | | | | | |
Net income | | $ | 7,443 | | | $ | 9,896 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 16,390 | | | | 20,097 | |
Amortization of debt issuance costs | | | 2,565 | | | | 2,591 | |
Amortization of prior hedge effectiveness | | | — | | | | 3,481 | |
Stock-based compensation | | | 5,181 | | | | 12,894 | |
Impairment of available-for-sale debt securities | | | — | | | | 4,818 | |
Impairment of goodwill and long-lived assets | | | 14,321 | | | | 1,105 | |
Loss on sale of business | | | — | | | | 1,764 | |
Deferred income taxes | | | 472 | | | | 1,325 | |
Change in fair value of financial guarantee | | | 1,900 | | | | (1,750 | ) |
Change in fair value of derivative instruments | | | 439 | | | | 205 | |
Unrealized foreign exchange gain | | | (2,572 | ) | | | (1,755 | ) |
Other | | | (299 | ) | | | 22 | |
Changes in operating assets and liabilities, net of effects of business combination and disposal of business: | | | | | | | | |
Accounts receivable | | | (413 | ) | | | 954 | |
Prepaid expenses and other current assets | | | (128 | ) | | | (799 | ) |
Other assets | | | 470 | | | | 1,153 | |
Accounts payable | | | 3,914 | | | | 12,416 | |
Accrued expenses and other liabilities | | | (1,568 | ) | | | 1,418 | |
Income tax payable | | | (985 | ) | | | 10 | |
Deferred revenue | | | 5,565 | | | | 23,204 | |
| | | | | | | | |
Net cash provided by operating activities | | | 52,695 | | | | 93,049 | |
| | | | | | | | |
Cash flows from investing activities | | | | | | | | |
Acquisition, net of cash acquired | | | — | | | | (934 | ) |
Purchase of property and equipment | | | (18,349 | ) | | | (10,587 | ) |
Purchase of other equity security | | | (668 | ) | | | — | |
Purchase of available-for-sale debt securities | | | (2,013 | ) | | | — | |
Proceeds from sale of equity method investment | | | 313 | | | | — | |
Sale of business, net of cash sold | | | — | | | | (1,206 | ) |
| | | | | | | | |
Net cash used in investing activities | | | (20,717 | ) | | | (12,727 | ) |
| | | | | | | | |
Cash flows from financing activities | | | | | | | | |
Repayment of capital lease obligations | | | (26 | ) | | | (31 | ) |
Repayment of 2018 Term Loan | | | (5,350 | ) | | | (5,350 | ) |
Proceeds from 2018 Revolving Facility | | | — | | | | 40,000 | |
Repayment of 2018 Revolving Facility | | | — | | | | (40,000 | ) |
Repayment of hybrid debt | | | — | | | | (1,249 | ) |
Repurchase of common stock | | | (1,535 | ) | | | (4,805 | ) |
Tender offer costs | | | — | | | | (145 | ) |
Repurchase of common stock and restricted stock units | | | (927 | ) | | | — | |
Payment of special dividends | | | (877 | ) | | | (284 | ) |
See The accompanying notes are an integral part of these consolidated financial statements
LegalZoom.com, Inc.
Consolidated Statements of Cash Flows (continued)
(In thousands)
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Payment of deferred purchase consideration | | | (547 | ) | | | — | |
Repurchases of common stock for tax withholding obligations | | | (3,784 | ) | | | (3,606 | ) |
Proceeds from exercise of stock options | | | 194 | | | | 381 | |
| | | | | | | | |
Net cash used in financing activities | | | (12,852 | ) | | | (15,089 | ) |
| | | | | | | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash equivalent | | | (495 | ) | | | 57 | |
Net increase in cash, cash equivalents and restricted cash equivalent | | | 18,631 | | | | 65,290 | |
Cash, cash equivalents and restricted cash equivalent, at beginning of the period | | | 55,549 | | | | 74,180 | |
| | | | | | | | |
Cash, cash equivalents and restricted cash equivalent, at end of the period | | $ | 74,180 | | | $ | 139,470 | |
| | | | | | | | |
Supplemental cash flow data | | | | | | | | |
Cash paid during the year for: | | | | | | | | |
Interest | | $ | 37,276 | | | $ | 27,864 | |
Income taxes | | | 1,469 | | | | 1,485 | |
| | |
Reconciliation of cash, cash equivalents, and restricted cash equivalent reported in the consolidated balance sheets | | | | | | | | |
Cash and cash equivalents | | $ | 49,180 | | | $ | 114,470 | |
Restricted cash equivalent | | | 25,000 | | | | 25,000 | |
| | | | | | | | |
Total cash, cash equivalents, and restricted cash equivalent shown in the consolidated statements of cash flows | | $ | 74,180 | | | $ | 139,470 | |
| | | | | | | | |
Non-cash investing and financing activities | | | | | | | | |
Purchase of property and equipment included in accounts payable and accrued expenses and other current liabilities | | $ | 1,268 | | | $ | 717 | |
Conversion of available-for-sale debt security into other equity security | | | 791 | | | | — | |
Change in fair value of hedged interest rate swaps and interest rate cap | | | 5,234 | | | | 412 | |
Transfer of interest rate swaps derivative liability to hybrid debt | | | — | | | | 12,345 | |
Contingent consideration for business acquired | | | — | | | | 1,250 | |
The accompanying notes are an integral part of these consolidated financial statements
LegalZoom.com, Inc.
Notes to Consolidated Financial Statements.
Statements
Table of Contents
LEGALZOOM.COM, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Series A
Redeemable
Convertible
Preferred
Stock | |
| |
| |
| |
| |
| |
| |
| |
|---|
| | Common Stock | |
| | Notes
Receivable
from
Stockholders | |
| |
| |
| |
|---|
| | Additional
Paid-In
Capital | | Treasury
Stock | | Accumulated
Deficit | | Total
Stockholders'
Deficit | |
|---|
| | Shares | | Amount | | Shares | | Amount | |
|---|
Balance at December 31, 2008 | | | 7,628 | | $ | 50,576 | | | 18,554 | | $ | 18 | | $ | — | | $ | (533 | ) | $ | (519 | ) | $ | (61,933 | ) | $ | (62,967 | ) |
Issuance of common stock upon exercise of stock options | | | — | | | — | | | 566 | | | 1 | | | 263 | | | — | | | — | | | — | | | 264 | |
Interest on notes receivable from stockholders | | | — | | | — | | | — | | | — | | | — | | | (21 | ) | | — | | | — | | | (21 | ) |
Stock-based compensation | | | — | | | — | | | — | | | — | | | 1,157 | | | — | | | — | | | — | | | 1,157 | |
Accretion of preferred stock | | | — | | | 4,035 | | | — | | | — | | | (1,420 | ) | | — | | | — | | | (2,615 | ) | | (4,035 | ) |
Net loss | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (640 | ) | | (640 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2009 | | | 7,628 | | $ | 54,611 | | | 19,120 | | $ | 19 | | $ | — | | $ | (554 | ) | $ | (519 | ) | $ | (65,188 | ) | $ | (66,242 | ) |
Issuance of common stock upon exercise of stock options | | | — | | | — | | | 1,644 | | | 2 | | | 2,881 | | | — | | | — | | | — | | | 2,883 | |
Interest on notes receivable from stockholders | | | — | | | — | | | — | | | — | | | — | | | (22 | ) | | — | | | — | | | (22 | ) |
Reclassification of non-recourse note receivable from founding third-party consultant | | | — | | | — | | | — | | | — | | | 39 | | | (39 | ) | | — | | | — | | | — | |
Settlement of non-recourse note receivable from founding third-party consultant for services rendered | | | — | | | — | | | — | | | — | | | — | | | 62 | | | — | | | — | | | 62 | |
Repayment of notes receivable from stockholders | | | — | | | — | | | — | | | — | | | — | | | 553 | | | — | | | — | | | 553 | |
Stock-based compensation | | | — | | | — | | | — | | | — | | | 1,320 | | | — | | | — | | | — | | | 1,320 | |
Accretion of preferred stock | | | — | | | 4,038 | | | — | | | — | | | (4,038 | ) | | — | | | — | | | — | | | (4,038 | ) |
Net loss | | | — | | | — | | | ��� | | | — | | | — | | | — | | | — | | | (4,024 | ) | | (4,024 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2010 | | | 7,628 | | $ | 58,649 | | | 20,764 | | $ | 21 | | $ | 202 | | $ | — | | $ | (519 | ) | $ | (69,212 | ) | $ | (69,508 | ) |
Issuance of common stock upon exercise of stock options | | | — | | | — | | | 242 | | | — | | | 336 | | | — | | | — | | | — | | | 336 | |
Stock-based compensation | | | — | | | — | | | — | | | — | | | 950 | | | — | | | — | | | — | | | 950 | |
Excess windfall tax benefits from stock-based compensation | | | — | | | — | | | — | | | — | | | 331 | | | — | | | — | | | — | | | 331 | |
Accretion of preferred stock | | | — | | | 4,042 | | | — | | | — | | | (1,488 | ) | | — | | | — | | | (2,554 | ) | | (4,042 | ) |
Net income | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 12,123 | | | 12,123 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2011 | | | 7,628 | | $ | 62,691 | | | 21,006 | | $ | 21 | | $ | 331 | | $ | — | | $ | (519 | ) | $ | (59,643 | ) | $ | (59,810 | ) |
Issuance of common stock upon exercise of stock options (unaudited) | | | — | | | — | | | 226 | | | 1 | | | 394 | | | — | | | — | | | — | | | 395 | |
Stock-based compensation (unaudited) | | | — | | | — | | | — | | | — | | | 683 | | | — | | | — | | | — | | | 683 | |
Accretion of preferred stock (unaudited) | | | — | | | 2,017 | | | — | | | — | | | (1,408 | ) | | — | | | — | | | (609 | ) | | (2,017 | ) |
Net income (unaudited) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,257 | | | 1,257 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2012 (unaudited) | | | 7,628 | | $ | 64,708 | | | 21,232 | | $ | 22 | | $ | — | | $ | — | | $ | (519 | ) | $ | (58,995 | ) | $ | (59,492 | ) |
| | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
Table of Contents
LEGALZOOM.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months
Ended June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| |
| |
| |
| | (unaudited)
| | (unaudited)
| |
|---|
Cash flows from operating activities | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (640 | ) | $ | (4,024 | ) | $ | 12,123 | | $ | 1,340 | | $ | 1,257 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 2,937 | | | 3,509 | | | 4,562 | | | 2,058 | | | 2,537 | |
Deferred income taxes | | | — | | | — | | | (6,928 | ) | | — | | | 813 | |
Stock-based compensation | | | 1,137 | | | 1,308 | | | 944 | | | 455 | | | 679 | |
Excess windfall tax benefits from stock-based compensation | | | — | | | — | | | (331 | ) | | — | | | — | |
Loss on disposal of property and equipment | | | 30 | | | 280 | | | 94 | | | — | | | — | |
Other | | | 20 | | | 93 | | | 22 | | | 9 | | | 8 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | |
Accounts receivable | | | (301 | ) | | (834 | ) | | (1,489 | ) | | (1,638 | ) | | (1,492 | ) |
Prepaid expenses and other current assets | | | 1,004 | | | (543 | ) | | (289 | ) | | (143 | ) | | (512 | ) |
Other assets | | | 6 | | | (49 | ) | | (74 | ) | | (28 | ) | | 5 | |
Accounts payable | | | (946 | ) | | 757 | | | (227 | ) | | 1,074 | | | 217 | |
Accrued expenses and other liabilities | | | 4,261 | | | 5,345 | | | 4,689 | | | 3,916 | | | 2,723 | |
Deferred revenue | | | 7,171 | | | (4,867 | ) | | (427 | ) | | 214 | | | 2,179 | |
Deferred rent | | | — | | | 513 | | | 1,053 | | | 555 | | | (153 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 14,679 | | | 1,488 | | | 13,722 | | | 7,812 | | | 8,261 | |
| | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | | | | | |
Decrease (increase) in restricted cash | | | (501 | ) | | (1 | ) | | 502 | | | 250 | | | — | |
Proceeds from disposal of property and equipment | | | — | | | 49 | | | — | | | — | | | 23 | |
Purchase of property and equipment | | | (3,983 | ) | | (4,721 | ) | | (6,562 | ) | | (4,090 | ) | | (2,419 | ) |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (4,484 | ) | | (4,673 | ) | | (6,060 | ) | | (3,840 | ) | | (2,396 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | | | | | |
Repayment of capital lease obligations | | | (17 | ) | | (19 | ) | | (384 | ) | | (102 | ) | | (197 | ) |
Payment of initial public offering costs | | | — | | | — | | | — | | | — | | | (1,797 | ) |
Payment of deferred financing costs | | | — | | | (31 | ) | | (6 | ) | | (4 | ) | | — | |
Proceeds from repayment of notes receivable from stockholders | | | — | | | 553 | | | — | | | — | | | — | |
Excess windfall tax benefits from stock-based compensation | | | — | | | — | | | 331 | | | — | | | — | |
Proceeds from exercise of stock options | | | 264 | | | 2,883 | | | 336 | | | 256 | | | 395 | |
| | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 247 | | | 3,386 | | | 277 | | | 150 | | | (1,599 | ) |
| | | | | | | | | | | | |
Net increase in cash and cash equivalents | | | 10,442 | | | 201 | | | 7,939 | | | 4,122 | | | 4,266 | |
Cash and cash equivalents, at beginning of the period | | | 8,526 | | | 18,968 | | | 19,169 | | | 19,169 | | | 27,108 | |
| | | | | | | | | | | | |
Cash and cash equivalents, at end of the period | | $ | 18,968 | | $ | 19,169 | | $ | 27,108 | | $ | 23,291 | | $ | 31,374 | |
| | | | | | | | | | | | |
Supplemental cash flow data | | | | | | | | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | | | | | | | | |
Interest | | $ | — | | $ | — | | $ | 15 | | $ | 6 | | $ | 12 | |
Income taxes | | | 1 | | | 110 | | | 754 | | | 535 | | | 490 | |
Non-cash investing and financing activities | | | | | | | | | | | | | | | | |
Accretion of Series A redeemable convertible preferred stock | | | 4,035 | | | 4,038 | | | 4,042 | | | 2,005 | | | 2,017 | |
Stock-based compensation capitalized as software development costs | | | 20 | | | 12 | | | 6 | | | 3 | | | 4 | |
Purchase of property and equipment included in accounts payable and accrued expenses | | | 324 | | | 1,180 | | | 386 | | | 1,595 | | | 442 | |
Deferred initial public offering costs included in accounts payable and accrued expenses | | | — | | | — | | | — | | | — | | | 1,240 | |
Acquisition of equipment under capital lease | | | — | | | — | | | 491 | | | 491 | | | — | |
Settlement of non-recourse note receivable | | | — | | | 62 | | | — | | | — | | | — | |
Tenant incentive for purchase of leasehold improvements | | | — | | | 2,554 | | | — | | | — | | | — | |
See Notes to Consolidated Financial Statements.
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LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of the 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-ownedwholly owned subsidiaries, (the "Company") conductsor referred to herein as “we,” “us,” or “our” has its operations fromexecutive headquarters located in Glendale, California, andits operational headquarters in Austin, Texas and San Francisco, California.
The Company isadditional 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 in the United States. The Company offersconsumers. We offer a broad portfolio of interactive legal documentsservices through itsour online legal platform that customers can tailor to their specific needs. The CompanyIn the United States, or U.S., we also offersoffer several subscription services, including legal plans through which customersbusinesses and consumers can be connected to an experienced attorney licensed in their jurisdiction, registered agent services, tax and compliance services and unlimited access to the Company'sour forms library.
Note 2. Summary of Significant Accounting Policies
A summary of the significant accounting policies followed by the Companywe follow in the preparation of the accompanying consolidated financial statements is set forth below.
The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America, or GAAP, and include the operations of LegalZoom.com, Inc. and its wholly-owned subsidiaries.GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.
In July 2011,On occasion, we enter into relationships or investments with other entities that may be a variable interest entity, or VIE. We analyze our interests, including agreements, loans, guarantees, and equity investments on a periodic basis to determine if such interests are variable interests. If variable interests are identified, then the Company effectedrelated entity is assessed to determine if it is a three-for-one stock splitVIE. If we determine that the entity is a VIE, we then assess if we must consolidate the VIE as the primary beneficiary. Our determination of its common stockwhether we are the primary beneficiary is based upon qualitative and a proportional adjustmentquantitative analyses, which assess the purpose and design of the VIE, the nature of the VIE’s risks and the risks that we absorb, the power to direct activities that most significantly impact the economic performance of the VIE, and the obligation to absorb losses or the right to receive benefits that could be significant to the conversion ratio for Series A redeemable convertible preferred stock ("Series A" or "preferred stock").VIE.
On July 19, 2012, the board of directors and stockholders of the Company approved a two-for-three reverse stock split of its common stock and a proportional adjustment to the conversion ratio for Series A that was effected on July 31, 2012.
All share, per-share and related information presented in these consolidated financial statements and accompanying footnotes have been retroactively adjusted, where applicable, to reflect the impact of the stock splits including an adjustment to the preferred stock conversion ratio.
The accompanying interim consolidated balance sheet as of June 30, 2012, the consolidated statements of operations and cash flows for the six months ended June 30, 2011 and 2012, the consolidated statement of stockholders' deficit for the six months ended June 30, 2012 and financial information disclosed in these notes to the consolidated financial statements related to the six months ended June 30, 2011 and 2012 are unaudited. These unaudited interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In the opinion of the Company's management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the Company's statement of financial position as of June 30, 2012 and its results of operations and its cash flows for the six months ended June 30, 2011 and 2012. The results for the six months ended June 30, 2012 are not necessarily indicative of the results expected for the full year.
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LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On January 31, 2012, the Company's board of directors approved the Company to prepare for the filing of an initial public offering of the Company's common stock. Immediately upon the closing of a qualifying initial public offering, all of the preferred stock outstanding will automatically convert into 15,256,000 shares of common stock. The unaudited pro forma balance sheet gives effect to the conversion of the preferred stock to stockholders' equity as of June 30, 2012. Unaudited pro forma basic and diluted net income per common share for the year ended December 31, 2011 and the six months ended June 30, 2012 has been computed to give effect to the conversion of the preferred stock into common stock, using the if-converted method, as though such conversion had occurred as of January 1, 2011.
The following table sets forth the computation of the Company's pro forma basic and diluted net income per share of common stock (in thousands, except for per share amounts):
| | | | | | | |
| | Year Ended
December 31,
2011 | | Six Months
Ended
June 30,
2012 | |
|---|
| | (unaudited)
| | (unaudited)
| |
|---|
Net income (loss) attributable to common stockholders | | $ | 4,674 | | $ | (760 | ) |
Pro forma adjustment to reverse accretion of preferred stock | | | 4,042 | | | 2,017 | |
Pro forma adjustment to reverse income attributable to | | | | | | | |
preferred stockholders | | | 3,407 | | | — | |
| | | | | | |
Net income used in computing pro forma net income per share: | | $ | 12,123 | | $ | 1,257 | |
| | | | | | |
Weighted average common shares outstanding, basic | | | 20,925 | | | 21,136 | |
Pro forma adjustment to reflect assumed conversion of redeemable convertible preferred stock | | | 15,256 | | | 15,256 | |
| | | | | | |
Weighted average common shares outstanding used in computing basic pro forma net income per share: | | | 36,181 | | | 36,392 | |
Effect of potentially dilutive securities—stock options | | | 3,270 | | | 4,206 | |
| | | | | | |
Weighted average common shares outstanding used in computing diluted pro forma net income per share: | | | 39,451 | | | 40,598 | |
| | | | | | |
Pro forma net income per share: | | | | | | | |
Basic | | $ | 0.34 | | $ | 0.03 | |
Diluted | | $ | 0.31 | | $ | 0.03 | |
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and the disclosureexpenses, and related disclosures of contingent assets and liabilities at the dates ofin the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates estimates whichaccompanying notes. Estimates are subjectused for, however not limited to, significant judgment including those related torevenue recognition, sales allowances and credit reserves, the evaluationavailable-for-sale debt securities, valuation of revenue recognition criteria, including the determination of standalone valuelong-lived assets and estimates of the selling price of deliverables in the Company's revenue arrangements, useful lives associated with propertygoodwill, income taxes, commitments and equipment, loss contingencies, valuation allowances related to deferred income taxesof assets and assumptions used toliabilities acquired in business combinations, fair value of derivative instruments and stock-based awards.compensation. Actual results could differ materially from those estimates.
The Company evaluates its estimates comparedextent to historical experiencewhich COVID-19 impacts our business and trends,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 formit will impact worldwide macroeconomic conditions, including interest rates, employment rates, and health insurance coverage; the basisspeed 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 December 31, 2020 and through the date of issuance of these consolidated financial statements. The accounting matters assessed included, but were not limited to, our allowance for making judgments aboutdoubtful accounts, sales allowances, and the carrying value of goodwill and other long-lived assets. While there was not a material impact on our consolidated financial statements at and for the year ended December 31, 2020, our future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to our consolidated financial statements in future reporting periods.
Business Combinations
The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities.
Tableliabilities of Contentsan acquired business being recorded at their estimated fair values on the acquisition date. Any excess purchase consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.
LEGALZOOM.COM, INC. AND SUBSIDIARIESWe perform valuations of assets acquired and liabilities assumed for an acquisition and allocate the purchase price to their respective net tangible and intangible assets. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. We generally engage the assistance of a third-party valuation firm in determining fair values of assets acquired and liabilities assumed and contingent consideration, if any, in a business combination.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expenses in the accompanying consolidated statements of operations.
Our Chief Executive Officer, as the Chief Operating Decision Maker, or CODM, organizes our company, manages resource allocations, and measures performance on the basis of one operating segment.
Revenue outside of the United States, based on the location of the customer, represented 4% and 1% of our consolidated revenue for 2019 and 2020, respectively. Our property and equipment located outside of the United States was 3% and 1% of our consolidated property and equipment as of December 31, 2019 and 2020, respectively.
Foreign Currency
The Company does not have any componentsBritish 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 accumulated other comprehensive income (loss) for any period presented,as a component of our consolidated statements of redeemable convertible preferred stock and accordingly, net income (loss) equals comprehensive income (loss).stockholders’ deficit. We recognized foreign currency transaction gains of $2.6 million and $1.8 million in 2019 and 2020, respectively.
The Company accounts for fair value measurements in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 820,Fair Value Measurements ("ASC 820"). ASC 820 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. Fair value is defined as the exchange price that would be received forfrom selling an asset, or paid to transfer a liability, (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants onat the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 describesThe standard establishes a fair value hierarchy based on three levelsthe level of inputs, of whichindependent, objective evidence surrounding the first two are considered observable and the last unobservable, that may beinputs used to measure fair
value. A financial instrument’s categorization within the fair value which arehierarchy is based upon the following:lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
| | | | | |
| Level 1 | | — | | Quoted prices in active markets for identical assets and liabilities. |
|
|
Level 2 — |
|
— |
|
Inputs other than Level 1Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly, such as quoted market prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.indirectly. |
|
|
Level 3 — |
|
— |
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputsAt December 31, 2019 and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value. For the periods presented, the Company has no2020, our financial assets orand liabilities recorded at fair value on a recurring basis.basis consist of cash equivalents, a restricted cash equivalent, available-for-sale debt securities, interest rate swaps, an interest rate cap and a financial guarantee derivative. Cash equivalents and the restricted cash equivalent consist of money market funds valued using quoted prices in active markets, which represents Level 1 inputs in the fair value hierarchy. Our interest rate swaps and interest rate cap are valued using observable market inputs including the London Interbank Offered Rate, or LIBOR, swap rates and third-party dealer quotes, which represent Level 2 inputs in the fair value hierarchy. The available-for-sale debt securities and financial guarantee derivative are valued using a Monte Carlo simulation, which include inputs that represent Level 3 inputs in the fair value hierarchy.
The carrying amounts of cash equivalents, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses and other current liabilities approximate fair values because of the short-term nature of these items. The fair value of our long-term debt is estimated by using quoted or sales prices of similar debt instruments, which represent Level 2 inputs in the fair value hierarchy.
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, respectively. Our bank accounts may, at times, exceed the FDIC and FSCS insured limits. Financial instruments that potentially subject the Companyus 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 accounts receivable. The Company, at times, maintains cash balances at financial institutionshave not experienced any losses in excess of amounts insured by United States government agencies. The Company places its cash and cash equivalents with high credit quality financial institutions.such accounts.
Concentrations of credit risk with respect to revenues are limited dueDue to a large and diverse customer base. Nobase, no individual customer represented more than 1% of total revenues for the years ended December 31, 2009, 2010 and 2011 and for the six months ended June 30, 2011 and 2012 (unaudited).
revenue in 2019 or 2020, respectively. At December 31, 2010, December 31, 20112019 and June 30, 2012 (unaudited),2020, there were no individualwas one customer accountwith an outstanding balance of 26% and 20% of our accounts receivable balances, that comprised more than 10% of accounts receivable.
Table of Contentsrespectively.
LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash and cash equivalents typically consist of highly liquid investments including certificates of deposits, with original maturities of three monthsninety days or less when purchased.from the date of purchase. At December 31, 2010, December 31, 20112019, and June 30, 2012, the Company's2020, our cash balances totaled $19.2 million, $27.1 million and $31.4 million (unaudited), respectively, and consist entirelyconsisted of bank account deposits and hence there are noour cash equivalents.equivalents consisted of $5.1 million and $5.2 million invested in money market funds, respectively.
During 2009, the Company established a relationship withOur restricted cash equivalent balance of $25.0 million as of December 31, 2019 and 2020 represents cash required to be held as collateral by a financial institution for credit and debit card merchant processing and procurement credit card services. Withto guarantee up to half of a $50.0 million personal loan provided by the establishmentfinancial institution to a former executive officer. The restriction lapses upon the repayment of the credit and debit card merchant processing services, the Company was required to maintain $250,000personal loan, which matures in an interest-bearing six-month certificate of deposit as collateral against debit card chargebacks or returned e-checks.September 2022. At December 31, 2010,2019 and 2020, our restricted cash equivalent of $25.0 million was invested in a money market fund with the certificate of deposit balance was $252,000 and was included in restricted cash. During 2011, the Company changed the financial institution providing merchant processing of credit cards and e-checks resulting in the removal of the requirement to maintain the certificate of deposit by thesame financial institution.
Similarly, for the procurement credit card services, the Company was required to maintain, in a non-interest bearing account, a balance of $250,000 equivalent to the credit limit on such procurement credit cards, which was included in restricted cash at December 31, 2010. In February 2011, the financial institution removed the requirement to maintain the $250,000 collateral against the available credit limit on the procurement credit cards. There are no restricted cash balances at December 31, 2011 and June 30, 2012 (unaudited).
Accounts Receivable and Related Allowances
The Company'sOur accounts receivable balance, which is not collateralized and does not bear interest, primarily consists of amounts receivable from (i) the Company'sour credit and debit card merchant processor, (ii)processors, customer receivables, and (iii) fees due from third-parties for services purchased by the Company'sour customers from such third-parties. The Company does not obtain collateral or other security related toWe reduce our accounts receivable. Merchant processor receivables, which do not bear interest, arise due to the time taken to clear transactions through external payment networks, which typically ranges between two to five business days,receivable for sales allowances and are recorded net of processing fees. Customer receivables arise from the Company's three-pay plan where the customers have the option to pay the total amount due in three equal payments, with the first payment being due upon placement of the order and the remaining two payments being due 30 and 60 days after the first payment date. Accordingly, the customer receivable balances included in the consolidated balance sheets represent those second- and third-payments due to the Companya reserve for which services have been rendered, net of the related sales allowance for charge-back or credits. The sales allowance for three-pay plan receivables is determined based on the Company's best estimate ofpotentially uncollectible receivables. We determine the amount of charge-backs or credits in its existing accounts receivable and is recorded against revenues as further described in Note 3.
The Company also maintains an allowance for doubtful accounts for its receivables from third-party service providersthe allowances based on itsvarious factors including historical collection experience, and a review in each periodthe age of the statusaccounts receivable balances, credit quality of the then outstanding accounts receivables, with an emphasis on thoseour customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that are over 90 days past due.may affect our ability to collect from customers. Account balances are charged off against the allowance when the Company determineswe determine that it is not probable we will collect the receivable will not be recovered. To date, the allowance for doubtful accounts has not been significant.
Table of Contentsreceivable.
LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and equipment are stated at cost, less accumulated depreciationdepreciation. Repairs and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, as shown in the table below. Maintenance and repairsmaintenance are expensed as incurred whereas significant renewals and bettermentsenhancements are capitalized. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation are removed from the respective accounts and any resulting gain or loss is reflected in the Company'sour results of operations. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets as follows:
| | |
| | | | | Useful Life (years)
(Years) |
|---|
Purchased and internally developedinternal-use software | | 3 |
Building and building improvements | | 5–30 |
Land improvements | | 7 |
Furniture and office equipment | | 5 |
Computer hardware | | 3 |
Land | | Indefinite |
Leasehold improvements | | Shorter of
lease term
or
useful life
|
The Company capitalizes thedevelopment costs associated withinclude costs to develop software developed or obtained forto be used to meet internal use whenneeds and applications used to deliver our services. We capitalize development costs related to these software applications once the preliminary project stage is completedcomplete and it is determinedprobable that the software or significant modification thereto,project will provide significantly enhanced capabilities whichbe completed and the software will be used to perform the function intended. These capitalizedWe amortize internal-use software costs include external direct coston a straight-line basis over their estimated useful life of services procured in developing or obtaining internal usethree years commencing when the internal-use software and personnel and related benefits, including stock-based compensation for employees who are directly associated with the development of internal use software projects. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended purpose. Post-implementation training and maintenance costs are expensed as incurred. The Company does not transfer ownership of, or lease its software to its customers or third-parties.
Costs related to development of internal useinternal-use software that has not yet been placed in service are included in the accompanying consolidated balance sheets in software development costsproperty and equipment, net.
Intangible Assets and Other Long-Lived Assets
Intangible assets are stated at cost, net of accumulated amortization. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, which approximates the pattern in progress.which the economic benefits are consumed. We amortize our intangible assets over an estimated useful life of three years.
The Company assessesWe assess the impairment of long-lived assets, which consist primarily of property and equipment, intangible assets, and capitalized internal-use software costs, whenever events or changes in circumstances indicate that such assets might be impaired and the carrying value may not be recoverable. Events or changes in circumstances that may indicate thatImpairment testing is performed at an asset is impaired include significant decreases inlevel that represents the market valuelowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, or an asset significant underperformance relative to expected historical or projected future results of operations, a change in the extent or manner in whichgroup. If an asset group is utilized, significant declines in the estimated fair value of the overall Company for a sustained period, shifts in technology, loss of key management or personnel, changes in the Company's operating model or strategy and competitive forces.
If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the expected undiscounted future cash flows attributable to the asset are less than the carrying amount of the asset,considered impaired, an impairment loss equal to the excess of the asset'sasset group’s carrying value over itstheir fair value is
recorded. Fair value is determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risk involved, quoted market prices, or appraised values, depending on the nature of the assets.
Goodwill
Goodwill represents the excess of the aggregate fair value of the consideration transferred in a business combination over the fair value of the assets acquired, net of liabilities assumed. Goodwill is not amortized, however, it is subject to impairment testing at the reporting unit level annually during the fourth quarter of our fiscal year or more frequently if events or changes in circumstances indicate that goodwill may be impaired.
In assessing impairment, we have the option to first assess qualitative factors to determine whether or not a reporting unit is impaired. Alternatively, we may perform a quantitative impairment assessment or if the qualitative assessment indicates that it is more-likely-than-not that the reporting unit’s fair value is less than its carrying amount, a quantitative analysis is required. The Companyquantitative analysis compares the estimated fair value of the reporting unit with its respective carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount including goodwill, goodwill is considered not to be impaired. If the fair value is less than the carrying amount including goodwill, then a goodwill impairment charge is recorded by the amount that the carrying value exceeds the fair value, up to the carrying amount of goodwill.
Derivative Financial Instruments
Derivative financial instruments, which include interest rate swaps, an interest rate cap, and a financial guarantee relating to a former executive officer, are recorded at fair value. For derivatives that qualify for hedge accounting, specifically as cash flow hedges, the change in fair value of the derivatives is recorded as an unrealized gain (loss), net of taxes, in the accompanying consolidated statements of comprehensive income. For derivatives that do not qualify for hedge accounting, the change in the fair value of our derivatives related to our long-term debt are recorded in interest expense, net, and the change in the fair value of our financial guarantee is recorded in other income, net, in the accompanying consolidated statements of operations.
Available-for-sale Debt Securities
At December 31, 2019 and 2020, we held long-term investments in two companies through the purchase of convertible promissory notes. These investments are classified as available-for-sale debt securities and the changes in fair values of these securities are recognized in other comprehensive loss, net of tax, in the accompanying consolidated statements of comprehensive income. We periodically review our available-for-sale debt securities to determine if there has notbeen an other-than-temporary decline in fair value. If the impairment is deemed other-than-temporary, the portion of the impairment related to credit losses is recognized in the accompanying consolidated statements of operations, and the portion related to non-credit related losses is recognized in other comprehensive loss. In 2020, we recorded anyan other-than-temporary impairment of its long-lived assetsan available-for-sale debt security of $4.9 million, of which $4.8 million was recognized as other expense in our statement of operations and $0.1 million was recognized in other comprehensive loss.
Equity Method Investments
We have investments in common stock or in-substance common stock of certain entities. Investments through which we exercise significant influence but do not have control over the affiliates are accounted for under the equity method. Our proportional share of affiliate earnings or losses are included in income from equity method investment in our consolidated statements of operations. Losses in affiliates are recorded until the carrying value of our investment is reduced to zero. Investments accounted for under the equity method are not material, individually or in the aggregate, to our financial position, results of operations or cash flows for any period presented.
Investments in Other Equity Securities
We hold investments in equity securities of certain privately held companies, which do not have readily determinable fair values. We have elected to measure these non-marketable investments at cost, with remeasurements to fair value only upon the occurrence of observable price changes in orderly transactions for the identical or similar securities of the periods presented.
Tablesame issuer, or in the event of Contentsany impairment. This election is reassessed each reporting period to determine whether a non-marketable equity security has a readily determinable fair value, in which case they would no longer be eligible for this election. We evaluate our non-marketable equity securities for impairment at each reporting period based on a qualitative assessment that considers various potential impairment indicators. If an impairment exists, a loss is recognized in the consolidated statements of operations for the amount by which the carrying value exceeds the fair value of the investment. We include investments in equity securities within other assets in the accompanying consolidated balance sheets.
LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company recordsFor operating leases, we record rent expense for operating leases, some of which have escalating rent payments, over the term of the lease, on a straight-line basis over the lease term. The Company begins recognition of rent expense on the date of initial possession, which is generally when the Company enters the leased premises and begins to make improvements in preparation for its intended use. Some of the Company'sour lease arrangements provide for concessions by the landlords, including payments for leasehold improvements and rent-free periods. The Company accountsWe account for the difference between the straight-line rent expense and rent paid as a deferred rent liability.
The Company leasesWe also lease certain equipment under capital lease arrangements. The assets and liabilities under capital lease are recorded at the lesser of the present value of aggregate future minimum lease payments, including estimated bargain purchase options, or the fair value of the asset under lease. Assets under capital leaseleases are amortized using the straight-line method over the estimated useful lives of the assets. Capital lease obligations, which are not material as of December 31, 2019 and 2020, are included in other liabilities in the accompanying consolidated balance sheets.
Debt Issuance Costs
Debt issuance costs associated with our term loans are deducted from the carrying value of current and long-term debt in the accompanying consolidated balance sheets and are amortized over the term of the loan using the effective interest method. Debt issuance costs associated with revolving facilities are classified as other assets in the accompanying consolidated balance sheets and are amortized over the term of the respective facility on a straight-line basis. Debt issuance costs are amortized to interest expense, net in the accompanying consolidated statements of operations.
Deferred Offering Costs
We record certain legal, accounting, and other third-party fees in other assets that are directly associated with in-process equity financings until such financings are consummated. After consummation, these costs are recorded in stockholders’ deficit as a reduction from the proceeds of the offering. Should the equity financing no longer be considered probable of being consummated, the deferred offering costs are expensed in the consolidated statements of operations within income from operations. In 2019, we expensed $3.7 million related to a stock offering, which was not consummated. There were no deferred offering costs as of December 31, 2020.
Revenue Recognition
The Company derives its revenuesWe derive our revenue from the following sources:
(i)Transaction Revenuesrevenue
—Transaction revenues arerevenue is primarily generated from the Company'sour customized legal document preparation services upon fulfillment of these services, as well as certain legal document preparation services that were bundled with one-services. Transaction revenue includes filing fees and five-year document revision and vaulting services. Prior to the change in accounting guidance on how revenue recognition is applied to multiple deliverable arrangements that the Company adopted on January 1, 2010, the full value of these bundled services were required to be recognized as revenues ratably on a straight-line basis over the service period. Revenues are recognized upon fulfillment of services, predominantly when a completed set of documents is shipped to the customer. Transaction revenues are net of cancellations, promotional discounts and sales allowances, credit reservesallowances. 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 addition, until July 2019, when we ceased providing such services, we generated revenue from litigation services in the United Kingdom, and we recognized this revenue based on the time incurred by the attorneys at their market billing rates. In 2020, we commenced providing tax advice and filing services in the United States, which are recognized at the point in time when the customer’s tax return is filed and accepted by the applicable government authority.
Subscription revenue—Subscription revenue is generated primarily from subscriptions to our registered agent services, compliance packages, attorney advice, and legal forms services, in addition to software-as-a-service, or SaaS, subscriptions in the 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 the Company's subscription-based services.
(ii)Subscription Revenues—Subscription revenues are generated primarily when customers enroll in subscriptions to the Company's legal plans, registered agent services or access to its forms library. The Company recognizes revenues from its subscriptions ratably on a straight-line basis over the subscription term as such services are rendered. Subscription terms range from a period of 30 days to two years. Subscription revenues include the value allocated to bundled free-trials for the Company'sour subscription services and areis net of promotional discounts, cancellations, sales allowances and credit reserves and payments to third-party service providers such as legal plan attorneys.
(iii)- law firms and tax service providers.
Other RevenuesPartner revenue
—Other revenues consistPartner revenue consists primarily of one-time or recurring fees earned from third-party providers for services provided to orfrom leads generated forto such providers through the Company'sour online legal platform. The Company typically earns these revenuesRevenue 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. Revenue from our transaction, subscription and partner revenue is as follows (in thousands):
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Transaction | | $ | 168,305 | | | $ | 212,114 | |
Subscription | | | 206,447 | | | | 229,840 | |
Partner | | | 33,628 | | | | 28,682 | |
| | | | | | | | |
Total revenue | | $ | 408,380 | | | $ | 470,636 | |
| | | | | | | | |
We adopted Financial Accounting Standards Board, or FASB, Accounting Standard Codification, or ASC, No. 606, Revenue from Contracts with Customers, or ASC 606, on a modified retrospective basis on January 1, 2019. The Company recognizes revenues when four basic criteria are met: persuasive evidenceadoption of an arrangement exists; services have been rendered;ASC 606 resulted in a cumulative adjustment to accumulated deficit of $1.0 million. We determine revenue recognition through the fees are fixed or determinable and collectability is reasonably assured. The Company considers persuasive evidencefollowing five steps: identification of a sales arrangement to be the customer's placementcontract with a customer; identification of the order and acceptanceperformance obligations in the contract; determination of the Company's termstransaction price; allocation of service. For arrangements with third-party companies relatedthe transaction price to other revenues, the Company ensures a written contract isperformance obligations in place. The Company'sthe contract; and recognition of revenue when or as the performance obligations are satisfied.
Our customers generally pay for their orders and subscription servicestransactions in advance by credit or debit card.card except for certain services provided under installment plans where we allow customers to pay for their order in two or three equal payments. The first installment due under the installment plans is charged to the customer’s debit or credit card on the date the order is placed, and the remaining installments are generally charged on a monthly basis thereafter. We recognize revenue for the amount we expect to be entitled to for providing the services to our customers. The total fees or the consideration, collected by the Companyus for itsour services include, as applicable, expedited services fees, government filing fees, and shipping fees. The Company records the total consideration initially as deferred revenues that
Subscription services are then recognized as revenue when the Company meets allgenerally paid monthly or annually in advance of the criteriasubscription period except for SaaS services in the United Kingdom which are invoiced monthly in arrears. Amounts collected in advance of revenue recognition. Deferred revenues thatrecognition are recorded in deferred revenue. Customers may pay for services, however, may not provide the Company willnecessary information to complete a transaction. We attempt to contact the customer to complete the abandoned order. We recognize
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
during the succeeding 12 month period from the Company's balance sheet date revenue on abandoned services, or breakage, when it is recorded as current deferred revenues,likely to occur and the remaining portion is recorded as non-current at the balance sheet date. On a more limited basis, the Company may offer alternative payment methods to credit cards for certain services. These alternative payment methods include automated clearing house ("ACH") or payment by personal check or money order for registered agent renewals. In October 2010, the Company commenced offering its customers the ability to pay the fees owed
amount can be recognized without significant risk of reversal. We recognize breakage in proportion to the Companypattern of rights exercised by the customer. Judgment is required to determine the amount of breakage and when breakage is likely to occur, which we estimate based on certain services in three equal monthly payments, or the three-pay plan. One-thirdhistorical data of the fees due under the three-pay plan is charged to the customer's debit or credit card, on the date the order is placed, and the second and third payments are charged 30 and 60 days after the first payment date. Where full payment is not received in advance, revenue is only recognized if collectability is reasonably assured assuming all other revenue recognition criteria are met. The Company's online platform allows customers to prepare legal documents, schedule consultations with plan attorneys and subscribe to other relatedbreakage for similar services. The Company's customers do not have the rights to the underlying software code of its online platform, accordingly, the Company's arrangements are outside the scope of software revenue recognition rules under ASC 985,Software.
For the Company's legal document preparation services, transaction revenues are recognized when the Company fulfills the service. For time-based, subscription services, such as legal plans, registered agent services or unlimited access to the Company's forms library, the Company recognizes subscription revenues ratablyServices we offer can generally either be purchased on a straight-linestand-alone basis over the subscription term for those services, which ranges fromor bundled together as part of a periodpackage of 30 days to two years.
Other revenues are recognized when the related performance-based criteria have been met. The Company assesses whether performance criteria have been met onservices. Accordingly, a cost-per-click or cost-per-action basis and whether the fees are fixed or determinable based on a reconciliation of the performance criteria and the payment terms associated with the transaction. The reconciliation of the performance criteria generally includes a comparison of internally tracked performance data to the contractual performance obligation and, when available, to third-party or affiliate provided performance data. These arrangements do not include multiple deliverables.
A significant number of the Company'sour arrangements include multiple bundled deliverables,performance obligations, such as the preparation of legal documents combined with related document revision, document storage, 30-day free trial of the Company's registered agent services, or itsand free trial periods of our legal plans. The Company therefore recognizes revenuesAt contract inception, we assess the services promised in our contracts with customers and identify performance obligations for these arrangements in accordance with FASB ASC 605-25,Revenue Recognition—Multiple-Element Arrangements ("ASC 605-25"). ASC 605-25 was updated by Accounting Standards Update ("ASU") 2009-13,Revenue Recognition (Topic 605)—Multiple-Deliverable Revenue Arrangements—a Consensus of the Emerging Issues Task Force ("ASU 2009-13").
The Company electedeach promise to early adopt ASU 2009-13 on a prospective basis for all arrangements entered into or materially modified after January 1, 2010.
For multiple deliverable revenue arrangements, the Company first assesses whether each deliverable has valuetransfer to the Company's customer on a standalone basis andservice or bundle of services that is distinct. The identification of distinct performance is considered probable and substantially in its control. obligations within our packages may require significant judgment.
The Company's services can be sold both on a standalone basis and as parttransaction price allocated to each separate performance obligation represents the amount of multiple deliverable arrangements. Accordingly, substantially all of the Company's services have standalone valueconsideration to its customer. Based on that standalone value of the deliverables, the Company allocates its revenues among the separate deliverables in the arrangement, including the bundled free trials, using the relative selling price method hierarchy established in ASU 2009-13. This hierarchy requires the selling price of each deliverable in a multiple deliverable revenue arrangementwhich we expect to be based on,entitled in descending order: (i) vendor-specific objective evidence, or VSOE, (ii) third-party evidence of sellingexchange for the services we provide. The transaction price or TPE, or (iii) management's best estimated selling price, or BESP.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company establishes VSOE for a majority of its servicesis based on the price the Company charges when the deliverablecontractual amounts in our contracts and is sold separately. In determining VSOE, the Company requires that a substantial majority of the Company's selling pricesreduced for its services to fall within a reasonably narrow pricing range, and the Company then establishes VSOE based on the mid-point of the range for those services. This requires significant management judgment, including as to how the Company groups similar services, the time period analyzed for assessing transactions and the volume of similar transactions available to the Company in the relevant time period.
When the Company cannot establish VSOE, the Company applies its judgment with respect to whether the Company can establish TPE based on competitor prices for similar deliverables that are sold separately. The Company believes its strategy differs from that of its peers, and its services contain a significant level of differentiation such that comparable pricing of the Company's services cannot be obtained. The Company's competitors do not sell services similar to its services on a standalone basis, and the Company therefore is unable to reliably determine what similar competitor services' selling prices are on a stand-alone basis. As a result, the Company has been unable to establish selling price based on TPE.
When the Company cannot establish VSOE or TPE, the Company applies its judgment to determine BESP. The objective of BESP is to determine the price at which the Company would transact a sale if the service were sold on a stand-alone basis. The determination of BESP requires the Company to make significant estimates and judgments and the Company considers numerous factors in this determination, including the nature of the deliverables, market conditions and the Company's competitive landscape, internal costs and its pricing and discounting practices. The Company's determination of BESP is made through consultation with and formal approval by its senior management. The Company updates its estimates of both VSOE and BESP on an ongoing basis as events and as circumstances may require. Because the Company can establish VSOE for substantially all of its services, use of BESP estimate for revenue recognition is limited to document revision and document storage services.
The Company is unable to determine VSOE or TPE for document revision and document storage services, which the Company bundles with certain of its consumer services. Accordingly, as of January 1, 2010, the selling prices of these document revision and document storage services are determined based on BESP, and the Company recognizes revenues from these services based on the relative selling price of the deliverables in the arrangement. The Company's adoption of ASU 2009-13 resulted in the Company recognizing $4.7 million of transaction revenues in 2010 that the Company would not have otherwise recognized during that year.
Prior to January 1, 2010, the Company considered document revision and document storage services that the Company bundles with other consumer services to be a single unit of accounting and the total fees received from those arrangements were recognized as transaction revenues ratably on a straight-line basis over the service term. Prior to August 2009, the Company offered document revision and document storage services with a term of five years and, accordingly, the deferred revenues will be recognized as transaction revenues through August 2014. Beginning in August 2009, the Company sold these services only on a one year service term. At December 31, 2010, December 31, 2011 and June 30, 2012, the Company's non-current deferred revenues balances of $7.0 million, $3.3 million and $1.7 million (unaudited), respectively, included in the Company's consolidated balance sheets primarily consist of document revision and document storage services.
The Company's arrangements do not include contractual provisions for cancellations or terminations. As a business practice, the Company provides that if its customers are not fully satisfied with the services or support and they notify the Company within a limited period of time after the purchase, the Company
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
will attempt to resolve the matter, offer a credit that can be used for future services or provide a refund, excluding third-party fees. Revenues are recognized net of promotional discounts and estimated sales allowances and credit reserves related to credit or debit cardfor price concessions, charge-backs, sales credits and refunds. For completed services whererefunds, which are accounted for as variable consideration when estimating the customers have elected the three-pay plan, the Company records a sales allowance for estimated charge backs, sales credits and collection losses for the second and third payment receivable amounts. The sales allowance is recorded against the customer receivables balance. For completed and paid services, the Company records sales and credit reserves based on its estimate of refunds or credits. The sales and credit reserves are included in accrued expenses and other current liabilities. The sales allowance and the sales and credit reserves are made at the timeamount of revenue recognitionto recognize. We only include variable consideration in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. We estimate sales allowances using the expected value method. We recognize a liability or a reduction of accounts receivable, and a reduction to revenue based on the Company's historical experience, activity occurring afterestimated amount of sales allowances. We record sales allowances as a reduction of accounts receivable where we expect not to collect the balance sheet datefull amount of the outstanding accounts receivable and other factors. The Company haswe record sales allowances as a liability for estimated refunds or credits where we have collected the amounts due from the customer. We have established a sufficient history of estimating refunds, charge backs, write offs and credits,sales allowances given the large number of homogeneous transactions. The majority of the Company'sour allowances and reserves are known within the timea relatively short period of its financial reporting cycle.time following our balance sheet date. The estimated provision for sales allowances and reserves has varied from actual results within ranges consistent with management'smanagement’s expectations. If actualThe transaction price excludes sales allowances, credit reservestaxes.
Contracts with our customers may include options to purchase additional future services, and promotional discountsin the case of subscription services, options to auto-renew the subscription service. Additional consideration attributable to either the option to purchase additional future services or the option to renew are greater than estimatedexcluded from the transaction price until such time that the option is exercised, unless these options provide a material right to the customer.
For arrangements that contain multiple performance obligations, such as our bundled arrangements, we allocate the transaction price to each performance obligation based on estimates of the standalone selling price of each performance obligation within the bundle. For the services we sell on a standalone basis, we use the sales price of these services in the allocation of the transaction price in bundled arrangements. Where we do not sell the service on a standalone basis, we estimate the standalone selling price based on the adjusted market assessment approach or the expected cost plus a margin approach when market information is not observable. In these cases, the determination of the standalone selling price may require significant judgment.
We recognize revenue when we satisfy the performance obligation by management, revenues and operating results would be negatively impacted.transferring the promised good or service to the customer. For our transaction-based services, we generally recognize revenue at a point-in-time when the services are delivered to the customer. For our subscription-based services we recognize revenue on a straight-line basis over the subscription term. For our partner-based services, we recognize revenue at a point-in-time when the related performance-based criteria have been met.
We do not have significant financing components in arrangements with our customers.
Principal Agent Considerations
The Company evaluates the criteria as prescribed by FASB ASC 605-45,Principal Agent Considerations,In certain of our arrangements, another party may be involved in orderproviding services to determineour customer. We evaluate whether the Companywe can recognize revenuesrevenue gross as a principal or net as an agent. The Company records revenuesWe record revenue on a gross
basis when we are the Company is the primary obligorprincipal in the arrangement and therefore principally responsible for the fulfillment of the services. The determination ofarrangement. To determine whether the Company is thewe are a principal or an agent, requires itwe identify the specified good or service to be provided to the customer and assess whether we control the specified good or service before that good or service is transferred to the customer. We evaluate a number of indicators of whether we control the good or service before it is transferred to the customer, including which party, as applicable, in the arrangement:
•is the primary obligor, or haswhether we have primary fulfillment responsibility and obligation to perform the services being sold to the customer;
•has we have latitude in establishing the sales price;
•can make changes to or perform part of the service;
•has supplier selection; and
•has credit or collection we have inventory risk.
When forming the Company's conclusion on whether the Company is the principal or agent in an arrangement and whether to present revenues gross or net, the Company weighs the above factors, and places more weight on the first factor, or primary obligor, followed by whether the Company has latitude in establishing the sales price and whether the Company performs part of the service.
In arrangements in which we are the Company is the primary obligor and the indicators are weighted towards the Company actingprincipal, we record as a principal, the Company records as revenuesrevenue the amounts the Company haswe have billed to itsour customer, net of sales allowance, and we record the Company recordsfee payable to the related coststhird-party as cost of revenue. We are the Company has incurredprincipal in fulfilling the Company's services. The Company is the primary obligor in substantially allmost of itsour legal document preparation and registered agent services.services, including legal entity formations and similar arrangements and conveyancing and formation services in the United Kingdom. For these services, revenue includes filing and similar fees.
In arrangements in which the Company iswe are not the primary obligor and the indicators are more weighted towards the Company acting as the agent in the arrangement, the Company records revenuesprincipal, we record revenue on a net basis, which is equal to the amount billed to itsour customer, net of sales allowances and the fee payable to the primary obligor, which is another third partythird-party or partner that is primarily responsible for performing the services for the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
customer. Because the Company isWe are not a law firm in the United States and cannot provide legal advice through our U.S. entities, therefore the participating independent law firms in the Company'sour legal plans control the service to the customer and have the primary service obligation to provide attorney consultations to the Company'sour customers, for which the Company payswe pay the law firms a monthly fee. Therefore, the Company recognizes revenuesFor these arrangements, we recognize revenue on a net basis as an agentagent. Since 2016, our Alternative Business Structure, or ABS, subsidiary in the United Kingdom began offering legal advisory services that were marketed through our website. Our ABS provides independent legal advice to our customers and is directly responsible for, subscriptionsand controls the fulfillment of, the legal services. Accordingly, for services provided by our ABS, we recognize revenue as the principal. For other services provided by third parties, including deed transfer, accounting, tax, credit monitoring, business data protection and logo design services, revenue is recognized net of fees payable to third parties. For partner revenue, we receive a fee for the referral of our customer to the Company's legal plans. The Company also recognized revenues net as an agent for registered agent services prior to March 2010. Before March 2010, the Company contracted with third-party service providers to perform substantially all registered agent services on the Company's behalf and accordingly, the Company recorded the amount received from the customer netpartner or we retain a portion of the fee payablepaid by the customer and share the remainder with the partner. Our partner controls the service to the customer and the partner is responsible for fulfilling the referred service provider.
The Company has one operating segment, providing legal document preparation and related subscription services. The Company's Chief Operating Decision Maker ("CODM"),to the Chief Executive Officer, manages the Company's operations based on consolidated financial informationcustomer; accordingly, we recognize revenue for purposes of evaluating financial performance and allocating resources. The CODM reviews separate revenue information for its transaction and subscription services. All other financial information is reviewed by the CODMthese arrangements on a consolidatednet basis. All of the Company's principal operations, decision-making functions
Revenue includes shipping and assets are located in the United States. Assets and revenues generated outside of the United States are not material for any of the periods presented.handling fees charged to customers.
Revenues derived from the Company's transaction and subscription services are as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months Ended June 30, | |
|---|
| | 2009 | | 2011 | | 2011 | | 2011 | | 2012 | |
|---|
| |
| |
| |
| | (unaudited)
| | (unaudited)
| |
|---|
Revenues by type: | | | | | | | | | | | | | | | | |
Transaction | | $ | 92,561 | | $ | 105,491 | | $ | 121,856 | | $ | 64,055 | | $ | 69,905 | |
Subscription | | | 4,966 | | | 10,889 | | | 27,878 | | | 11,430 | | | 21,359 | |
Other | | | 5,772 | | | 4,391 | | | 6,332 | | | 3,474 | | | 5,195 | |
| | | | | | | | | | | | |
Total revenues | | $ | 103,299 | | $ | 120,771 | | $ | 156,066 | | $ | 78,959 | | $ | 96,459 | |
| | | | | | | | | | | | |
Cost of services includerevenue includes all costs of providing and fulfilling the Company'sour services. Cost of servicesrevenue primarily includeincludes government filing fees; costs of fulfillment, customer care, including the cost of credentialed professionals for tax, bookkeeping and inbound sales personnelpayroll services, and related benefits, including stock-based compensation, and costs of independent contractors for document preparation; telecommunications and data center costs, includingamortization of acquired developed technology, depreciation and amortization of network computers, equipment and internal useinternal-use software; printing, shipping and courierhandling charges; credit and debit card fees; allocated overhead; legal document kit expenses; and sales and use taxes. The Company defersWe defer direct and incremental costs primarily related to government filing fees incurred prior to the associated service meeting the criteria for revenue recognition. The deferred cost of services isThese contract assets are recognized as cost of servicesrevenue in the same period in the related revenue is recognized. At December 31, 2010, December 31, 20112019 and June 30, 2012,2020, there were $0.9 million, $0.8was $1.9 million and $1.0$2.0 million, (unaudited), respectively, ofin deferred cost of servicerevenue included in prepaid expenses and other current assets onin the accompanying consolidated balance sheets.
Table Filing fees of Contents$50.7 million and $64.5 million were recorded in cost of revenue in the accompanying consolidated statements of operations for 2019 and 2020, respectively.
LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Sales and marketing expenses are comprisedconsist of customer acquisition media consisting primarily of search engine marketing, television and radio;costs; compensation and related benefits, including stock-based compensation for marketing and outbound 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 the Company's products andour services are expensed in the period incurred. Media production costs are expensed the first time the advertisement is aired. Advertising expenses were $29.6 million, $32.6$67.2 million and $36.4$119.2 million for the years ended December 31, 2009, 20102019 and 2011, respectively, and $19.9 million (unaudited) and $25.6 million (unaudited) for the six months ended June 30, 2011 and 2012, respectively, are included in sales and marketing on the accompanying consolidated statements of operations.2020, respectively.
Technology and development expenses consist primarily of personnel costs and related benefits, including stock-based compensation, and expenses for outside consultants.consultants, an allocation of depreciation and amortization and allocated overhead. These expenses include allocated overhead and costs incurred in the development and implementation amortization and maintenance of internal use software, including our website,websites, mobile applications, online legal platform, research and development and related infrastructure. Technology and development costsexpenses are expensed as incurred, except to the extent that such costs are associated with internal use ofinternal-use software or website development costs that qualify for capitalization as previously described underInternal-useCapitalized Software Costs.
The Company'sOur general and administrative expenses relate primarily to compensation and related benefits, including stock-based compensation, for executive and corporate personnel;personnel, professional and consulting fees;fees, an allocation of depreciation and amortization, allocated overhead;overhead and legal loss contingencies.
The Company applies the two-class method for calculating basic earnings per share. Under the two-class method, net income is reduced by accretion of preferred stock and the residual amount is allocated between common stock and other participating securities based on their participation rights. Participating securities are comprised of preferred stock which participate in dividends, if declared, by the Company. Basic earnings per share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding, net of unvested restricted stock subject to repurchase by the Company, if any, during the period. For periods in which the Company reported a net loss, the participating securities are not contractually obligated to share in the losses of the Company, and accordingly, no losses have been allocated to the participating securities. Diluted earnings per share is calculated by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding, adjusted for the effects of potentially dilutive common stock, which are comprised of stock options, using the treasury-stock method, and convertible preferred stock, using the if-converted method. Because the Company reported losses attributable to common stockholders for the years ended December 31, 2009 and 2010 and for the six-month periods ended June 30, 2011 and 2012, all potentially dilutive common stock are antidilutive for those periods.
costs.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table shows the computation of basic and diluted earnings per share for the years ended December 31, 2009, 2010 and 2011, and the six months ended June 30, 2011 and 2012:
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months Ended
June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| |
| |
| |
| | (unaudited)
| | (unaudited)
| |
|---|
| | (In thousands, except per share amounts)
| |
|---|
Numerator | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (640 | ) | $ | (4,024 | ) | $ | 12,123 | | $ | 1,340 | | $ | 1,257 | |
Accretion of preferred stock | | | (4,035 | ) | | (4,038 | ) | | (4,042 | ) | | (2,005 | ) | | (2,017 | ) |
Less amount attributable to participating securities | | | — | | | — | | | (3,407 | ) | | — | | | — | |
| | | | | | | | | | | | |
Net income (loss) attributable to common stockholders—basic and diluted | | $ | (4,675 | ) | $ | (8,062 | ) | $ | 4,674 | | $ | (665 | ) | $ | (760 | ) |
| | | | | | | | | | | | |
Denominator | | | | | | | | | | | | | | | | |
Weighted average common stock—basic | | | 18,700 | | | 19,360 | | | 20,925 | | | 20,878 | | | 21,136 | |
Effect of potentially dilutive securities—stock options and restricted stock units | | | — | | | — | | | 3,270 | | | — | | | — | |
| | | | | | | | | | | | |
Weighted-average common stock—diluted | | | 18,700 | | | 19,360 | | | 24,195 | | | 20,878 | | | 21,136 | |
| | | | | | | | | | | | |
Earnings per share | | | | | | | | | | | | | | | | |
Basic | | $ | (0.25 | ) | $ | (0.42 | ) | $ | 0.22 | | $ | (0.03 | ) | $ | (0.04 | ) |
Diluted | | $ | (0.25 | ) | $ | (0.42 | ) | $ | 0.19 | | $ | (0.03 | ) | $ | (0.04 | ) |
Net income for the year ended December 31, 2011 has been allocated to the common stock and participating preferred stock based on their respective rights to share in dividends.
The following table presents the number of anti-dilutive shares excluded from the calculation of diluted net income (loss) per share attributable to common stockholders for years ended December 31, 2009, 2010 and 2011, and for the six months ended June 30, 2011 and 2012 (in thousands):
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months Ended
June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| |
| |
| |
| | (unaudited)
| | (unaudited)
| |
|---|
Conversion of redeemable convertible preferred stock | | | 15,256 | | | 15,256 | | | 15,256 | | | 15,256 | | | 15,256 | |
Options to purchase common stock and restricted stock units | | | 5,425 | | | 4,752 | | | 588 | | | 4,455 | | | 5,003 | |
| | | | | | | | | | | | |
Total shares excluded from the calculation of diluted net income (loss) per share attributable to common stockholders | | | 20,681 | | | 20,008 | | | 15,844 | | | 19,711 | | | 20,259 | |
| | | | | | | | | | | | |
The Company recognizes compensation expense related to employee option grants and restricted stock units in accordance with FASB ASC 718,Compensation—Stock Compensation ("ASC 718").
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company estimatesWe estimate the fair value of employee stock-based payment awards on the grant-date and recognizesrecognize the resulting fair value, net of estimated forfeitures, over the requisite service period. The Company usesWe use the Black-Scholes option pricing model for estimating the fair value of options granted under the Company'sour stock option plans.plans that vest based on service and performance conditions. The fair value of restricted stock units, or RSUs, that vest based on service and performance conditions is determined based on the value of the underlying common stock. The Company hasstock at the date of grant. For awards that contain market conditions, we estimate the fair value using a Monte Carlo simulation model. We record expense for awards that contain performance conditions only to the extent that we determine it is probable that the performance condition will be achieved. Expense for awards containing market conditions is not reversed even if the market condition is not achieved. We have elected to treat stock-based payment awards with graded vesting schedules and time-based service conditions as a single award and recognizesrecognize stock-based compensation on a straight-line basis, net of estimated forfeitures, over the requisite service period. Awards with performance or market conditions are recognized using graded vesting.
Compensation expense for non-employee stock-based awards is recognized in accordance with ASC 718 and FASB ASC 505-50,Equity-Based Payments to Non-Employees ("ASC 505-50"). Stock option awards issued to non-employees are accounted for at fair value using the Black-Scholes option pricing model. Management believes that the fair value of the stock options is more reliably measured than the fair value of services received. The Company records compensation expense based on the then-current fair values of the stock options at each financial reporting date. Compensation recorded during the service period is adjusted in subsequent periods for changes in the stock options' fair value until the earlier of the date at which the non-employee's performance is complete or a performance commitment is reached, which is generally when the stock option award vests. There were no grants of stock-based awards to non-employees for the years ended December 31, 2009 and 2010. In September 2011 and January 2012, the Company granted options to purchase 43,332 and 23,333 (unaudited) shares, respectively, of the Company's common stock to certain non-employees for advisory services. Compensation expense for non-employee grants is recorded on a straight-line basis in the consolidated statements of operations and was insignificant for the year ended December 31, 2011 and the six months ended June 30, 2012 (unaudited).
The Black-Scholes option pricing model and the Monte Carlo simulation model requires the Companyus to make certain assumptions including the fair value of the underlying common stock, the expected term, the expected volatility, the risk-free interest rate and the dividend yield.
The fair value of the shares of common stock underlying the stock options has historically been determined by the Board of Directors. Because there has been no public market for the Company'sour common stock, the Board of Directors has determined the fair value of the common stock at the time of the grant of options and restricted stock unitsRSUs by considering a number of objective and subjective factors including valuation of comparable companies, sales of common stock to unrelated third parties, operating and financial performance and general and industry-specific economic outlook, amongst other factors. The fair value of the underlying common stock will be determined by the Board of Directors until such time as the Company'sand if our common stock is listed on an established stock exchange or national market system. The fair value was determined in accordance with applicable elements of the practice aid issued by the American Institute of Certified Public Accountants titledValuation of Privately Held Company Equity Securities Issued Asas Compensation.
The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. The expected term of options granted is calculatedestimated based upon actual historical exercise and post-vesting cancellations, adjusted for expected future exercise behavior.
Because the Company'sour common stock has no publicly traded history, the Company estimateswe estimate the expected volatility of the awards from the historical volatility of selected public companies within the Internet and media industry with comparable characteristics to the Company,us, including similarity in size, lines of business, market capitalization and revenue and financial leverage. The Company determinedWe determine the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expected volatility assumption using the frequency of daily historical prices of comparable public company'scompany’s common stock for a period equal to the expected term of the options. The CompanyWe periodically assessesassess the comparable companies and other relevant factors used to measure expected volatility for future stock option grants.
The risk-free interest rate assumption is based upon observed interest rates on the United StatesU.S. government securities appropriate for the expected term of the Company's employeeour stock options.
The dividend yield assumption is based on the Company'sour history and expectation of dividend payouts. The Company hasOther than the special dividends declared in periods prior to these financial statements, which resulted in corresponding reductions in the exercise price of the stock options, we have never declared or paid any cash dividends on itsour common stock, and the Company doeswe do not anticipate paying any cash dividends in the foreseeable future.
The assumptions that were used to calculate the grant date fair value of the Company's employee and non-employee stock option grants for the years ended December 31, 2009, 2010 and 2011 and the six months ended June 30, 2012 were as follows.
| | | | | | | | | | | | | |
| | Year Ended December 31, | |
| |
|---|
| | Six Months Ended
June 30, 2012 | |
|---|
| | 2009 | | 2010 | | 2011 | |
|---|
| |
| |
| |
| | (unaudited)
| |
|---|
Risk-free interest rate | | | 2.34 | % | | 2.35 | % | | 1.25 | % | | 1.22 | % |
Expected life (years) | | | 5.95 | | | 5.90 | | | 6.10 | | | 5.90 | |
Dividend yield | | | — | | | — | | | — | | | — | |
Volatility | | | 50 | % | | 45 | % | | 42 | % | | 42 | % |
Stock-based compensation expense is recognized based on awards that are ultimately expected to vest, and as a result, the amount has been reduced by estimated forfeitures. vest.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on the Company'sour historical experience and future expectations.
The determination of stock-based compensation is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment. If the Companywe had made different assumptions, itsour stock-based compensation expense, and itsour net income (loss) for years ended December 31, 2009, 20102019 and 2011 and the six months ended June 30, 2011 and 2012,2020, may have been significantlymaterially different.
AsWe record loss contingencies in our consolidated financial statements in the Series Aperiod when they are probable and reasonably estimable. If the amount is redeemableprobable and we are able to reasonably estimate a range of loss, we accrue the amount that is the best estimate within that range, and if no amount is better than any other in the range, we record the amount at the optionlow end in the range. We disclose those contingencies that we believe are at least reasonably possible but not probable regardless of whether they are reasonably estimable. The likelihood of a loss is determined using several factors including the nature of the holdermatter, advice of our internal and external counsel, previous experience and historical and relevant information available to us. The determination of the likelihood of loss or in the caserange of loss requires significant management judgment. We expense legal costs for defending legal proceedings as incurred.
Income Taxes
We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events outside the control of the Company, the Company has presented the preferred stock outside of stockholders' deficitthat have been recognized in the mezzanine section of the December 31, 2010, December 31, 2011 and June 30, 2012 (unaudited)our consolidated balance sheets.
The Company accretes the carrying value of the preferred stock to the redemption value over the period to the earliest redemption date using the effective interest method. Accretion is recorded as a charge against retained earnings, or in the absence of retained earnings by charges against additional paid-in capital until fully depleted, then ultimately against accumulated deficit.
financial statements. Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that willanticipated to be in effect when the differencesthose tax assets and liabilities are expected to reverse.be realized or settled. The Company must alsoeffect of a change in tax rates on deferred tax assets and liabilities is recognized in the consolidated statements of operations in the period that includes the enactment date.
We make judgments in evaluating
Table of Contents
LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
whether deferred tax assets will be recovered from future taxable income. ToA valuation allowance is established if, based upon the extent that it believes that recovery is not likely, the Company establishes a valuation allowance. The carrying value of the Company's net deferred tax assets is based on whetheravailable evidence, it is more likely than not that some or all of the Companydeferred tax assets will generate sufficientnot be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risk associated with estimates of future taxable income to realizein assessing the deferred tax assets. Aneed for a valuation allowance is established for deferred tax assets which the Company does not believe meet the "more likely than not" criteria. The Company's judgments regarding future taxable income may change over time due to changes in market conditions, changes in tax laws, tax planning strategies or other factors.allowance. If the Company'sour assumptions and consequently itsour estimates, change in the future, the valuation allowance may be increased or decreased, resulting in an increase or decrease, which may be material, in theto our provision for income tax (provision) benefittaxes and the related impact on the Company's reportedour net income (loss).income.
The Company adopted the provisions of FASB's guidance onAccounting for Uncertainty in Income Taxes on January 1, 2007. This guidance clarifies the accounting for uncertainty in income taxes recognized in
We recognize tax benefits from an enterprise's financial statements and prescribes a recognition threshold and measurement process for the accounting of a taxuncertain position taken or expected to be taken in a tax return. The guidance contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determiningonly if the weight of available evidence indicates it is more likely than not that the tax position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second stepexamination by the taxing authorities, based on the technical merits. If this threshold is tomet, we measure the tax benefit as the largest amount whichof the benefit that is moregreater than fifty percent likely of beingto be realized upon ultimate settlement. We recognize penalties and effectively settled. The Company considers many factors when evaluating and estimating itsinterest accrued with respect to uncertain tax positions as a component of the income tax provision. At December 31, 2019 and tax benefits, which may require periodic adjustments2020, accrued penalties and which may not accurately forecast actual outcomes. The Company recognizes interest and penalties accrued related to unrecognizeduncertain tax benefitspositions were not material.
Net Income Per Share Attributable to Common Stockholders
We apply the two-class method for calculating net income per share. Under the two-class method, in periods where we generate net income, tax provision (benefit)net income is allocated between common stock and other participating securities based on their participation rights. Our participating securities consist of redeemable convertible preferred stock, which participate in dividends, if declared. For periods in which we report a net loss, the accompanying consolidated statementsparticipating securities are not contractually obligated to share in our losses, and accordingly, no loss is allocated to the participating securities. Basic net income per share is calculated by dividing net income attributable to common stockholders by the weighted-average number of operations.shares of common stock outstanding, net of unvested restricted stock, if any, during the period. We compute diluted net income per share under the two-class method where income is reallocated between common stock, potential common stock and participating securities. Potential common stock includes stock options, restricted stock and RSUs computed using the treasury stock method.
Recent Accounting Pronouncements
Under the Jumpstart our Business Startups Act, or JOBS Act, we meet the definition of an emerging growth company. We have elected to use the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public 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.
Recently Adopted Accounting Pronouncements
In 2011,June 2018, the FASB issued newASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The guidance simplifies the accounting guidance that amends some fair value measurement principlesfor share-based payments made to non-employees so the accounting for such payments is substantially the same as those made to employees. The Update is effective for our fiscal year beginning January 1, 2020 and disclosure requirements. The new guidance states thatinterim periods within our fiscal year beginning after January 1, 2021. Early adoption is permitted, however, no earlier than the conceptsadoption date of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance.ASC 606. We adopted this Update on January 1, 2020. The adoption of this accounting guidance during the six months ended June 30, 2012Update did not have anya material impact on the Company'sour consolidated financial statements.
In 2011,August 2018, the FASB issued newASU No. 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The Update modifies the disclosure guidancerequirements in Topic 820, Fair Value Measurement, by removing certain disclosure requirements related to the presentation offair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, such as disclosing the Statement of Comprehensive Income. This guidance eliminateschanges in unrealized gains and losses for the current option to reportperiod included in other comprehensive income and its components infor recurring Level 3 fair value measurements held at the consolidated statement of stockholders' equity. The requirement to present reclassification adjustments out of accumulated other comprehensive income on the faceend of the consolidated statementreporting period and disclosing the range and weighted average of income has been deferred.significant unobservable inputs used to develop Level 3 fair value measurements. The Update is effective for our annual and interim periods beginning on January 1, 2020. We adopted this Update on January 1, 2020. The adoption of this accounting guidance during the six months ended June 30, 2012Update did not have anya material impact on the Company'sour consolidated financial statements.
In October 2018, the FASB issued ASU TableNo. 2018-16,Derivatives and Hedging (Topic 815): Inclusion of Contentsthe Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark for Hedge
Accounting Purposes. This Update permits use of the overnight index swap rate based on the secured overnight financing rate as a U.S. benchmark interest rate for hedge accounting purposes. The Update is effective for our fiscal year beginning on January 1, 2020, concurrently with ASU
LEGALZOOM.COM, INC. AND SUBSIDIARIES2017-12. We adopted this Update on January 1, 2020. The adoption of this Update did not have a material impact on our consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02,Leases, or ASU 2016-02. 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 2018-11,Leases (Topic 842): Targeted Improvements, which includes an option to not restate comparative periods in transition, however, to elect to use the effective date of ASU 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, 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 2020-05,Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities, which extended the effective date of this guidance for non-public entities to fiscal years beginning after December 15, 2021. The Update is effective for our annual reporting period beginning on January 1, 2022. We are currently evaluating the impacts the adoption of these Updates will have on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments—Credit losses: Measurement of Credit Losses on Financial Instruments (Topic 326), or ASU 2016-13, 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, available-for-sale debt securities and accounts receivable. These Updates are effective for our annual reporting period beginning on January 1, 2023. We are currently evaluating the impacts the adoption of these Updates will have on our consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting, that provides optional relief to applying reference rate reform to contracts, hedging relationships, and other transactions that reference LIBOR, which will be discontinued by the end of 2021. Also, in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848)—Scope, 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 2020-04. The amendments in these Updates are effective immediately and may be applied through December 31, 2022. We are currently evaluating the impacts the adoption of these Updates will have on our consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This Update simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740, Income Taxes as well as by improving consistent application of the topic by clarifying and amending existing guidance. This standard is effective for our annual reporting period beginning on January 1, 2022, with early adoption permitted. We are currently evaluating the impact the adoption of the Update will have on our consolidated financial statements.
Note 3. SupplementalNet Income Per Share Attributable to Common Stockholders
The following table shows the computation of basic and diluted net income per share attributable to common stockholders (in thousands, except per share amounts):
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 �� | | | 2020 | |
Numerator: | | | | | | | | |
Net income | | $ | 7,443 | | | $ | 9,896 | |
Less: amounts attributable to redeemable convertible preferred stock | | | (2,021 | ) | | | (2,674 | ) |
| | | | | | | | |
Net income attributable to common stockholders—basic | | | 5,422 | | | | 7,223 | |
Add: undistributed earnings reallocated to common stockholders | | | 54 | | | | 39 | |
| | | | | | | | |
Net income attributable to common stockholders—diluted | | $ | 5,476 | | | $ | 7,262 | |
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted-average common stock used in computing net income per share attributable to common stockholders—basic | | | 123,826 | | | | 124,709 | |
Effect of potentially dilutive securities: | | | | | | | | |
Stock options | | | 4,161 | | | | 2,444 | |
Restricted stock units | | | 559 | | | | 106 | |
| | | | | | | | |
Weighted-average common stock used in computing net income per share attributable to common stockholders—diluted | | | 128,546 | | | | 127,259 | |
| | | | | | | | |
Net income per share attributable to common stockholders—basic | | $ | 0.04 | | | $ | 0.06 | |
| | | | | | | | |
Net income per share attributable to common stockholders—diluted | | $ | 0.04 | | | $ | 0.06 | |
| | | | | | | | |
The following table presents the number of options, restricted stock units and restricted stock excluded from the calculation of diluted net income per share attributable to common stockholders because they are anti-dilutive (in thousands):
| | | | | | | | |
| | | As of December 31, | |
| | | 2019 | | | 2020 | |
Options to purchase common stock | | | 7,256 | | | | 12,529 | |
Restricted stock units | | | 884 | | | | 2,235 | |
Restricted stock | | | 200 | | | | 100 | |
| | | | | | | | |
Total | | | 8,340 | | | | 14,864 | |
| | | | | | | | |
Note 4. Other Financial Statement Information
Accounts receivable, netChanges in the allowance consisted of the following (in thousands):
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Beginning balance | | $ | 1,939 | | | $ | 2,461 | |
Add: amounts recognized as a reduction of revenue | | | 2,996 | | | | 6,493 | |
Add: bad debt expense recognized in general and administrative expense | | | — | | | | 2,170 | |
Less: write-offs, net of recoveries | | | (2,474 | ) | | | (5,868 | ) |
| | | | | | | | |
Ending balance | | $ | 2,461 | | | $ | 5,256 | |
| | | | | | | | |
| | | | | | | | | | |
| | December 31, | |
| |
|---|
| | June 30,
2012 | |
|---|
| | 2010 | | 2011 | |
|---|
| |
| |
| | (unaudited)
| |
|---|
Receivables from credit card merchant processors | | $ | 674 | | $ | 1,376 | | $ | 1,744 | |
Receivables from three-pay customers, net of allowance | | | 886 | | | 1,375 | | | 2,066 | |
Receivables from third-party business partners | | | 546 | | | 843 | | | 1,277 | |
Other | | | 57 | | | 58 | | | 57 | |
| | | | | | | | |
Total accounts receivable, net | | $ | 2,163 | | $ | 3,652 | | $ | 5,144 | |
| | | | | | | | |
The sales allowance activity for the three-payrecognized as a reduction of revenue primarily relates to our installment plan receivables was as followsfor 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):
| | | | | | | | | | | | | |
| | Balance at
beginning of
period | | Reduction of
revenues | | Write offs,
net of
recoveries | | Balance at
end of
period | |
|---|
December 31, 2009 | | $ | — | | $ | — | | $ | — | | $ | — | |
December 31, 2010 | | | — | | | 53 | | | — | | | 53 | |
December 31, 2011 | | | 53 | | | 1,180 | | | (1,019 | ) | | 214 | |
June 30, 2012 (unaudited) | | | 214 | | | 594 | | | (585 | ) | | 223 | |
Accrued expenses and other current liabilities consisted of the following (in thousands):
| | | | | | | | |
| | | As of December 31, | |
| | | 2019 | | | 2020 | |
Accrued payroll and related expenses | | $ | 12,551 | | | $ | 16,135 | |
Accrued vendor payables | | | 11,610 | | | | 10,854 | |
Derivative liabilities and hybrid debt | | | 1,655 | | | | 5,131 | |
Sales allowances | | | 4,651 | | | | 4,856 | |
Accrued sales, use and business taxes | | | 1,773 | | | | 1,789 | |
Accrued advertising | | | 1,057 | | | | 173 | |
Other | | | 3,129 | | | | 2,090 | |
| | | | | | | | |
Total accrued expenses and other current liabilities | | $ | 36,426 | | | $ | 41,028 | |
| | | | | | | | |
Changes in sales allowances relating to charge-backs, sales credits and refunds consisted of the following (in thousands):
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Beginning balance | | $ | 4,483 | | | $ | 4,651 | |
Add: increase in sales allowances | | | 10,387 | | | | 9,976 | |
Less: utilization of reserves | | | (10,219 | ) | | | (9,771 | ) |
| | | | | | | | |
Ending balance | | $ | 4,651 | | | $ | 4,856 | |
| | | | | | | | |
Depreciation and Amortization
| | | | | | | | | | |
| | December 31, | |
| |
|---|
| | June 30,
2012 | |
|---|
| | 2010 | | 2011 | |
|---|
| |
| |
| | (unaudited)
| |
|---|
Accrued payroll and related expenses | | $ | 2,078 | | $ | 5,164 | | $ | 3,360 | |
Accrued legal settlements | | | — | | | 5,359 | | | 3,639 | |
Accrued advertising | | | 3,084 | | | 2,536 | | | 6,580 | |
Accrued sales, use and business taxes | | | 1,169 | | | 2,188 | | | 2,636 | |
Sales and credit reserves | | | 510 | | | 801 | | | 933 | |
Accrued vendors | | | 2,483 | | | 2,760 | | | 5,523 | |
State income taxes payable | | | 279 | | | 116 | | | 53 | |
Other | | | 334 | | | 510 | | | 515 | |
| | | | | | | | |
Total accrued expenses and other current liabilities | | $ | 9,937 | | $ | 19,434 | | $ | 23,239 | |
| | | | | | | | |
Depreciation and amortization expense of our property and equipment, including capitalized internal-use software, and intangible assets consisted of the following (in thousands):
At
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Cost of revenue | | $ | 6,773 | | | $ | 8,324 | |
Sales and marketing | | | 6,469 | | | | 6,913 | |
Technology and development | | | 1,055 | | | | 2,800 | |
General and administrative | | | 2,093 | | | | 2,060 | |
| | | | | | | | |
Total depreciation and amortization expense | | $ | 16,390 | | | $ | 20,097 | |
| | | | | | | | |
Deferred revenue
Deferred revenue as of December 31, 2010, the accrued legal settlement of $5.42019 and 2020 was $106.7 million and $130.1 million, respectively. Revenue recognized in 2019 and 2020 that was included in deferred revenue at the beginning of the year was $99.8 million and $103.5 million, respectively. We expect to recognize substantially all of the deferred revenue as of December 31, 2020 as revenue in 2021.
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 5. Acquisitions
Purely Solutions, LLC
In October 2020, we entered into a membership interest purchase agreement with Purely Solutions, LLC, or Pure, in which we acquired 100% of the membership interest as part of our plans to offer tax services. Pure provides tax preparation, bookkeeping and outsourced payroll services.
The total fair value of the consideration for the acquisition was $2.3 million. Of the total consideration, $1.0 million was paid in cash on the acquisition date and up to $0.5 million and $0.8 million will be paid in cash within six and eighteen months, respectively, based upon certain earnout metrics being achieved including hiring targets and customer experience metrics. We classify contingent consideration in accrued expenses and other long-termcurrent liabilities and other liabilities in the accompanying consolidated financial statements.
Intangible assets acquired from Pure included customer relationships of $0.6 million, which are being amortized over their estimated useful life of three years using the straight-line method. The goodwill of $1.6 million arising from the acquisition consists largely of the assembled workforce and synergies expected from combining Pure into our operations. The acquired goodwill is not expected to be deductible for tax purposes.
Note 6. Disposition of Business
Beaumont ABS Limited
In April 2020, we sold our conveyancing business in the United Kingdom, Beaumont ABS Limited, or Beaumont, 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 year ended December 31, 2020. In March 2020, prior to the disposition, we recorded an impairment charge of $0.6 million related to property and equipment.
Note 7. Investments
Available-for-sale Debt Securities
In 2019, we invested in Legal Vision Pty Ltd., or Legal Vision, an Australian proprietary limited company that provides online legal services to small and medium size businesses, through the purchase of a convertible promissory note for a total of Australian Dollar, or AUD $1.0 million ($0.7 million). The convertible promissory note has a maturity term of ten years, which is convertible into Legal Vision’s common stock. The underlying conversion feature is exercisable upon an exit event including an IPO, merger or sale, upon a new financing round or at our election. At December 31, 2020, we do not hold any equity interests or in-substance common stock in Legal Vision, and accordingly, we classify the convertible promissory note as an investment in an available-for-sale debt security in the accompanying consolidated balance sheet (see sheets. The fair value of the Legal Vision available-for-sale debt security was AUD $1.5 million ($1.1 million) at December 31, 2020.
The fair value of the convertible promissory note is based on unobservable inputs that are categorized as Level 3 in the fair value hierarchy. We determined that the conversion option on the Legal Vision convertible promissory note will not have material value until Legal Vision executes on its business plans to drive growth, which consequently will drive the fair value of the associated conversion option in excess of the carrying value of the convertible promissory note. Accordingly, the fair value of the convertible debt approximated its carrying value as of December 31, 2019 and 2020. At December 31, 2019 and 2020, the fair value of our available-for-sale debt security in Legal Vision was AUD $1.3 million ($0.9 million) and AUD $1.4 million ($1.0 million), respectively. In 2019, key assumptions used in the Monte Carlo simulation model to determine the fair value of the convertible promissory note in Legal Vision were: expected term of 9.3 years, risk-free rate of 1.3%, and volatility of 45%. In 2020, key assumptions used in the Monte Carlo simulation model to determine the fair value of the convertible promissory note in Legal Vision were: expected term of 8.3 years, risk-free rate of 0.8%, and volatility of 50%.
Since the Legal Vision convertible promissory note has a contractual maturity date that exceeds one year and we do not intend to liquidate in the next twelve months, we have classified the convertible promissory note as a noncurrent available-for-sale debt security in the accompanying consolidated balance sheets as of December 31, 2019 and 2020.
Between 2017 and 2019, we made several investments in Firma.de Firmenbaukasten AG, or Firma, a German limited liability company that provides web-based business formation services to small business owners. The investments were made through the purchase of convertible promissory notes, or convertible debt, with maturity terms of five years, which are convertible into Firma’s common stock. The underlying conversion feature is only exercisable upon Firma achieving a trailing 12-month revenue target of EUR €5.0 million any time prior to the maturity of the convertible debt in May 2023. In 2020, we fully impaired our investment in Firma 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 consolidated statements of operations during the year ended December 31, 2020.
Equity Method Investment
In October 2016, our wholly owned subsidiary Pulse Global Services, Limited, or Pulse, and Sort Group Limited, a third-party company in the United Kingdom, formed Sort Legal Limited, or Sort Legal, as a joint venture with Pulse owning 49% equity interest in Sort Legal. We determined that Pulse was not the primary beneficiary of Sort Legal and Pulse had significant influence over Sort Legal. Accordingly, Sort Legal was accounted for using the equity method. In December 2019, we sold our equity interests to Sort Group Limited for $0.3 million. Sort Legal’s operating results were not material to our consolidated financial statements in 2019.
Investments in Other Equity Securities
In 2018, we invested in LawPath, Pty Ltd, or LawPath, an Australian proprietary limited company that provides an online legal platform to individuals and small and medium size businesses, through the purchase of a convertible promissory note for a total of AUD $1.1 million ($0.8 million). The convertible promissory note had a maturity term of five years from issuance and was convertible into LawPath’s common stock upon an exit event including IPO, merger or sale, a new financing round, or LawPath achieving a trailing 12-month performance target of AUD $10.0 million in net revenue or AUD $2.0 million in earnings before interest, tax, depreciation and amortization, or EBITDA, any time prior to the maturity of the convertible debt in July 2023. In October 2019, coinciding with a new financing round, we elected to convert our convertible promissory note into LawPath’s common stock and invested AUD $1.0 million ($0.7 million) in additional LawPath common stock. The outstanding balance of the note totaling AUD $1.2 million ($0.8 million) was converted into 4,215 shares of LawPath’s common stock. At December 31, 2019 and 2020, our total equity interest in LawPath was 14%, which is recorded at cost.
In December 2018, we purchased 3,000,000 shares of Class C nonvoting common units in Mylo, LLC, or Mylo, a digital insurance broker that services small and medium size businesses, for $3.0 million, resulting in a 4% interest in Mylo.
The investments in LawPath and Mylo do not have readily determinable fair values. There were no impairments of these investments during the years ended December 31, 2019 and 2020, respectively.
At December 31, 2019 and 2020, the carrying value of these investments is included in other assets in the accompanying consolidated balance sheets.
Note 6).
Table of Contents
LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The sales and credit reserves activity was as follows (in thousands):
| | | | | | | | | | |
| | Balance at
beginning of
period | | Decrease in
revenues | | Balance at
end of
period | |
|---|
December 31, 2009 | | $ | 257 | | $ | 27 | | $ | 284 | |
December 31, 2010 | | | 284 | | | 226 | | | 510 | |
December 31, 2011 | | | 510 | | | 291 | | | 801 | |
June 30, 2012 (unaudited) | | | 801 | | | 132 | | | 933 | |
Note 4.8. Property and Equipment
Property and equipment, net, consisted of the following (in thousands):
| | | | | | | | | | |
| | December 31, | |
| |
|---|
| | June 30,
2012 | |
|---|
| | 2010 | | 2011 | |
|---|
| |
| |
| | (unaudited)
| |
|---|
Purchased and internally developed software | | $ | 7,342 | | $ | 9,354 | | $ | 9,986 | |
Furniture and office equipment | | | 1,173 | | | 1,275 | | | 1,286 | |
Computer hardware | | | 6,387 | | | 9,057 | | | 10,110 | |
Leasehold improvements | | | 4,271 | | | 4,494 | | | 4,627 | |
Software development in progress | | | 162 | | | 914 | | | 1,505 | |
| | | | | | | | |
| | | 19,335 | | | 25,094 | | | 27,514 | |
Less: accumulated depreciation and amortization | | | (8,718 | ) | | (12,883 | ) | | (15,384 | ) |
| | | | | | | | |
Property and equipment, net | | $ | 10,617 | | $ | 12,211 | | $ | 12,130 | |
| | | | | | | | |
| | | | | | | | |
| | | As of December 31, | |
| | | 2019 | | | 2020 | |
Building and building improvements | | $ | 29,350 | | | $ | 29,850 | |
Land | | | 6,437 | | | | 6,437 | |
Internal-use software | | | 52,394 | | | | 56,756 | |
Purchased software | | | 3,483 | | | | 3,370 | |
Furniture and office equipment | | | 4,190 | | | | 3,868 | |
Computer hardware | | | 14,450 | | | | 12,195 | |
Leasehold improvements | | | 4,902 | | | | 4,904 | |
Software development in-progress | | | 5,536 | | | | 4,305 | |
| | | | | | | | |
Total cost of property and equipment | | | 120,742 | | | | 121,685 | |
Less: accumulated depreciation and amortization | | | (60,683 | ) | | | (70,311 | ) |
| | | | | | | | |
Property and equipment, net | | $ | 60,059 | | | $ | 51,374 | |
| | | | | | | | |
Depreciation and amortization expense related to property and equipment was $12.1 million and $17.3 million for 2019 and 2020, respectively.
At December 31, 2010, December 31, 20112019 and June 30, 20122020, accumulated amortization in connection with internally developed and purchasedinternal-use software costs was $4.0 million, $6.1$29.9 million and $7.2$38.7 million, (unaudited), respectively. For the years ended December 31, 2009, 2010In 2019 and 2011, and the six months ended June 30, 2011 and 2012, the Company2020, we recorded amortization expense of $1.2$7.3 million $2.0and $12.3 million, $2.1 million, $1.0 million (unaudited) and $1.1 million (unaudited), respectively, in connection with these costs. Software development in-progress consists primarily of internal-use software projects, which when placed in service, will provide enhancements and improvements to the operational and functional capabilities to our online legal platform and our customer-
facing website. In 2019 and 2020, we capitalized internal-use software development costs of $14.2 million and $8.1 million, respectively. In 2019 and 2020, we impaired $3.7 million and $1.1 million, respectively, of capitalized software developments costs related primarily to internal-use software projects that no longer met our business requirements or were no longer expected to be placed in service.
Note 9. Goodwill
The changes in goodwill for 2019 and 2020 were as follows (in thousands):
Total depreciation
| | | | |
Balance as of December 31, 2018 | | | 20,077 | |
Impairment | | | (10,597 | ) |
Foreign currency translation | | | 326 | |
| | | | |
Balance as of December 31, 2019 | | | 9,806 | |
Acquisition | | | 1,569 | |
Foreign currency translation | | | 29 | |
| | | | |
Balance as of December 31, 2020 | | $ | 11,404 | |
| | | | |
As discussed in Note 5, we acquired Pure in October 2020.
In 2019, we had two reporting units, the U.S. reporting unit and the U.K. reporting unit. Our U.K. reporting unit’s performance was below expectations and further deteriorated in 2019. Our quantitative goodwill assessment in 2019 concluded that the carrying value of the U.K. reporting unit exceeded its fair value, and accordingly, we impaired all the goodwill attributable to the U.K. reporting unit of $10.6 million. At December 31, 2020, we have one reporting unit.
Note 10. Intangible Assets, net
Intangible assets, net, consisted of the following (in thousands):
| | | | | | | | | | | | |
| | | December 31, 2019 | |
| | | Gross
Carrying
Amount | | | Accumulated
Amortization | | | Net Carrying
Amount | |
Customer relationships | | $ | 7,770 | | | $ | 6,172 | | | $ | 1,598 | |
Developed technology | | | 5,118 | | | | 3,692 | | | | 1,426 | |
Trade names | | | 2,360 | | | | 2,306 | | | | 54 | |
Non-compete agreements | | | 224 | | | | 224 | | | | — | |
| | | | | | | | | | | | |
Total intangible assets | | $ | 15,472 | | | $ | 12,394 | | | $ | 3,078 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | December 31, 2020 | |
| | | Gross
Carrying
Amount | | | Accumulated
Amortization | | | Net Carrying
Amount | |
Customer relationships | | $ | 8,626 | | | $ | 7,949 | | | $ | 677 | |
Developed technology | | | 5,216 | | | | 5,085 | | | | 131 | |
Trade names | | | 288 | | | | 281 | | | | 7 | |
| | | | | | | | | | | | |
Total intangible assets | | $ | 14,130 | | | $ | 13,315 | | | $ | 815 | |
| | | | | | | | | | | | |
For 2019 and 2020, we recorded amortization expense recordedof $4.3 million and $2.8 million, respectively.
At December 31, 2020, estimated future intangible assets amortization expense was allocated as follows on the accompanying consolidated statements of operations (in thousands):
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Six Months Ended
June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| |
| |
| |
| | (unaudited)
| | (unaudited)
| |
|---|
Cost of services | | $ | 2,297 | | $ | 2,557 | | $ | 2,999 | | $ | 1,400 | | $ | 1,649 | |
Selling and marketing | | | 54 | | | 130 | | | 214 | | | 90 | | | 193 | |
Technology and development | | | 255 | | | 320 | | | 584 | | | 267 | | | 351 | |
General and administrative | | | 331 | | | 502 | | | 765 | | | 301 | | | 344 | |
| | | | | | | | | | | | |
Total depreciation and amortization expense | | $ | 2,937 | | $ | 3,509 | | $ | 4,562 | | $ | 2,058 | | $ | 2,537 | |
| | | | | | | | | | | | |
| | | | |
For Years Ending December 31, | | | | |
2021 | | $ | 430 | |
2022 | | | 210 | |
2023 | | | 175 | |
| | | | |
Total amortization expense | | $ | 815 | |
| | | | |
TableNote 11. Long-term Debt
A reconciliation of Contents
LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 5. Line of Creditthe scheduled maturities to the consolidated balance sheets is as follows (in thousands):
On October
| | | | | | | | |
| | | As of December 31, | |
| | | 2019 | | | 2020 | |
Current portion of 2018 Term Loan | | $ | 5,350 | | | $ | 5,350 | |
Current portion of discount and unamortized debt issuance costs | | | (2,351 | ) | | | (2,321 | ) |
| | | | | | | | |
Total current portion of long-term debt | | $ | 2,999 | | | $ | 3,029 | |
| | | | | | | | |
Noncurrent portion of 2018 Term Loan | | $ | 524,300 | | | $ | 518,950 | |
Noncurrent portion of discount and unamortized debt issuance costs | | | (8,909 | ) | | | (6,588 | ) |
| | | | | | | | |
Total long-term debt, net of current portion | | $ | 515,391 | | | $ | 512,362 | |
| | | | | | | | |
At December 31, 2008, the Company2020, aggregate future principal payments are as follows(in thousands):
| | | | |
As of December 31, | | | | |
2021 | | $ | 5,350 | |
2022 | | | 5,350 | |
2023 | | | 5,350 | |
2024 | | | 508,250 | |
| | | | |
Total outstanding principal of 2018 Term Loan | | | 524,300 | |
Less: current portion of 2018 Term Loan | | | (5,350 | ) |
| | | | |
Outstanding principal of 2018 Term Loan, net of current portion | | $ | 518,950 | |
| | | | |
In November 2018, we entered into an amended first lien credit and guaranty agreement, or the 2018 Credit Facility, which consists of a revolving line of creditfirst lien term loan facility, or 2018 Term Loan, with a financial institutionprincipal amount of $535.0 million and was eligible to borrow up to $5a 2018 Revolving Facility of $40.0 million, (the "Lineor the 2018 Revolving Facility. The 2018 Term Loan matures in November 2024 and the 2018 Revolving Facility matures in November 2023. Debt issuance costs of Credit"). The Line of Credit agreement set limitations on the Company's ability to pay dividends$6.5 million and to incur additional credit obligations or indebtedness. On October 29, 2010, the Line of Credit was amended to increase the term of the credit agreement by two years and also increased the Company's ability to borrow funds$0.2 million from the financial institution from $5 million2018 Term Loan and 2018 Revolving Facility, respectively, are being amortized to $10 million.interest expense over their respective terms.
The Line ofOur 2018 Credit may be used to fund the general working capital requirements, if required, and any principal amounts drawn would be due up to 180 days from the date of borrowing. Borrowings under the Line of Credit are collateralizedFacility is guaranteed by substantially all of our material domestic subsidiaries and is secured by substantially all of our and such subsidiaries’ assets, with the exception of our restricted cash equivalent. Under the terms of the Company. The Line of2018 Credit expires on October 31, 2012.
The Line of Credit bears interest atFacility, for our 2018 Revolving Facility, we are required to maintain a LIBOR- or prime-based interest rate, which the Company can select at the time of borrowing, plus an applicable margin. The applicable margin is dependent on the Company'sTotal Net First Lien Leverage Ratio calculated contractually using amounts outstanding, if any, divided by a trailing twelve-month earnings of the Company, excluding interest, taxes, depreciation and amortization. For LIBOR- or prime-based advances, if thenot to exceed 7.9 to 1.0 unless we receive written consent. The Total Net First Lien Leverage Ratio is less than or equalrepresents the ratio of consolidated total net indebtedness to 2:1, the applicable margin would be 3.5% or 1%, and if theconsolidated adjusted cash EBITDA based on a retroactive rolling, 12-month period. The Total Net First Lien Leverage Ratio exceeds 2:1, the applicable margin wouldwill be 5% or 2.5%, respectively.
Any LIBOR-based advances must be at least $500,000 and LIBOR rate cannot be less than 1% per annum, before the applicable margin. There are no minimum advance requirements under the prime-based borrowing and the interest rate, if elected, cannot be less than the sum of the LIBOR rate plus 2.5% per annum, before the applicable margin. At December 31, 2011, the 30-day, LIBOR-interest rate was 0.28% and the prime interest rate was 3.25%, subject to the minimums described above, as applicable.
The Company is obligated to pay an unused line fee equal to 0.20% per annum of the average unused portion of the Line of Credit, payable in quarterly installmentstested on the last day of each quarter.fiscal quarter commencing in March 2019, where the total principal amount of all revolving loans and letters of credit outstanding under the 2018 Revolving Facility, excluding any issued
and outstanding undrawn letters of credit, exceeds 35% of the total commitments. In addition, we will be required to apply 50% of any excess cash flow, as defined in the 2018 Credit Facility toward prepayments of the 2018 Term Loan and 2018 Revolving Facility. The excess cash flow requirement will reduce to 25% if our Total Net First Lien Leverage Ratio is between 4.25 to 1.00 and 3.75 to 1.00 and will reduce to 0% if our Total Net First Lien Leverage Ratio is less than 3.75 to 1.00. The 2018 Credit Facility also contains certain non-financial covenants including, among other things, limitations on our ability to incur additional debt, incur additional liens, sell or dispose of assets, merge with or acquire other companies, liquidate or dissolve ourselves, engage in businesses that are not in a related line of business, make loans, advances or guarantees, pay dividends, engage in transactions with affiliates, incur liens and make investments. The 2018 Credit Facility also has various customary representations and warranties and events of default. We were in compliance with the financial covenants under the 2018 Credit Facility as of December 31, 2019 and 2020.
The 2018 Term Loan bears either a base rate plus an interest drawn spread of 3.5%, or LIBOR plus an interest drawn spread of 4.5%. The interest rate applicable to loans under our 2018 Revolving Facility is, at our option, either (a) LIBOR plus a margin of 4% or (b) the base rate plus a margin of 3%. Each quarterly installmentsuch margin may decrease depending on our Net First Lien Leverage Ratio. The base rate is calculatedthe highest of (a) the federal funds rate plus 1/2 of 1%, (b) the prime rate as announced by our financial institution, or (c) LIBOR plus 1% and (d)(i) in the case of the 2018 Term Loan, 2% or (ii) otherwise, 1%. The 2018 Revolving Facility bears the following interest drawn spreads and unused commitment fees based upon our Total Net First Lien Leverage Ratio:
| | | | | | | | | | | | |
| Total Net First Lien Leverage Ratio | | Fixed Rate
Margin | | | Base Rate Margin | | | Commitment
Fee | |
Greater than 4.25 to 1.00 | | | 4.00 | % | | | 3.00 | % | | | 0.50 | % |
Greater than 3.75 to 1.00 however less than or equal to 4.25 to 1.00 | | | 3.75 | % | | | 2.75 | % | | | 0.375 | % |
Less than or equal to 3.75 to 1.00 | | | 3.50 | % | | | 2.50 | % | | | 0.25 | % |
We are obligated to pay a commitment fee accrued daily on the undrawn portion of the 2018 Revolving Facility based on the average unused portionrates set forth above, payable in arrears at the end of the Line of Credit during sucheach fiscal quarter. We also have $8.0 million in letters of credit available under our 2018 Revolving Facility.
All direct financing costs incurredIn March 2020, in response to the World Health Organization’s declaration of COVID-19, we drew down the full $40.0 million available from our 2018 Revolving Facility. The 2018 Revolving Facility was paid in full by May 2020. At December 31, 2019 and 2020, we had no amounts outstanding under our 2018 Revolving Facility or any outstanding letters of credit.
At December 31, 2019 and 2020, all of our borrowings were related to the Line2018 Term Loan. The effective interest rate of Credit have been deferredthe 2018 Term Loan is 7.0% and 5.1% for 2019 and 2020, respectively. The thirty-day LIBOR-interest rate was approximately 1.8% and 0.2% as of December 31, 2019 and 2020, respectively. We paid $5.35 million in principal repayments on the 2018 Term Loan in 2019 and 2020.
We determined that the fair value of our long-term debt approximates its carrying value as of 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.
Note 12. Derivative Financial Instruments
Derivative financial instruments and hybrid debt consisted of the following (in thousands):
| | | | | | | | |
| | | As of December 31, | |
| | | 2019 | | | 2020 | |
Interest rate swaps derivative liability, current portion | | $ | 1,655 | | | $ | 2,177 | |
| | | | | | | | |
Interest rate swaps | | $ | 3,750 | | | $ | 3,640 | |
Financial guarantee | | | 1,900 | | | | 150 | |
| | | | | | | | |
Total derivative liability, net of current portion | | $ | 5,650 | | | $ | 3,790 | |
| | | | | | | | |
Hybrid debt, current portion | | $ | — | | | $ | 2,954 | |
| | | | | | | | |
Hybrid debt, net of current portion | | $ | — | | | $ | 8,152 | |
| | | | | | | | |
Current and noncurrent derivative liabilities and hybrid debt are being amortized overincluded in accrued expenses and other current liabilities and other liabilities, respectively, in the accompanying consolidated balance sheets.
Financial Guarantee
In September 2019, we provided a financial guarantee relating to a former executive officer upon their voluntary termination. The executive officer entered into a personal loan with a financial institution for $50.0 million with a three-year term. The personal loan is collateralized by personal assets, an investment portfolio and our common stock owned by the former executive officer. We provided a financial guarantee to the financial institution up to $25.0 million should the former executive officer default or not meet certain collateral requirements throughout the term of the Linepersonal loan. We deposited $25.0 million into a money market fund with the financial institution, or the restricted cash equivalent, to evidence this financial guarantee. Should the former executive officer not meet certain collateral requirements or defaults on the personal loan, the financial institution has the ability to use our restricted cash equivalent for any shortfall up to $25.0 million. In that event, we will have full recourse against the former executive officer to recover the amount retained by the financial institution up to $25.0 million. The personal loan is required to be repaid by the former executive officer prior to us making a public filing with the Securities and Exchange Commission for our IPO, or September 2022, whichever comes first. In the event of Creditour IPO, the former executive officer has the option to sell up to $25.0 million of his common stock back to us to pay off the personal loan with the financial institution.
The financial guarantee is being accounted for as a derivative at fair value with changes in fair value recorded in other income, net in our consolidated statements of operations. The financial guarantee has a term of three years and matures in September 2022. The estimated fair value of the financial guarantee liability of $1.9 million and $0.1 million as of December 31, 2019 and 2020, respectively, was estimated using a Monte Carlo simulation model using Level 3 inputs from the fair value hierarchy. The principal assumptions used in the model as of December 31, 2019 were: expected volatility of 50% and risk-free rate of 1.6%. The principal assumptions used in the model as of December 31, 2020 were: expected volatility of 63% and risk-free rate of 0.1%. The change in fair value of the financial guarantee in 2020 was $1.8 million. The change in fair value of the financial guarantee from September 2019 to December 31, 2019 was not material to our consolidated financial statements.
Interest Rate Swaps
In April 2019, we entered into two interest rate swaps, or initial swaps, to manage cash flow exposure and exposure to interest rate fluctuations under our 2018 Term Loan. The initial swaps mature in April 2022. Under the swap agreements, we were required to pay interest at a fixed rate of 2.3% per annum and receive interest at a variable rate indexed to one-month LIBOR. The initial notional amount of each initial swap was $66.0 million.
The initial swaps are being accounted for as cash flow hedges as the transactions were executed to hedge our future interest payments.
Due to the impact of COVID-19 and decreases in LIBOR, in March 2020, we entered into two blend-and-extend 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 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 consolidated statements of operations.
Interest Rate Cap
In March 2018, we entered into an interest rate cap agreement at a cost of $0.8 million with a three-year term, for an aggregate notional amount of $340.0 million to hedge variability of cash flows in our variable interest payments attributable to fluctuations in LIBOR beyond 3%. The critical terms of the interest methodrate cap are substantially the same as our underlying term loans. The interest rate cap is being accounted for as a cash flow hedge as the transaction was executed to hedge our future interest payments. The interest rate cap expired on March 31, 2021.
Other Derivative Instruments
We also held an interest rate swap, which was used to manage cash flow exposure and such amounts areexposure to interest rate fluctuations under our previous credit facilities, or the 2016 swap. The 2016 swap matured in January 2020. Under the swap agreement, we were required to pay interest at a fixed rate of 1.8% per annum and we received interest at a variable rate indexed to one-month LIBOR. The initial notional amount of the 2016 swap was $18.3 million. The 2016 swap did not materialqualify for any period presented.
The Line of Credit requires immediate repayment of amounts outstanding upon an event of default, as definedhedge accounting and changes in fair value were recorded in interest expense, net in the agreement, which includes events suchaccompanying consolidated statements of operations.
The impact from losses from our interest rate cap, interest rate swaps, and hybrid debt on our consolidated statements of operations were as a payment default, a covenant default or the occurrence of a material adverse change, as defined in the agreement. At December 31, 2010, December 31, 2011 and June 30, 2012 (unaudited), the Company had no amounts outstanding or any letters of credit backed by the Line of Credit.follows (in thousands):
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Net payments upon settlement of interest rate swaps | | $ | 208 | | | $ | 1,103 | |
Change in fair value of 2016 swap | | | 128 | | | | — | |
Amortization of prior hedge effectiveness | | | — | | | | 3,481 | |
Amortization of interest rate cap premium | | | 312 | | | | 194 | |
Interest expense on hybrid debt | | | — | | | | 630 | |
| | | | | | | | |
Total, recorded in interest expense, net | | $ | 648 | | | $ | 5,408 | |
| | | | | | | | |
Note 6.13. Commitments and Contingencies
The Company conducts itsWe conduct operations from certain leased facilities in various locations. At December 31, 2011, the Company2020, we had various non-cancellablenon-cancelable operating and capital leases for office space and computer equipment, respectively which expire between August 2013 through January 2021.
Table of Contents
LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 2021 and December 2022. Future minimum payments under operating and capital leases are as follows (in thousands):
| | | | | | | |
| | Operating
Leases | | Capital
Leases | |
|---|
Years ending December 31, | | | | | | | |
2012 | | $ | 2,572 | | $ | 205 | |
2013 | | | 2,298 | | | — | |
2014 | | | 1,878 | | | — | |
2015 | | | 1,932 | | | — | |
2016 | | | 1,828 | | | — | |
Thereafter | | | 6,748 | | | — | |
| | | | | | |
Total minimum lease payments | | $ | 17,256 | | $ | 205 | |
| | | | | | | |
Less amounts representing interest | | | | | | (3 | ) |
| | | | | | | |
Present value of net minimum lease payments | | | | | $ | 202 | |
| | | | | | | |
The Company
| | | | |
| | | Operating Leases | |
Years Ending December 31, | | | | |
2021 | | $ | 3,195 | |
2022 | | | 1,776 | |
| | | | |
Total minimum lease payments | | $ | 4,971 | |
| | | | |
In 2020, we signed a lease amendment to extend the term of our corporate offices in Glendale, California for an additional 18 months, which expires in July 2022. We recorded rent expense of $1.6 million, $2.6$3.1 million and $2.0$3.1 million for the years ended December 31, 2009, 20102019 and 2011, and $1.0 million (unaudited) and $1.3 million (unaudited) for the six months ended June 30, 2011 and 2012,2020, respectively.
Advertising, Media and Other Commitments
The Company usesWe use a variety of mediumsmedia to advertise itsour services, including search engine marketing, television and radio. At December 31, 2011 and June 30, 2012, the Company2020, we had non-cancellablenon-cancelable minimum advertising and media commitments for future advertising spots of $18.1$11.9 million, and $8.7 million (unaudited), respectively, substantially all of which will be paid during 2012. The Company2021. We also has a have non-cancelable license agreement agreements with a technology vendorvarious vendors, which requires the Companyrequire us to pay $1.5$6.5 million over a three-yearfive-year period, for utilizationof which $4.3 million remains to be paid as of December 31, 2020.
Legal Proceedings
We, along with Pulse Global Services, Ltd, former executive officers, the State Bars of Arizona, California, and Texas, and the United States Patent and Trademark Office, or USPTO, were served with a complaint from Plaintiffs Raj Abhyanker, LegalForce RAPC Worldwide, or LegalForce RAPC, and LegalForce Inc., purported competitors, on December 19, 2017 in the Northern District of California. Plaintiffs’ complaint initially alleged unreasonable restraint of trade in violation of the vendor's web-based application.
Sherman Act, unfair competition, false and misleading advertising, professional negligence and breach of fiduciary duties, but over the course of two years, the plaintiffs filed multiple amendments, additional matters, and administrative complaints against us, and others, in multiple jurisdictions. The Company was namedparties reached the terms of a defendant in two purported class action lawsuits filed in California state courtglobal confidential settlement for all claims, known or unknown, on September 15, 2009October 7, 2019, and May 27, 2010,all actions were dismissed with prejudice. In 2019, we incurred a loss of $0.8 million for the settlement, net of insurance recoveries of $2.4 million.
We received a demand letter dated April 20, 2020 from service partner Dun & Bradstreet alleging primarily that the Company failedDun & Bradstreet had overpaid us for services. The letter alleges these overpayments occurred between 2015 and 2019, amounted to comply with the California Legal Document Assistant Act, engaged in unfair business practices$5.6 million, and made misrepresentations in the Company's business operations (collectively, "Matter A"). Between them, the complaints sought to have all contracts between the Companywere caused by overreporting by us. We deny and its customers in the prior four years declared void and demanded a return of all the revenues generated from these customers plus punitive damages, penalties and injunctive relief.
The Company denied and continueswill continue to deny all of the allegations and claims asserted in the lawsuits,by Dun & Bradstreet, including, but not limited to, any allegation that the plaintiffs haverespondent has suffered any harm or damages. In June 2011, the Company, without admitting liability, and to avoid additional legal costs to defend these matters, agreed to a settlement agreement of the May 27, 2010 action to resolve the claims in both of these cases. ("Matter A Settlement") A fairness hearing was held on this matter on April 5, 2012, and the court issued an order granting final approval of the Matter A settlement on April 18, 2012. The plaintiff from the September 15, 2009 action has filed a notice of appeal of the court's denial of his motion to intervene. The plaintiff from the September 15, 2009 action and additional plaintiffsWe believe we have filed notices of appeal of the court's order and judgment.
Table of Contents
LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Matter A Settlement includes a settlement class of all customers residing in the United States who purchased certain services from the Company from September 15, 2005 through June 16, 2011 ("Matter A class members"). The key terms of the settlement obligate the Company to pay plaintiff attorney fees and expenses not to exceed $2.2 million; in the states where the Company sells legal plans, for the Company to provide the class members who file a valid and timely claim, a sixty-day free subscription service to those legal plans (an "in-kind services award"); in the states where the Company does not sell legal plans, to pay the class members a cash award of up to $75 per claimant, the aggregate for this category not to exceed $150,000; in lieu of the in-kind services award, for class members who requested but did not receive a refund for the purchase price of the legal document prepared through the Company, and have not already successfully used the document for its intended purpose, the Company will provide a cash award of up to $100 per claimant, the aggregate for this category not to exceed $250,000. Third-party administrative costs of the settlement have been estimated to be approximately $250,000.
The Company accrued the estimated settlement of $2.9 million in the December 31, 2010 financial statements that had not been issued as of the date of the settlement agreement. The $2.9 million accrual, recorded in non-current liabilities as of December 31, 2010 because the payment of the amount was not expected to occur within twelve months of that date, is comprised of plaintiff legal fees and expenses of $2.2 million, the maximum $150,000 to class members who reside in states where the Company does not sell legal plans, an estimated liability of $250,000 for in-kind services awards, and $250,000 for administration costs.
The $2.9 million legal settlement accrual was also recorded as a reduction of revenues of $0.2 million and a charge to general and administrative expenses of $2.7 million in the accompanying consolidated statements of operations for the year ended December 31, 2010. The reduction of revenues represents estimated refunds to claimants of previously recorded sales amounts.
The Matter A deadline for class members to submit a valid claim to participate in the settlement was May 15, 2012. Based on the claims received by the settlement administrator through the May 15, 2012 submission deadline, the Company has not adjusted the $2.9 million estimated accrued legal settlement liability during the six months ended June 30, 2012. However, the settlement administrator continues to process late claims and/or corrections to incomplete claims, the finalization of which the Company believes will not significantly impact the amount accrued to settle this Matter A.
The Company expenses legal fees and costs for defending legal proceedings as incurred.
On December 17, 2009, a statewide class action lawsuit was filed against the Company in Missouri state court, alleging that we were engaged in the unauthorized practice of law and violated the Missouri Merchandising Practices Act ("Matter B"). The complaint was later amended on January 15, 2010 to add additional plaintiffs. The complaint sought damages of five years of fees charged to Missouri customers with the fees from the two years immediately preceding the complaint trebled and an injunction to enjoin the Company from continued operation in Missouri. The Company subsequently removed the case to federal court in Missouri.
The Company has denied and continues to deny all of the allegations and claims asserted in the lawsuit, including, but not limited to, any allegation that the plaintiffs have suffered any harm or damages. The Company does not admit liability, but agreed to settle the cases to avoid the ongoing cost, expense and time required to defend Matter B. In August 2011, the parties reached agreement on the material terms of a settlement ("Matter B Settlement"). The court held a fairness hearing on April 13, 2012 and issued a final approval order and dismissal with prejudice on April 30, 2012.
Table of Contents
LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Matter B Settlement includes a settlement class of all customers residing in the State of Missouri who purchased services from the Company from December 18, 2004 through May 20, 2011 ("Matter B class members"). The key terms of the settlement obligate the Company to pay a maximum of $1.9 million to the plaintiffs' attorneys for their fees and expenses plus amounts to be paid to Matter B class members in cash, on a claims-made basis, to be administered by a Claims Administrator. Third-party administrative costs of the settlement have been estimated by the Company to be approximately $75,000. In June 2012, the Company paid the $1.9 million to the plaintiffs' attorneys for their fees and expenses.
The Company had accrued the estimated settlement of $2.5 million in the December 31, 2010 financial statements that had not been issued as of the date of the settlement agreement. The $2.5 million accrual, recorded in non-current liabilities as of December 31, 2010 because the payment of the amount was not expected to occur within twelve months of that date, is comprised of the capped plaintiffs' attorneys' fees and expenses of $1.9 million plus an estimated $0.6 million payment to the Matter B class members.
The $2.5 million legal settlement accrual was also recorded as a reduction of revenues of $0.6 million and a charge to general and administrative expenses of $1.9 million in the accompanying consolidated statements of operations for the year ended December 31, 2010. The reduction of revenues represents estimated cash refunds to Matter B claimants of previously recorded sales amounts.
The Matter B deadline for class members to submit a valid claim to participate in the settlement was May 14, 2012, and based on claims received by the settlement administrator through that date, the Company increased its accrued settlement liability by $0.2 million (unaudited) to $2.7 million (unaudited) and in June 2012 paid the plaintiffs' attorneys $1.9 million (unaudited) for fees and expenses, reducing the Matter B accrued liability to $0.8 million (unaudited), which is included in accrued expenses and other current liabilities in the consolidated balance sheet as of June 30, 2012. The $0.2 million (unaudited) increase from the original estimate was recorded as a reduction of revenues during the six months ended June 30, 2012, representing cash refunds to Matter B claimants of previously recorded sales amounts. The settlement administrator continues to process late claims and/or corrections to incomplete claims, the finalization of which the Company believes will not significantly impact the amount accrued to settle this Matter B.
The maximum settlement for Matters A and B, assuming all eligible claimants made a valid claim, was estimated to be $16 million. As of December 31, 2011, the Company had reasonably estimated the collective range of aggregate probable losses for Matters A and B to be between approximately $5.4 million and $7 million and had accrued the low end of the range as no other amount within this range was a better estimate than any other amount.
Based on the claims received through the respective aforementioned claims submission deadlines and processed to date, after the Matter B payments made to the plaintiffs' attorneys in June 2012, the Company has reasonably estimated the collective aggregate probable losses for Matters A and B to be approximately $3.7 million (unaudited) which is included in accrued expenses and other liabilities as of June 30, 2012. The ultimate costs of these two settlements are dependent on a number of factors, including the resolution of any appeals of the Matter A settlement, and actual claims made by, and the resulting payments to, the class members. Any difference between the amount accrued and the ultimate cost of the settlements will be recognized as an additional or lower expense or revenue in the period in which the final settlement is approved and the claims made by the plaintiffs are finalized. There is at least a reasonable possibility that the Company may incur an additional loss in excess of the amount accrued at June 30, 2012. The Company is unable to estimate the amount of additional loss or range of additional loss, if any, relating to these Matters. If the actual payments for the settlements are materially higher than the amount
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estimated by the Company, this difference could have a material adverse effect on the Company's business, operating results, cash flows and financial condition.
The Company has other pending matters described below.
On June 10, 2011, a purportedquo warranto action was filed against the Company in Alabama state court by the DeKalb County Bar Association. The complaint generally alleges that the Company engages in the unauthorized practice of law in Alabama and requests injunctive relief, not damages. The Company has denied and continues to deny all of the allegations and claims asserted in the lawsuit, including, but not limited to, any allegation that the plaintiffs have suffered any harm or damages. The Company believes it has meritorious defenses to the claims and intends towill vigorously defend this lawsuit. The Company isany action. We are unable to predict the ultimate outcome of this matter. Since no monetary damages are being sought by plaintiff, the Company does not reasonably believe that it has incurred any financial loss and therefore hasWe have not recorded any loss or accrual in the accompanying consolidated financial statements at December 31, 2011, and June 30, 2012 (unaudited)2020 for this matter.
On July 19, 2012, the Company prevailed onmatter as a motion to dismiss a purported statewide class action filed on October 27, 2011, in federal court in Ohio, alleging that the Company engages in the unauthorized practice of lawloss is not probable and violates the Ohio Consumer Sales Practices Act through its transaction business. The complaint sought disgorgement of revenue, among other remedies. The complaint did not state any dollar amounts being sought. The Company denied and continues to deny all of the allegations and claims asserted in the lawsuit, including, but not limited to, any allegation that the plaintiffs have suffered any harm or damages. Since the Company prevailed on the motion to dismiss, the Company does not reasonably believe that it has incurred any financial loss and therefore has not recorded any loss in the accompanying consolidated financial statements at December 31, 2011, and June 30, 2012 (unaudited) for this matter.
On January 25, 2012, a purported class action complaint was filed against the Company in Arkansas state court, generally alleging that the Company engages in unauthorized practice of law constituting violation of the Arkansas deceptive trade practices act and unjust enrichment. The complaint seeks a refund of all monies paid to the Company and punitive damages, among other remedies. The complaint does not state any dollar amounts being sought. The Company has denied and continues to deny all of the allegations and claims asserted in the lawsuit, including, but not limited to, any allegation that the plaintiffs have suffered any harm or damages. The Company believes it has meritorious defenses to the claims and intends to vigorously defend this lawsuit. The Company is unable to predict the ultimate outcome of this matter.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 Companypossible 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 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 consolidated financial statements at December 31, 2011, and June 30, 2012 (unaudited)2020 for this matter as the amount ofa loss if any, is not probable and reasonably estimable. The Company is unable to estimate the possible loss or a range of loss, if any, relating to this matter.
On February 17, 2012, a complaint was filed against the Company in South Carolina state court, generally alleging that the Company engages in the unauthorized practice of law through its transaction model. The complaint requests declaratory relief, injunctive relief and disgorgement of revenues, among other measures. The complaint does not state any dollar amounts being sought. The Company has denied and continues to deny all of the allegations and claims asserted in the lawsuit, including, but not limited to, any allegation that the plaintiffs have suffered any harm or damages. The Company believes it has meritorious defenses to the claims and intends to vigorously defend this lawsuit. The Company is unable to predict the ultimate outcome of this matter. There is at least a reasonable possibility that a loss may have been incurred for this contingency, however, the Company has not recorded any loss or accrual in the
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LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accompanying consolidated financial statements at December 31, 2011, and June 30, 2012 (unaudited) for this matter as the amount of loss, if any, is not probable and estimable. The Company is unable to estimate the possible loss or a range of loss, if any, relating toloss. If this matter.
If the matters noted above arematter is not resolved in the Company'sour favor, the losses arising from the resultsresult of litigation or settlements may have a material adverse effect on the Company'sour business, operating 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, from a Florida resident who claims to have visited the www.legalzoom.com website. The Company filed a complaintplaintiff 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 seeks damages on September 30, 2011 in Raleigh, North Carolina against the North Carolina State Bar. The suit brought by the Company requests a declaration that LegalZoom.com Inc.'s self-help services are lawful and requiring the registrationbehalf of the Company's subscription legal plans. The Company cannotpurported class as well as injunctive and declaratory relief. 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 consolidated financial statements at December 31, 2020 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.
The Company isWe are involved in both active and inactive state administrative inquiries relating to the unauthorized practice of law.law or insurance. Because these are inquiries and no claims have been alleged or asserted against the Company, the Companyus, we cannot predict the outcome of these inquiries or whether these matters will even turn intoresult in litigation or any outcome of suchpotential litigation.
From time to time, the Companywe may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. Other than described above, the Company iswe are not currently a party to any material legal proceedings, nor is the Companyare we aware of any pending or threatened litigation that would have a material adverse effect on the Company's business, operatingour results of operations, cash flows, orand financial condition, should such litigation be resolved unfavorably.
The Company hasWe have entered into employment contracts with certain employees and officers.officers, including standard indemnification agreements with each of our officers and directors. All of the contracts are under the terms of at-will employment. However, under the provisions of the contracts, the Companywe may be required to incur severance obligations for matters relating to changes in control, as defined, and involuntary terminations. At December 31, 2011 and June 30, 2012 (unaudited),2020, total potential severance obligations in connection with the termination of employment contracts approximated $1.6without a change in control, or CIC, was $3.3 million and a termination following a CIC was $5.2 million. The Company has an obligation to pay one of its named officers a cash bonus of $100,000 and accelerate vesting by one year of his then-unvested stock options that would have otherwise vested monthly during that same 12-month period upon the completion of an initial public offering.
In February 2010, the Company received a cash incentive payment of $0.5 million from the State of Texas in connection with the Company's opening of its office in Austin, Texas. The cash incentive, among other things, requires the Company to hire a contractually determined number of eligible employees who reside and work in the state beginning in 2010 and annually thorough 2017 ("incentive period"). This incentive contract is subject to annual compliance audits by the State of Texas. Shortfalls in the number of required new hires, if any, may result in the State penalizing the Company over the incentive period and such penalties over the incentive period cannot in the aggregate exceed the original $0.5 million payment made by the State. Although the Company does not expect to pay back this amount entirely based on its expected hiring in the State, it is also unable to estimate how much of the incentive the Company will retain, if any, since the Company can potentially end up paying back the entire incentive payment over the incentive period if it is unable to meet and maintain contractual hiring requirements. Accordingly, the Company has recorded $0.4 million of the incentive payment as a noncurrent liability and $0.1 million as a current liability in the accompanying consolidated balance sheets at December 31, 2011 and June 30, 2012
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited) the current amount representing the estimated expected amount to be paid back to the state in the next twelve months.
Indemnification provisions in our third-party service provider agreements provide that the Companywe will indemnify, hold harmless, and reimburse the indemnified parties on a case-by-case basis for losses suffered or incurred by the indemnified parties in connection with any claim by any third partythird-party as a result of the Company'sour website, advertising, marketing, payment processing, collection or customer service activities. The maximum potential amount of future payments the Companywe could be required to make under these indemnification provisions is undeterminable. The Company has never
No amounts are accrued or have been paid a claim, nor hasduring any period presented as we believe the Company been sued in connection withfair value of these indemnification provisions. At December 31, 2011, and June 30, 2012 (unaudited), the Company has not accrued a liability for these guarantees, because the likelihood of incurring a payment obligation in connection with these guaranteesobligations is not probable.immaterial.
Note 7.14. Redeemable Convertible Preferred Stock
On February 9, 2007, the Company issued 7,628,000At December 31, 2020, we were authorized to issue 264,720,000 and 30,512,000 shares of common stock and Series A redeemable convertible preferred stock, at $5.98471 per share for total gross proceeds of $45.7 million less direct issuance costs of $2.7 million. The Company used the proceeds of this issuance to redeem previously issued securities.
At December 31, 2011 and June 30, 2012 (unaudited), the Company is authorized to issue 66,180,000 and 7,628,000 shares of common stock andor Series A, respectively. The Series A has the following rights and preferences:
The holders of Series A are entitled to receive non-cumulativenoncumulative dividends when and if declared by the Board of Directors. There is no stated dividend rate on the Series A. The CompanyWe cannot declare any dividends on any shares of capital stock unless the holders of the Series A then outstanding first receive a dividend on each outstanding share of Series A in an amount at least equal to (i) in the case of a dividend on common stock or any class or series that is convertible into common stock, that dividend per share of Series A as would equal the product of (A) the dividend payable on each share of such class or series determined as if all such shares of such class or series had been converted into common stock and (B) the number of shares of common stock issuable upon conversion of a share of Series A or (ii) in the case of a dividend on any class or series that is not convertible into common stock, at a rate per share of Series A determined by dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock and multiplying such fraction by an amount equal to $5.98471$1.4961775 per share. For the years ended December 31, 2009, 2010 and 2011 and the six months ended June 30, 2012 (unaudited), no dividends have been declared.
Each share of the Series A is convertible any time, at the option of the holder, into two shares of common stock.stock whereby the initial issuance price of $1.4961775 per share is divided by the conversion price of $0.74808875 per share. All shares of Series A will automatically convert upon the earlier of (i) immediately prior to the closing of the sale of shares of common stock to the public at a price of at least $9.00$13.10 per share, in a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933 with at least $50$100.0 million of gross proceeds to the Companyus and with respect to which the common stock is listed for trading on either the New York Stock Exchange or the National Association of Securities Dealers Automated Quotations Exchange, or NASDAQ National
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LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Market, each a “qualifying initial public offering,” or (ii) a date specified by the vote of the holders of at least a majority of the then outstanding shares of Series A.
The holders of the Series A are entitled to request that the Company redeem their shares on or after February 9, 2014, which is the date of earliest possible redemption. If the Series A shareholders request redemption, the Company can deny such request. However, in such event, the Series A have certain rights to take control of the Company's Board of Directors and approve such redemption. The redemption amount at February 9, 2014 is an amount per share in cash equal to (i) $5.98471, plus (ii) $0.4788, per annum, accruing on a daily basis, or a total of $71.2 million.
In the event of any voluntary or involuntary liquidation, dissolution, or winding up, of the Company, including a merger or consolidation, as defined as a deemed liquidation event under the holdersCertificate of shares of Series A then outstanding are entitled to be paid out ofIncorporation, the assets available for distribution to its shareholders before any payment will be made to the holders of common stock or any other class or series of stock ranking on liquidation junior to the Series A by reason of their ownership thereof, an amount per share of Series A equal to the Series A original issue price of $5.98471 multiplied by 1.25 (the "Base Liquidation Amount"), plus any dividends declared but unpaid thereon. If upon liquidation, dissolution, or winding up of the Company, the assets available for distribution to its shareholders are insufficient to pay the holders of shares of Series A the full aforesaid preferential amount to which they are entitled, the holders of shares of Series A will share ratably in any distribution of the remaining assets available for distribution in proportion to the respective amounts, which would otherwise be payable in respect of the shares of Series A held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.
After the payment of all preferential amounts required to be paid to the holders of Series A, the remaining assets available for distribution to the Company's shareholders willour stockholders shall be distributed among the holders of the shares of our Series A and common stock, pro rata based on the number of shares held by each such holder, treating for this purpose all such securities as if they had been converted to our common stock immediately prior to such dissolution, liquidation or winding upup.
We have presented our Series A outside of stockholders’ deficit in the mezzanine section of the Company; provided, however, that if and to the extent that the aggregate per share amount to be distributed to the holders ofaccompanying consolidated balance sheets, as Series A would exceedis contingently redeemable in the case of certain events outside of our control, such as a CIC or sale of substantially all of our assets.
Our Series A original issue priceis not redeemable at the option of $5.98471 multiplied by two, the Base Liquidation Amount will be reduced on a dollar-for-dollar basis by an amount equal to such excess amount; provided that in no event will the Base Liquidation Amount be reduced below zero.holder.
Each holder of outstanding shares of Series A is entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Series A held by such holder are convertible as of the record date for determining shareholdersstockholders entitled to vote on such matter. Holders of Series A will vote together with the holders of common stock as a single class.
As long as there are 2,542,66710,170,668 shares of Series A outstanding, the Companywe will not: Amend,not amend, alter or repeal any provision of the Restated Certificate of Incorporation or the Company's our By-laws in a manner that adversely affects thatthe rights, preferences, privileges and other restrictions of the Series A; increase or decrease the number of authorized shares of Series A; authorize or enter into any transaction or series of related transactions (i) for the sale, exclusive license or other disposition of a substantial portion of theour assets, of the Company, (ii) for the acquisition of any equity interests or all or substantially all of the assets
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of another entity, including by merger, in each case, where the fair market value of the consideration paid or issued by the Companyus in connection with the transaction exceeds $5,000,000,$100.0 million, (iii) for the merger, consolidation or other reorganization with or into another entity, (iv) for theour voluntary dissolution or liquidation, of the Company, or (iv)(v) otherwise constituting a change of control, as defined; authorize, designate, issue or reclassify any equity security senior to or on parity with the Series A, with regard to redemption, liquidation preference, voting rights or dividends; Increaseincrease the size of the Board of Directors; pay or declare dividends on, make distributions with respect to, or repurchase any shares of our capital stock of the Company;stock; incur any aggregate indebtedness for borrowed money in excess of $5,000,000;2.5 times our trailing 12-month cash EBITDA, as defined; increase the number of shares available for grant under the Company'sour 2000 Stock Option Plan or 20072016 Stock Option Plan or authorize or establish any new plan or arrangement providing for the grant or issuance of shares of common stock, options or convertible securities to directors, employees or consultants of the Company;our consultants; or Issue,issue, or commit to issue, any additional shares of Series A.
The holders of the Series A, exclusively and as a separate class, are entitled to elect two directors of the Company. The holders of the Series A and common stock, exclusively and as a separate class, are entitled to elect all remaining directors.
The Company isWe are required to reserve and keep available out of itsour authorized, but unissued shares of common stock such number of shares sufficient to effect the conversion of all outstanding shares of preferred stock plus shares granted and available for grant under the Company'sour stock option plan.plans.
The amount of suchNote 15. Stock-based Compensation
We currently grant stock options under our 2016 Stock Option Plan, or 2016 Plan. At December 31, 2020, there were 5,706,362 shares of common stock reservedavailable for these purposes at December 31, 2010, December 31, 2011 and June 30, 2012 (unaudited) is as follows (in thousands):
| | | | | | | | | | |
| | December 31, | |
| |
|---|
| | June 30,
2012 | |
|---|
| | 2010 | | 2011 | |
|---|
| |
| |
| | (unaudited)
| |
|---|
Common stock issued | | | 20,944 | | | 21,186 | | | 21,412 | |
Conversion of preferred stock—Series A | | | 15,256 | | | 15,256 | | | 15,256 | |
Outstanding stock options, including restricted stock units | | | 4,752 | | | 4,933 | | | 5,003 | |
Additional shares available for grant under the Company's 2010 Stock Option plan | | | 116 | | | 616 | | | 218 | |
| | | | | | | | |
Total | | | 41,068 | | | 41,991 | | | 41,889 | |
| | | | | | | | |
Note 8. Stock-based Compensation
The Company has issued stock options under its 2000 Stock Option Plan ("2000 Plan") and the 2007 Stock option Plan ("2007 Plan"), which was renamed as the 2010 Stock Option Plan (hereafter, the 2007 Plan is now referred as the 2010 Plan, and together with the 2000 Plan, the "Plans"). Since February 2007, the Company currently grants its stock optionsgrant under the 2010 Plan exclusively. Under the 2000 Plan, employees, consultants, and directors have been granted options to purchase an aggregate of 4,775,800 shares of the Company's common stock, less any shares forfeited under the 20002016 Plan. Under the 2010 Plan, employees, consultants, and directors may be granted options to purchase up to an aggregate of 6,694,692 shares of the Company's common stock. At December 31, 2011 and June 30, 2012 there were approximately 616,000 and 218,000 (unaudited) shares of common stock, respectively, available for grant
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
under the 2010 Plan. Under the terms of the Plans,2016 Plan, both incentive and non-qualifiednonqualified stock options have been and may be granted with exercise prices not less than the fair value of the underlying common stock on the date of grant. Options granted pursuant to these plansthe 2016 Plan vest over periods of up to fourfive years and expire ten years from the grant date. If a 20002016 Plan option expires and is not exercised, such as upon termination of employment, becomes unexercisable without having been exercised in full, or is surrendered pursuant toif an option exchange program, the unpurchased shares will become available for future grant or sale under the 2000 Plan or the 2010 Plan. If a 2010 Plan option expires, such as after employment termination, becomes unexercisable without having been exercised in full, or is surrendered pursuant to an option exchange program, the unpurchased shares will become available for future grant or sale under the 2010 Plan. If the employee does not exercise vested 20002016 Plan options within 30thirty days of termination, then these options will expire and are not able to be issued as new grants under the 2000 Plan. If the employee does not exercise vested 2010 Plan options within 30 days of termination, these options will expire and revert back to the 2010 Plan's2016 Plan’s option pool. The Company'sOur policy is to issue new common sharesstock upon the exercise of stock options.
The exercise pricesprice of all options granted under the Plans werewas based on the estimated fair market value of the Company'sour common stock as determined by the Board of Directors at the date of grant. The Companygrant or date of modification.
We recorded stock-based compensation costexpense in the following categories onin the accompanying consolidated statements of operations and balance sheets (in thousands):
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Cost of revenue | | $ | 205 | | | $ | 177 | |
Sales and marketing | | | 1,020 | | | | 1,122 | |
Technology and development | | | 1,314 | | | | 2,703 | |
General and administrative | | | 4,170 | | | | 9,719 | |
| | | | | | | | |
Total stock-based compensation expense | | | 6,709 | | | | 13,721 | |
Amount capitalized to internal-use software | | | 98 | | | | 46 | |
| | | | | | | | |
Total stock-based compensation expense, including capitalized internal-use software | | $ | 6,807 | | | $ | 13,767 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Year Ended
December 31, | | Six Months Ended
June 30, | |
|---|
| | 2009 | | 2010 | | 2011 | | 2011 | | 2012 | |
|---|
| |
| |
| |
| | (unaudited)
| | (unaudited)
| |
|---|
Cost of services | | $ | 200 | | $ | 178 | | $ | 155 | | $ | 82 | | $ | 67 | |
Sales and marketing | | | 124 | | | 46 | | | 56 | | | 21 | | | 135 | |
Technology and development | | | 114 | | | 155 | | | 133 | | | 64 | | | 75 | |
General and administrative | | | 699 | | | 929 | | | 600 | | | 288 | | | 402 | |
| | | | | | | | | | | | |
Total | | | 1,137 | | | 1,308 | | | 944 | | | 455 | | | 679 | |
Amount capitalized to internal use software | | | 20 | | | 12 | | | 6 | | | 3 | | | 4 | |
| | | | | | | | | | | | |
Total stock-based compensation cost | | $ | 1,157 | | $ | 1,320 | | $ | 950 | | $ | 458 | | $ | 683 | |
| | | | | | | | | | | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Activity under the Plans was as followsStock option activity for the year ended December 31, 2011 and the six months ended June 30, 20122020 is as follows (in thousands, except weighted averageweighted-average exercise price and remaining contract life):
| | | | | | | | | | | | | |
| | Number of
Options | | Weighted
Average
Exercise
Price | | Weighted-
Average
Remaining
Contract
Life
(in years) | | Aggregate
Intrinsic
Value | |
|---|
Outstanding at December 31, 2010 | | | 4,702 | | $ | 1.77 | | | 7.5 | | $ | 11,469 | |
Granted | | | 588 | | | 8.21 | | | | | | | |
Exercised | | | (242 | ) | | 1.38 | | | | | | | |
Cancelled/forfeited | | | (165 | ) | | 1.73 | | | | | | | |
| | | | | | | | | | | | | |
Outstanding at December 31, 2011 | | | 4,883 | | | 2.55 | | | 6.9 | | $ | 29,566 | |
| | | | | | | | | | | | | |
Granted (unaudited) | | | 336 | | | 10.26 | | | | | | | |
Exercised (unaudited) | | | (226 | ) | | 1.72 | | | | | | | |
Cancelled/forfeited (unaudited) | | | (40 | ) | | 4.36 | | | | | | | |
| | | | | | | | | | | | | |
Outstanding at June 30, 2012 (unaudited) | | | 4,953 | | $ | 3.09 | | | 6.7 | | $ | 39,116 | |
| | | | | | | | | | |
Vested and expected to vest at December 31, 2011 | | | 4,781 | | $ | 2.57 | | | 6.9 | | $ | 28,830 | |
| | | | | | | | | | |
Exercisable at December 31, 2011 | | | 2,748 | | $ | 1.72 | | | 5.7 | | $ | 18,948 | |
| | | | | | | | | | |
Vested and expected to vest at June 30, 2012 (unaudited) | | | 4,875 | | $ | 3.06 | | | 6.7 | | $ | 38,659 | |
| | | | | | | | | | |
Exercisable at June 30, 2012 (unaudited) | | | 2,969 | | $ | 1.78 | | | 5.4 | | $ | 27,390 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | Number of
Options | | | Weighted-
Average
Exercise
Price | | | Weighted-
Average
Remaining
Contractual
Life
(in Years) | | | Aggregate
Intrinsic
Value | |
Outstanding at December 31, 2019 | | | 10,678 | | | $ | 8.05 | | | | 8.6 | | | $ | 36,235 | |
Granted | | | 6,243 | | | | 10.36 | | | | | | | | | |
Exercised | | | (1,270 | ) | | | 0.47 | | | | | | | | | |
Cancelled/forfeited | | | (416 | ) | | | 1.60 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2020 | | | 15,235 | | | $ | 8.78 | | | | 8.7 | | | $ | 15,873 | |
| | | | | | | | | | | | | | | | |
Vested and expected to vest at December 31, 2020 | | | 10,694 | | | $ | 8.36 | | | | 8.3 | | | $ | 15,610 | |
Exercisable at December 31, 2020 | | | 2,695 | | | $ | 4.57 | | | | 6.6 | | | $ | 14,138 | |
The aggregate intrinsic values in the table above represents the difference, if any, between the estimated fair value per share of the Company'sour common stock and the option exercise prices multiplied by the number of options at the respective balance sheet dates. The total intrinsic value of stock options exercised for the years ended December 31, 2009, 2010in 2019 and 2011,2020 was $0.7 million, $1.3$10.1 million and $1.1$12.3 million, respectively, and for the six months ended June 30, 2011 and 2012 was $0.9 million (unaudited) and $1.7 million (unaudited), respectively. At December 31, 2011,2020, total remaining stock-based compensation expense for unvested awards is $3.2$37.1 million, of which $19.7 million for time-based options are expected to be recognized over a weighted-average period of 2.9 years, up to $8.2 million for 2020 performance options, which will only vest upon the consummation of a CIC event and upon an IPO (as defined below), and $9.2 million for 2019 performance options, which is expected to be recognized over 2.8 years unless a CIC event (as defined below) occurs beforehand.
The weighted-average grant-date fair value per share of options granted using the Black-Scholes option pricing model for 2019 and 2020 was $4.64 and $4.32, respectively. There was a realized tax benefit of $8.7 million and $14.2 million for tax deductions from stock options exercised in 2019 and 2020, respectively. All tax effects related to stock-based compensation have been recorded in our provision for income taxes in the accompanying consolidated statements of operations.
The weighted-average assumptions that were used to calculate the grant-date fair value of our stock option grants using the Black-Scholes option pricing model were as follows:
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Expected life (years) | | | 5.1 | | | | 5.2 | |
Risk-free interest rate | | | 1.5 | % | | | 1.1 | % |
Expected volatility | | | 44 | % | | | 45 | % |
Expected dividend yield | | | — | | | | — | |
In 2019, we granted 3,627,936 nonqualified stock options to a new executive officer where the options will vest depending upon the appreciation of the fair value of our common stock compared to the exercise price upon the earlier of a CIC event or the fourth anniversary on the date of grant, or 2019 performance options, providing the executive officer remains employed through such date. A CIC event is a merger, acquisition or sale of more than 50% of our assets. The 2019 performance options do not vest upon an IPO. The 2019 performance options 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 2019 performance options vesting condition represents a market condition, and therefore expense is recognized irrespective of whether the valuation thresholds are met either upon the CIC event or fourth anniversary, whichever occurs first. The 2019 performance options have a weighted-average grant-date fair value of $3.09 per share and will be recognized over four years or earlier upon a CIC event. The 2019 performance option was valued using a Monte Carlo simulation, using the following assumptions: expected volatility of 50%, dividend rate of 0% and risk-free rate of 1.6%.
In 2020, we granted 4,509,041 nonqualified stock options to new executive officers and employees where the options will vest depending upon the appreciation of the fair value of our common stock compared to the exercise price solely upon the earlier of a CIC event or an IPO, or 2020 performance options, providing the executive officer or employee remains employed through the date of such event. A CIC event is a merger, acquisition or sale of more than 50% of our assets. The 2020 performance options 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 2020 performance options vesting condition represents a market condition, and therefore expense is recognized irrespective of whether the valuation thresholds are met, provided the CIC event occurs and the employee remains employed through the date of the CIC event. The 2020 performance options have a weighted-average grant-date fair value of $1.66 per share and will be recognized upon the consummation of a CIC event. The 2020 performance options were valued using a Monte Carlo simulation, using the following assumptions: expected volatility ranging between 50% and 55%, dividend rate of 0% and risk-free rate ranging between 0.1% and 1.7%.
For 5,334,824 time-based options granted to certain executive officers, vesting will accelerate 50% of their unvested options upon a change in ownership of more than 50%, sale, merger, disposition, dissolution or liquidation. Vesting does not accelerate upon an IPO. Furthermore, the time-based options will accelerate 100% if the executives are terminated without cause by us or by the executive officer for good reason within 24 months of a CIC event. Unrecognized compensation for these time-based options as of December 31, 2020 was $19.5 million.
Restricted Stock Units
A summary of RSU activity for the year ended December 31, 2020 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, 2019 | | | 1,720 | | | $ | 8.38 | |
Granted | | | 2,282 | | | | 9.59 | |
Cancelled/forfeited | | | (1,168 | ) | | | 7.57 | |
Vested | | | (335 | ) | | | 10.13 | |
| | | | | | | | |
Unvested at December 31, 2020 | | | 2,499 | | | $ | 9.53 | |
| | | | | | | | |
The fair value of vested RSUs in 2019 and 2020 were $4.4 million and $3.4 million, respectively. Our RSUs consist of time-based RSUs and various performance RSUs. At December 31, 2020, total remaining stock-based compensation expense for unvested RSU awards is $23.1 million, of which $4.6 million for time-based RSUs is expected to be recognized over a weighted-average period of 3.22.5 years, and up to $18.4 million for various performance RSUs, which will vest upon the consummation of a CIC event and subsequently thereafter for any remaining service period.
In 2019 and 2020, we granted 1,000,000 and 35,429 RSUs, respectively, to executive officers that vest upon reaching either a specified valuation for a consecutive 30-day period after an IPO or a CIC event with a valuation exceeding the specified valuation prior to December 2022, and providing continued service through the vest date, or performance awards. For the performance awards, no expense is recognized until an IPO or CIC occurs as these events are not considered probable of occurring for stock-based compensation purposes. If either event occurs, as the valuation threshold represents a market condition, expense is recognized irrespective of whether the valuation threshold is met provided the requisite service period is met. In 2019, the weighed-average grant-date fair value of the IPO and CIC performance conditions was $4.17 and $0.93 per share, respectively. The 2019 performance awards were valued using a Monte Carlo simulation, using the following assumptions: expected volatility range of 55% to 60%, dividend rate of 0% and risk-free rate ranging from 2.7% to 2.8%. In 2020, the grant-date fair value of the IPO and CIC performance conditions was $3.73 and $2.08 per share, respectively. The 2020 performance awards were valued using a Monte Carlo simulation, using the following assumptions: expected volatility of 50%, dividend rate of 0% and risk-free rate of 1.6%. In 2019 and 2020, 500,000 and 455,429 of these performance awards were forfeited with the termination of former executive officers, respectively, and only 80,000 remain outstanding at December 31, 2020.
In 2019, we granted 551,020 RSUs to certain members of senior management, which vest over four years. We provided an option for the employees to participate in a buyback program where they are eligible to settle their vested RSUs in either shares of our common stock or put their awards back to us for cash. The buyback program is accounted for as a liability and is remeasured each reporting period based upon the fair value of our common stock and recognized as stock-based compensation expense through each respective vesting date. At June 30, 2012,December 31, 2019 and 2020, the stock-based compensation liability was not material to our consolidated financial statements. In 2019, $0.1 million of the stock compensation liability was settled in 9,750 shares of our common stock, and $1.4 million for 128,005 vested awards were paid out to employees who participated in the buyback program for a total cash disbursement of $1.0 million after withholding taxes. In 2020, $0.1 million of the stock compensation liability was settled in 12,851 shares of our common stock, and $0.9 million for 90,667 vested awards were paid out to employees who participated in the buyback program for a total cash disbursement of $0.6 million after withholding taxes. The buyback program will conclude in 2022 and there are 106,460 unvested awards remaining in the program.
In 2020, we granted 81,468 RSUs to 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 RSUs vesting condition represents a market condition, and therefore expense is recognized irrespective of whether the valuation thresholds are met, provided the CIC event occurs and the employee remains employed through the date of the CIC event. The performance RSUs have a weighted-average grant-date fair value of $2.37 per share and will be recognized upon the consummation of a CIC event. The performance RSUs were valued using a Monte Carlo simulation, using the following assumptions: expected volatility of 55%, dividend rate of 0% and risk-free rate ranging between 0.1% and 0.4%.
In 2020, we granted 1,835,497 liquidity event RSUs, or LERSUs, which only vest upon the achievement of up to four-years of service and upon the consummation of a 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.
For 509,165 RSUs granted to an executive officer, vesting will accelerate on 25% of their unvested RSUs upon a CIC event including an IPO, or will accelerate 100% if the executive officer is terminated without cause by us or by the executive officer for good reason. At December 31, 2020, total remaining stock-based compensation expense for unvestedthe RSU award is $3.7was $5.0 million (unaudited),of which is expected$1.3 million will be expensed upon the consummation of a CIC event.
Restricted Stock
In February 2018, we issued an employee a restricted stock award for 200,000 shares of common stock with a grant-date fair-value of $3.1275 per share. The restricted stock award vests upon meeting an EBITDA-based performance target by December 31, 2019. The award did not meet the performance condition as of December 31, 2019 and accordingly no stock-based compensation was recognized in 2019.
In February 2020, we allowed 200,000 shares subject to the expired restricted stock award subject to expiration to be recognized overreissued to the same employee. For the reissued award, 50,000 shares of common stock became unrestricted, however, would be forfeited should the employee be terminated for cause through March 2023. The remaining 150,000 shares of common stock are subject to restriction whereby the employee is required to drive business performance to meet certain annual operational key performance indicators through March 2023, or the performance restricted stock. The 50,000 shares of common stock had a weighted-average period of 3.1 years.
The weighted-average grant-date fair value of $11.29 per share of options grantedshare. For accounting purposes, grant dates will be established for the years ended December 31, 2009, 2010 and 2011 were $0.77, $1.25 and $3.41, respectively. The weighted-average grant-date fair value per shareperformance restricted stock in March of options grantedeach year when the key performance indicators are determined for the six months ended June 30, 2012 was $4.20 (unaudited). There were noannual performance period. In 2020, 50,000 performance restricted stock option grants during the six months ended June 30, 2011.vested. The weighted-average fair value per share of options vested for the years ended December 31, 2009, 2010, and 2011 were $0.98, $1.03 and $1.01, respectively, for a total fair value of restricted stock that vested during 2020 was $1.1 million.
Modifications
In 2019, as part of a termination agreement with a former executive officer, we repurchased 170,000 shares of common stock for $1.5 million. In addition, we accelerated and repurchased 25,000 unvested options and 28,800 unvested time-based RSUs for $0.5 million and repurchased 200,000 vested options for each$2.0 million. The repurchase of 2009the common stock and 2010,vested options were recognized in accumulated deficit in the accompanying consolidated balance sheets and $0.8the repurchase of the accelerated options and unvested time-based RSUs were recorded as cash severance in the accompanying consolidated statements of operations. The former executive officer received cash consideration of $2.7 million after withholding taxes of $1.3 million.
In 2020, we modified 4,571,076 time-based options and 4,948,333 performance options for 2011. certain executive officers and adjusted the initial weighted-average exercise prices of $11.47 per share to a revised exercise price of $9.82 per share. Incremental stock-based compensation expense of $0.3 million was recognized in 2020 and $3.5 million will be recognized over the remaining vesting period of approximately three years. Furthermore, 177,147 time-based options were cancelled and replaced with 177,147 LERSUs for an executive officer. As the time-based options were replaced with LERSUs, that are improbable of vesting until a CIC is consummated, there was no incremental compensation expense associated with this modification.
In 2020, in connection with the termination of former executive officers, we accelerated 92,800 unvested time-based RSUs as part of their severance arrangements and recognized stock-compensation expense of $1.0 million.
Note 16. Fair Value Measurements
The weighted-averagefollowing tables summarizes our assets and liabilities that are measured at fair value per share of options vested foron a recurring basis, by level, within the six months ended June 30, 2011 and 2012 were $0.95 (unaudited) and $1.07 (unaudited) for a totalfair value hierarchy (in thousands):
| | | | | | | | | | | | |
| | | December 31, 2019 | |
| | | Level 1 | | | Level 2 | | | Level 3 | |
Available-for-sale debt securities | | $ | — | | | $ | — | | | $ | 5,528 | |
Money market fund | | | 5,083 | | | | — | | | | — | |
Restricted money market fund | | | 25,000 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total assets | | $ | 30,083 | | | $ | — | | | $ | 5,528 | |
| | | | | | | | | | | | |
Interest rate caps and swaps | | $ | — | | | | 5,405 | | | $ | — | |
Financial guarantee | | | — | | | | — | | | | 1,900 | |
| | | | | | | | | | | | |
Total liabilities | | $ | — | | | $ | 5,405 | | | $ | 1,900 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | December 31, 2020 | |
| | | Level 1 | | | Level 2 | | | Level 3 | |
Available-for-sale debt securities | | $ | — | | | $ | — | | | $ | 1,050 | |
Money market fund | | | 5,208 | | | | — | | | | — | |
Restricted money market fund | | | 25,000 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total assets | | $ | 30,208 | | | $ | — | | | $ | 1,050 | |
| | | | | | | | | | | | |
Interest rate caps and swaps | | $ | — | | | | 5,817 | | | $ | — | |
Financial guarantee | | | — | | | | — | | | | 150 | |
Contingent consideration | | | — | | | | — | | | | 1,250 | |
| | | | | | | | | | | | |
Total liabilities | | $ | — | | | $ | 5,817 | | | $ | 1,400 | |
| | | | | | | | | | | | |
There was no change in the fair value of $0.5 million (unaudited) and $0.4 million (unaudited), respectively.
There was no tax benefit realizedthe contingent consideration from our acquisition of Pure for the tax deductions from stock options exercised during the years ended December 31, 2009 and 2010 and for the six months ended June 30, 2011 and 2012 (unaudited). The
Table of Contents
LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company realized $0.3 million of excess windfall tax benefits from stock option exercises during the year ended December 31, 2011.2020.
Our available-for-sale debt securities measured using Level 3 inputs have the following activity (in thousands):
| | | | | | | | |
| | | As of December 31, | |
| | | 2019 | | | 2020 | |
Beginning balance | | $ | 3,866 | | | $ | 5,528 | |
Purchases | | | 2,013 | | | | — | |
Change in fair value | | | 440 | | | | 434 | |
Other-than-temporary impairment | | | — | | | | (4,912 | ) |
Transfer to other equity security | | | (791 | ) | | | — | |
| | | | | | | | |
Ending balance | | $ | 5,528 | | | $ | 1,050 | |
| | | | | | | | |
Our financial guarantee measured using Level 3 inputs has the following activity (in thousands):
| | | | | | | | |
| | | As of December 31, | |
| | | 2019 | | | 2020 | |
Beginning balance | | $ | 1,900 | | | $ | 1,900 | |
Purchases | | | — | | | | — | |
Change in fair value | | | — | | | $ | (1,750 | ) |
| | | | | | | | |
Ending balance | | $ | 1,900 | | | $ | 150 | |
| | | | | | | | |
Note 17. Restructuring
In 2019 and 2020, we incurred $1.6 million and $0.6 million, respectively, in severance costs related to a reduction in headcount in our U.K. workforce. In 2020, we incurred $1.9 million in severance costs related to a reduction in headcount in our U.S. workforce in October, or U.S. restructuring. Restructuring expenses include salary and benefits for the impacted employees and are included in general and administrative expenses in the accompanying consolidated statements of operations.
As part of the severance arrangement for our U.S. restructuring, certain separated employees were eligible to participate in a tender offer transaction and we repurchased 319,257 shares of common stock from employees who were existing stockholders and vested option holders for total consideration of approximately $3.1 million. The following table summarizesrepurchased shares were constructively retired.
Note 18. Income Taxes
On March 27, 2020 the Company's options granted duringCoronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act did not have a material impact on the provision for income taxes for the year ended December 31, 20112020.
The following are the domestic and the six months ended June 30, 2012:foreign components of our income before income taxes (in thousands):
| | | | | | | |
Date | | Number of
Shares
(in thousands) | | Exercise Price
and Fair Value
Per Share of
Common Stock | |
|---|
September 29, 2011 | | | 537 | | $ | 8.21 | |
December 20, 2011 | | | 51 | | $ | 8.22 | |
January 31, 2012 (unaudited) | | | 56 | | $ | 8.61 | |
March 31, 2012 (unaudited) | | | 280 | | $ | 10.59 | |
On April 20, 2010, the Company issued 50,000 restricted stock units to an executive employee with a grant date fair value
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Domestic | �� | $ | 19,778 | | | $ | 25,272 | |
Foreign | | | (9,174 | ) | | | (12,947 | ) |
| | | | | | | | |
Total income before income taxes | | $ | 10,604 | | | $ | 12,325 | |
| | | | | | | | |
The total income before income taxes above includes income from our equity method investment of $2.10 per share. These restricted stock units vest on the earlier to occur of (i) the fifth anniversary from the issuance date, or (ii) the completion of a successful strategic event, which includes a financing event, a qualified initial public offering or an acquisition. For the years ended December 31, 2010$0.3 million and 2011,$0 for 2019 and 2020, respectively.
The details for the six months ended June 30, 2011 and 2012 (unaudited), compensation expense related to the restricted stock was insignificant.
Note 9. Income Taxes
During the six months ended June 30, 2011 and 2012, the Company recorded an income tax provision of $0.1 million (unaudited) and $1.2 million (unaudited), respectively.
For the six months ended June 30, 2011 and 2012, the Company's effective tax rate differs from the statutory rate primarily as a result of current state taxes, nondeductible items and changes in deferredfor income taxes due to the release of the valuation allowance in the fourth quarter of 2011.
The details of the income tax (provision) benefit by jurisdiction for the years ended December 31, 2009, 2010 and 2011 are as follows (in thousands):
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Current | | | | | | | | |
Federal | | $ | 277 | | | $ | 846 | |
State | | | 700 | | | | 243 | |
Foreign | | | 255 | | | | 15 | |
| | | | | | | | |
Total current provision | | | 1,232 | | | | 1,104 | |
| | | | | | | | |
Deferred | | | | | | | | |
Federal | | | 2,944 | | | | 2,322 | |
State | | | (1,015 | ) | | | (997 | ) |
Foreign | | | — | | | | — | |
| | | | | | | | |
Total deferred provision | | | 1,929 | | | | 1,325 | |
| | | | | | | | |
Total provision for income tax | | $ | 3,161 | | | $ | 2,429 | |
| | | | | | | | |
| | | | | | | | | | |
| | 2009 | | 2010 | | 2011 | |
|---|
Current | | | | | | | | | | |
Federal | | $ | (61 | ) | $ | 65 | | $ | (313 | ) |
State | | | (250 | ) | | (347 | ) | | (617 | ) |
| | | | | | | | |
Total current | | | (311 | ) | | (282 | ) | | (930 | ) |
Deferred | | | | | | | | | | |
Federal | | | — | | | — | | | 4,818 | |
State | | | — | | | — | | | 2,110 | |
| | | | | | | | |
Total deferred | | | — | | | — | | | 6,928 | |
| | | | | | | | |
Total income tax (provision) benefit | | $ | (311 | ) | $ | (282 | ) | $ | 5,998 | |
| | | | | | | | |
Table of Contents
LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income tax (provision) benefitThe provision for the years ended December 31, 2009, 2010income taxes for 2019 and 20112020 differed from the amounts computed by applying the U.S. federalFederal income tax rate of 34%21% to pretax income (loss)before income taxes as a result of the following (in thousands):
| | | | | | | | | | |
| | 2009 | | 2010 | | 2011 | |
|---|
Income tax (provision) benefit at statutory rate | | $ | 112 | | $ | 1,272 | | $ | (2,082 | ) |
State income taxes | | | 259 | | | (550 | ) | | (372 | ) |
Research and development credits | | | 743 | | | 247 | | | 247 | |
Change in valuation allowance | | | (753 | ) | | 6 | | | 8,604 | |
Stock-based compensation expense | | | (113 | ) | | (911 | ) | | (21 | ) |
Unrecognized tax benefits | | | (674 | ) | | (175 | ) | | (176 | ) |
Other | | | 115 | | | (171 | ) | | (202 | ) |
| | | | | | | | |
Total income tax (provision) benefit | | $ | (311 | ) | $ | (282 | ) | $ | 5,998 | |
| | | | | | | | |
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Provision for income taxes at statutory rate | | $ | 2,227 | | | $ | 2,588 | |
State income taxes, net of federal benefit | | | 284 | | | | (891 | ) |
Rate differential on foreign earnings | | | 1,818 | | | | (1,217 | ) |
Research and development credits | | | (600 | ) | | | (1,340 | ) |
Change in valuation allowance | | | 117 | | | | 5,011 | |
Stock-based compensation | | | (2,014 | ) | | | (2,162 | ) |
Unrecognized tax benefits | | | 563 | | | | 978 | |
Deferred adjustments | | | (54 | ) | | | (486 | ) |
Non-deductible expenses | | | 820 | | | | (52 | ) |
| | | | | | | | |
Total provision for income taxes | | $ | 3,161 | | | $ | 2,429 | |
| | | | | | | | |
The tax effects of temporary differences that give rise to significant portions of the Company'sour deferred tax assets and liabilities consisted of the following atas of December 31, 20102019 and 20112020 (in thousands):
| | | | | | | | |
| | | As of December 31, | |
| | | 2019 | | | 2020 | |
Deferred tax assets | | | | | | | | |
Deferred revenue | | $ | 421 | | | $ | 694 | |
Accrued expenses | | | 2,323 | | | | 3,746 | |
Stock-based compensation | | | 1,058 | | | | 3,314 | |
Impairment on investment | | | — | | | | 1,445 | |
Net operating loss carryforwards | | | 9,750 | | | | 12,857 | |
Tax credit carryforwards | | | 10,346 | | | | 10,462 | |
Interest expense carryforward | | | 12,625 | | | | 7,679 | |
Derivatives and hedging | | | 1,440 | | | | 4,400 | |
| | | | | | | | |
Total deferred tax assets | | | 37,963 | | | | 44,597 | |
Valuation allowance | | | (7,816 | ) | | | (12,950 | ) |
| | | | | | | | |
Net deferred tax assets | | | 30,147 | | | | 31,647 | |
| | | | | | | | |
Deferred tax liabilities | | | | | | | | |
Depreciation and amortization | | | (7,491 | ) | | | (6,024 | ) |
State taxes | | | (2,406 | ) | | | (2,816 | ) |
| | | | | | | | |
Net deferred tax liabilities | | | (9,897 | ) | | | (8,840 | ) |
| | | | | | | | |
Net deferred tax assets and liabilities | | $ | 20,250 | | | $ | 22,807 | |
| | | | | | | | |
| | | | | | | |
| | 2010 | | 2011 | |
|---|
Deferred tax assets: | | | | | | | |
Deferred revenue | | $ | 4,395 | | $ | 2,695 | |
Accrued expenses | | | 2,419 | | | 3,463 | |
Accrued legal settlement | | | 2,031 | | | 2,029 | |
Stock-based compensation | | | 515 | | | 805 | |
Net operating loss carryforwards | | | 1,803 | | | 705 | |
Tax credit carryforwards | | | 1,846 | | | 2,081 | |
Capital loss carryforwards | | | 411 | | | 411 | |
| | | | | | |
| | | 13,420 | | | 12,189 | |
Valuation allowance | | | (9,015 | ) | | (411 | ) |
| | | | | | |
Net deferred tax assets | | | 4,405 | | | 11,778 | |
Deferred tax liabilities: | | | | | | | |
Depreciation and amortization | | | (3,451 | ) | | (3,878 | ) |
State taxes | | | (954 | ) | | (972 | ) |
| | | | | | |
Net deferred tax liabilities | | | (4,405 | ) | | (4,850 | ) |
| | | | | | |
Net deferred tax assets and liabilities | | $ | — | | $ | 6,928 | |
| | | | | | |
Deferred tax assets are recorded onWe evaluated the consolidated balance sheets at December 31, 2010 and 2011 as follows (in thousands):
| | | | | | | |
| | 2010 | | 2011 | |
|---|
Deferred tax assets—current | | $ | 3,174 | | $ | 6,735 | |
Valuation allowance—current | | | (3,174 | ) | | (237 | ) |
| | | | | | |
Net deferred tax assets—current | | | — | | | 6,498 | |
| | | | | | |
Deferred tax assets—noncurrent | | | 5,841 | | | 604 | |
Valuation allowance—noncurrent | | | (5,841 | ) | | (174 | ) |
| | | | | | |
Net deferred tax assets—noncurrent | | $ | — | | $ | 430 | |
| | | | | | |
Tablerealizability of Contents
LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company recorded a full valuation allowance against its net deferred tax assets at December 31, 2010. In determining the need for a valuation allowance, management reviewed all available evidence pursuant to the requirements of ASC 740. The determination of recording or releasing tax valuation allowances is made, in part, pursuant to an assessment performed by management regarding the likelihood that the Company will generate sufficient future taxable income against which benefits of the deferred tax assets may or may not be realized. This assessment requires management to exercise significant judgment and make estimates with respect to the Company's ability to generate revenue, operating income and taxable income in future periods. Amongst other factors, management must make assumptions regarding overall current and projected business and legal document and ancillary services' industry conditions, operating efficiencies, the Company's ability to timely and effectively adapt to technological change, fully and successfully resolve outstanding legal matters, and the competitive environment which may impact the Company's ability to generate taxable income and, in turn, realize the value of the deferred tax assets. Significant cumulative operating losses in 2010 and prior years and economic uncertainties in the market made the Company's ability to project future taxable income uncertain and volatile at December 31, 2010. Based upon management's assessment of all available evidence, including the Company's history of recent and cumulative losses, the Company concluded as of December 31, 2010, that it was not more likely than not that its net deferred tax assets would be realized.
In 2011, the Company became profitable due to the significant increase in its revenues and a continuous increase in demand for its services and was able to utilize a substantial amount of its federal net operating loss carryforwards. Based upon the current trend of operating results and Company forecasts, the Company believesdetermined it is more likely than not that it will realizeseparate state net operating losses, net operating losses from the benefitsacquisition of Legalinc Corporate Services Inc., the deferred tax assets. The majority of the Company's 2011 income from operations was earned in the second half of the year resulting in the Company's achievement of three-year cumulative income before income taxes by the fourth quarter of 2011. Accordingly, during the fourth quarter of 2011, the Company released its valuation allowance againstassets for Pulse IP, LLC and Pulse Business, LLC, and foreign deferred tax assets will not be realized based on the weight of positiveavailable objective evidence that existed at December 31, 2011, except forand recorded a valuation allowance. The following table summarizes the valuation allowance:
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | | 2020 | |
Beginning balance | | $ | 7,707 | | | $ | 7,816 | |
Net increase (decrease) in current year | | | 769 | | | | 4,646 | |
Net increase (decrease) in valuation prior period | | | (87 | ) | | | 528 | |
Net increase (decrease) in valuation allowance from acquisitions | | | (573 | ) | | | (40 | ) |
| | | | | | | | |
Ending balance | | $ | 7,816 | | | $ | 12,950 | |
| | | | | | | | |
Net changes in valuation allowance of $0.4 millioninclude changes recorded through earnings relating to the deferred tax asset forlosses primarily from foreign operations and to a capital loss carryforward which is expectedlesser extent valuation allowances established relating to expire unused in 2012.acquired businesses.
The activity in the valuation allowance for the years ended December 31, 2009, 2010 and 2011 was as follows (in thousands):
| | | | | | | | | | |
| | Balance at
beginning of
period | | Increase /
(decrease) | | Balance at
end of period | |
|---|
December 31, 2009 | | $ | 8,268 | | $ | 753 | | $ | 9,021 | |
December 31, 2010 | | | 9,021 | | | (6 | ) | | 9,015 | |
December 31, 2011 | | | 9,015 | | | (8,604 | ) | | 411 | |
At December 31, 2011, the Company2019 and 2020, we had federal net operating loss (“NOL”) carryforwards of $9.0 million and $11.7 million, respectively, which will begin to expire in 2031. At December 31, 2019 and 2020, we had state net operating loss carryforwards of approximately $1.1$41.3 million and $8.9$49.8 million, respectively. The federal and state net operating loss carryforwardsrespectively, which will begin to expire in the years ending December 31, 2028 and 2017, respectively.2022. At December 31, 2011, the Company also2019 and 2020, we had foreign net operating loss carryforwards of $23.1 million and $32.4 million, respectively, which can be carried forward indefinitely and are not subject to expiration. At December 31, 2019 and 2020, we had federal tax credit carryforwards of $7.4 million and $6.2 million, respectively, which will begin to expire in 2029. At December 31, 2019 and 2020, we had state tax credit carryforwards of $1.6$8.2 million and $1.4$8.8 million, respectively. The federal tax credit carryforwards will expire beginning in the year ending December 31, 2021 and the state tax creditsrespectively, which carry forward indefinitely. The Company has a capital loss carryforward of $1 million at December 31, 2011 which will expire in 2012. Utilization of the net operating
Table of Contents
LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
loss carryforwardsOur domestic entities may be subject to an annual limitation on the utilization of net operating loss and credit carryforwards based on changes in ownership as defined by Section 382 of the Internal Revenue Code of 1986.
During 2011, the Company realized excess windfall tax benefits of $0.3 million from stock option exercises. These benefits reduced income taxes payable and were recorded as an increase to additional paid-in capital in the accompanying consolidated balance sheets as of December 31, 2011.1986. In accordance with the reporting requirements under ASC 718, the Company did not include $0.5 million excess windfall tax benefits resulting from stock option exercises as components of the Company's gross deferred tax assets and corresponding valuation allowance disclosures, as tax attributes related to those windfall tax benefits should not be recognized until they result2018, we acquired Legalinc Corporate Services Inc. in a reduction of taxes payable. The tax effected amount of gross unrealizedstock acquisition. Since this was a change in ownership, the acquired net operating loss carryforwards excluded under ASC 718 was $0.5 million atare subject to an annual Section 382 limitation on the utilization of the net operating loss carryforwards.
We have had foreign operations since 2013. We did not provide for U.S. income taxes on the undistributed earnings and other outside temporary differences of foreign subsidiaries as they are considered indefinitely reinvested outside the United States. At December 31, 2011. When realized, those excess windfall tax benefits2019 and 2020, the amount of temporary differences related to undistributed earnings and other outside temporary differences upon which U.S. income taxes are creditednot material to additional paid-in capital.our consolidated financial statements.
As of December 31, 2010 and 2011, the Company had approximately $1.0 million and $1.2 million of unrecognized tax benefits, respectively, which if recognized, would affect the effective income tax rate.
The following table summarizes the changes in unrecognized tax benefits for the years ended December 31, 2019 and 2020 (in thousands):
| | | | |
| | | Gross
Unrealized Tax
Benefits | |
Balance at December 31, 2018 | | $ | 6,498 | |
Additions for tax positions related to the current year | | | 671 | |
Additions for tax positions related to prior years | | | (913 | ) |
| | | | |
Balance at December 31, 2019 | | $ | 6,256 | |
Additions for tax positions related to the current year | | | 916 | |
Reductions for tax positions related to prior years | | | 59 | |
| | | | |
Balance at December 31, 2020 | | $ | 7,231 | |
| | | | |
| | | | |
| | Gross
Unrealized Tax
Benefits | |
|---|
Balance at December 31, 2008 | | $ | 616 | |
Additions for tax positions related to the current year | | | 196 | |
| | | | |
Balance at December 31, 2009 | | | 812 | |
Additions for tax positions related to the current year | | | 201 | |
| | | | |
Balance at December 31, 2010 | | | 1,013 | |
Additions for tax positions related to the current year | | | 201 | |
| | | | |
Balance at December 31, 2011 | | $ | 1,214 | |
| | | | |
During all years presentedIf recognized, $7.1 million of unrecognized tax benefits, excluding interest and penalties, would reduce our annual effective tax rate. Due to the Company recognizeduncertain and complex application of tax laws and regulations, it is possible that the ultimate resolution of uncertain positions may result in liabilities that could be materially different from these estimates. In such an event, we will record additional tax expense or benefit in the period in which resolution occurs. Our policy is to recognize interest and penalties related to income tax matters in income tax expense. At December 31, 2019 and 2020, accrued interest and penalties related to income tax positions were not material to our consolidated financial statements. We do not anticipate that unrecognized tax benefits will materially change within the provision for income taxes on the consolidated statements of operations. There were no significant changes in unrecognized tax benefits during the six months ended June 30, 2012. The amount of interestnext twelve months.
We are subject to taxation and penalties accrued as of December 31, 2010, December 31, 2011 and June 30, 2012 (unaudited) are insignificant. The balance of the unrecognized tax benefits reduce tax attributes that have not yet been utilized on the Company's tax return.
The Company filesfile income tax returns in the U.S. federal, jurisdiction, state, of California and otherforeign jurisdictions. The federal income tax return for the years 2017 through 2019 and state jurisdictions.
Theincome tax returns for the tax years ended December 31, 20092008 through 20102019 remain open to examination. We are under examination in one state and it is not expected to have an impact on our results of operations, cash flows and financial condition.
Note 19. Related Party Transactions
In 2019 and 2020, we paid software and software maintenance fees of $0.9 million and $1.2 million, respectively, to two software vendors controlled by the Internal Revenue Service while the tax years endedour largest stockholder. Amounts due to these vendors were immaterial as of December 31, 2007 through 2010 remain open2019 and 2020.
In 2019 and 2020, we paid lead generation payments of $2.3 million and $0.8 million, respectively, to examination bya vendor in which a relative of the California Franchise Tax Board. The Company was under audit during 2010 byChairman of our Board of Directors is their President, SMB. At December 31, 2019 and 2020, amounts due to this vendor were $0.8 million and $1.5 million, respectively. During 2019 and 2020, we received lead generation payments of $3.6 million and $0.6 million, respectively, from this same vendor.
In 2020, certain former executive officers sold 2,500,000 shares of common stock to a related-party investor for $25.0 million. Stock-compensation expense measured as the Internal Revenue Service fordifference between the 2008 tax year,fair value of our common stock and the auditpurchase price was closed during 2011 with a no change letter issuednot material to the Company by the Internal Revenue Service. The Company was under audit by the California Franchise Tax Boardour consolidated financial statements.
Note 20. Accumulated Other Comprehensive Loss
Changes in fiscal 2009, which was withdrawn during the year ended December 31, 2010. All net operating loss carryforwards generated from 2005 andaccumulated other comprehensive income tax credit carryforwards generated to date are subject to adjustment for federal and state purposes. The Company does not anticipate that the unrecognized tax benefits will significantly decrease within the next twelve months.
Table of Contents
LEGALZOOM.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 10. Related Party Transactions
A consultant who is a stockholder(loss) consisted of the Company (the "Consultant"), provides legal and public relation consultancy services to the Company. The Company expensed consultancy fees of $188,000, $250,000 and $125,000 for the years ended December 31, 2009, 2010 and 2011, respectively, to the Consultant. In 2010, the Consultant provided services of $62,000 in settlement of a promissory note due from the Consultant which is included in the 2010 expense. The consultancy services agreement expired December 31, 2011, and fees paid during the six months ended June 30, 2011 (unaudited) were insignificant.following:
During the years ended December 31, 2010 and 2011, the Company paid $315,000 and $195,000, respectively, in legal fees to a law firm in which one of the Company's co-founders and stockholders is also a partner. Such fees paid to this law firm for 2009 were insignificant. During the six months ended June 30, 2011, such fees were $166,000 (unaudited) and were insignificant for the six months ended June 30, 2012 (unaudited).
| | | | | | | | | | | | |
| | | Year Ended December 31, 2019 | |
| (in thousands) | | Before Tax
Amount | | | Tax Effect | | | Net of Tax
Amount | |
Foreign currency translation adjustments: | | | | | | | | | | | | |
Beginning balance | | $ | 789 | | | $ | — | | | $ | 789 | |
Change during period | | | (2,507 | ) | | | — | | | | (2,507 | ) |
| | | | | | | | | | | | |
Ending balance | | $ | (1,718 | ) | | $ | — | | | $ | (1,718 | ) |
Available-for-sale debt securities: | | | | | | | | | | | | |
Beginning balance | | $ | — | | | $ | — | | | $ | — | |
Unrealized gains | | | 565 | | | | — | | | | 565 | |
Reclassification upon conversion into other equity security | | | (334 | ) | | | — | | | | (334 | ) |
| | | | | | | | | | | | |
Ending balance | | $ | 231 | | | $ | — | | | $ | 231 | |
Cash flow hedges: | | | | | | | | | | | | |
Beginning balance | | $ | (393 | ) | | $ | — | | | $ | (393 | ) |
Unrealized losses on interest rate swaps and cap | | | (5,234 | ) | | | 1,387 | | | | (3,847 | ) |
| | | | | | | | | | | | |
Ending balance | | $ | (5,627 | ) | | $ | 1,387 | | | $ | (4,240 | ) |
Accumulated other comprehensive loss: | | | | | | | | | | | | |
Beginning balance | | $ | 396 | | | $ | — | | | $ | 396 | |
Other comprehensive loss | | | (7,510 | ) | | | 1,387 | | | | (6,123 | ) |
| | | | | | | | | | | | |
Ending balance | | $ | (7,114 | ) | | $ | 1,387 | | | $ | (5,727 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Year Ended December 31, 2020 | |
| (in thousands) | | Before Tax
Amount | | | Tax Effect | | | Net of Tax
Amount | |
Foreign currency translation adjustments: | | | | | | | | | | | | |
Beginning balance | | $ | (1,718 | ) | | $ | — | | | $ | (1,718 | ) |
Change during period | | | (1,296 | ) | | | — | | | | (1,296 | ) |
| | | | | | | | | | | | |
Ending balance | | $ | (3,014 | ) | | $ | — | | | $ | (3,014 | ) |
Available-for-sale debt securities: | | | | | | | | | | | | |
Beginning balance | | $ | 231 | | | $ | — | | | $ | 231 | |
Unrealized gains | | | 144 | | | | (36 | ) | | | 108 | |
Loss from impairment | | | (94 | ) | | | — | | | | (94 | ) |
| | | | | | | | | | | | |
Ending balance | | $ | 281 | | | $ | (36 | ) | | $ | 245 | |
Cash flow hedges: | | | | | | | | | | | | |
Beginning balance | | $ | (5,627 | ) | | $ | 1,387 | | | $ | (4,240 | ) |
Unrealized loss on interest rate swaps and cap | | | (12,756 | ) | | | 3,178 | | | | (9,578 | ) |
Reclassification of losses from interest rate cap to net income | | | 194 | | | | (48 | ) | | | 146 | |
Reclassification of prior hedge effectiveness to net income | | | 3,481 | | | | (867 | ) | | | 2,614 | |
| | | | | | | | | | | | |
Ending balance | | $ | (14,708 | ) | | $ | 3,650 | | | $ | (11,058 | ) |
Accumulated other comprehensive loss: | | | | | | | | | | | | |
Beginning balance | | $ | (7,114 | ) | | $ | 1,387 | | | $ | (5,727 | ) |
Other comprehensive loss | | | (10,327 | ) | | | 2,227 | | | | (8,100 | ) |
| | | | | | | | | | | | |
Ending balance | | $ | (17,441 | ) | | $ | 3,614 | | | $ | (13,827 | ) |
| | | | | | | | | | | | |
The Company utilizes a credit card to make purchases for ordinary operating requirements and the underlying obligations incurred by the Company for these charges are guaranteed by the personal assets of one of the Company's co-founders. The Company also receives certain benefits from incurring these expenditures on this card including airline miles and cash reward points offered by the credit card's financial institution.
Note 11.21. 401(k) Savings Plan
The Company hasWe have a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. CompanyUnder the 401(k) plan, matching contributions toare based upon the plan are made at the discretionamount of the Board of Directors. The Company madeemployees’ contributions of $464,000, $613,000subject to certain limitations. We contributed $1.7 million and $744,000$1.8 million to the 401(k) plan during 2019 and 2020, respectively.
Note 22. Subsequent Events
In March 2021, we granted 833,541 LERSUs and 30,434 performance RSUs to various employees. The LERSUs have a weighted-average grant-date fair value of $11.50 per share. The performance RSUs have a weighted-average grant-date fair value of $1.57 per share and will be recognized upon the years ended consummation of a CIC event, which includes an IPO, merger, acquisition, or sale of more than 50% of our assets.
We evaluated all subsequent events through April 6, 2021, the date these consolidated financial statements were available to be issued.
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Balance Sheets
December 31, 2009, 20102020 and 2011, respectively.March 31, 2021
Note 12. Subsequent Events(In thousands, except par values)
| | | | | | | | |
| | | December 31,
2020 | | | March 31,
2021 | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 114,470 | | | $ | 141,175 | |
Accounts receivable | | | 8,555 | | | | 10,713 | |
Prepaid expenses and other current assets | | | 10,536 | | | | 12,227 | |
| | | | | | | | |
Total current assets | | | 133,561 | | | | 164,115 | |
Property and equipment, net | | | 51,374 | | | | 50,361 | |
Goodwill | | | 11,404 | | | | 11,411 | |
Intangible assets, net | | | 815 | | | | 543 | |
Deferred income taxes | | | 22,807 | | | | 25,032 | |
Restricted cash equivalent | | | 25,000 | | | | 25,000 | |
Available-for-sale debt securities | | | 1,050 | | | | 1,073 | |
Other assets | | | 6,053 | | | | 7,274 | |
| | | | | | | | |
Total assets | | $ | 252,064 | | | $ | 284,809 | |
| | | | | | | | |
Liabilities, redeemable convertible preferred stock and stockholders’ deficit | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 28,734 | | | $ | 35,287 | |
Accrued expenses and other current liabilities | | | 41,028 | | | | 56,415 | |
Deferred revenue | | | 127,142 | | | | 145,888 | |
Current portion of long-term debt | | | 3,029 | | | | 3,035 | |
| | | | | | | | |
Total current liabilities | | | 199,933 | | | | 240,625 | |
Long-term debt, net of current portion | | | 512,362 | | | | 511,594 | |
Deferred revenue | | | 2,937 | | | | 2,570 | |
Other liabilities | | | 16,558 | | | | 12,734 | |
| | | | | | | | |
Total liabilities | | | 731,790 | | | | 767,523 | |
| | | | | | | | |
Commitments and contingencies (Note 6) | | | | | | | | |
Series A redeemable convertible preferred stock, $0.001 par value; 30,512 shares authorized at December 31, 2020 and March 31, 2021; 23,081 issued and outstanding at December 31, 2020 and March 31, 2021 | | | 70,906 | | | | 70,906 | |
Stockholders’ deficit: | | | | | | | | |
Common stock, $0.001 par value; 264,720 shares authorized; 125,037 and 125,299 shares issued and outstanding at December 31, 2020 and March 31, 2021, respectively | | | 126 | | | | 126 | |
Additional paid-in capital | | | 102,417 | | | | 106,288 | |
Accumulated deficit | | | (639,348 | ) | | | (649,171 | ) |
Accumulated other comprehensive loss | | | (13,827 | ) | | | (10,863 | ) |
| | | | | | | | |
Total stockholders’ deficit | | | (550,632 | ) | | | (553,620 | ) |
| | | | | | | | |
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit | | $ | 252,064 | | | $ | 284,809 | |
| | | | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Operations
Three months ended March 31, 2020 and 2021
(In connectionthousands, except per share amounts)
| | | | | | | | |
| | | Three Months Ended March 31, | |
| | | 2020 | | | 2021 | |
Revenue | | $ | 105,795 | | | $ | 134,632 | |
Cost of revenue | | | 35,112 | | | | 43,960 | |
| | | | | | | | |
Gross profit | | | 70,683 | | | | 90,672 | |
Operating expenses: | | | | | | | | |
Sales and marketing | | | 43,481 | | | | 71,361 | |
Technology and development | | | 10,543 | | | | 10,499 | |
General and administrative | | | 12,661 | | | | 13,165 | |
Impairment of long-lived and other assets | | | 555 | | | | — | |
| | | | | | | | |
Total operating expenses | | | 67,240 | | | | 95,025 | |
| | | | | | | | |
Income (loss) from operations | | | 3,443 | | | | (4,353 | ) |
Interest expense, net | | | (9,270 | ) | | | (8,654 | ) |
Other (expense) income, net | | | (1,106 | ) | | | 248 | |
| | | | | | | | |
Loss before income taxes | | | (6,933 | ) | | | (12,759 | ) |
Benefit from income taxes | | | (2,055 | ) | | | (2,936 | ) |
| | | | | | | | |
Net loss | | $ | (4,878 | ) | | $ | (9,823 | ) |
| | | | | | | | |
Net loss attributable to common stockholders – basic and diluted | | $ | (4,878 | ) | | $ | (9,823 | ) |
| | | | | | | | |
Net loss per share attributable to common stockholders – basic and diluted | | $ | (0.04 | ) | | $ | (0.08 | ) |
| | | | | | | | |
Weighted-average shares used to compute net loss per share attributable to common stockholders – basic and diluted | | | 124,411 | | | | 125,065 | |
| | | | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Loss
Three Months Ended March 31, 2020 and 2021
(In thousands)
| | | | | | | | |
| | | Three Months Ended March 31, | |
| | | 2020 | | | 2021 | |
Net loss | | $ | (4,878 | ) | | $ | (9,823 | ) |
Other comprehensive loss (income), net of tax: | | | | | | | | |
Change in foreign currency translation adjustments: | | | 2,272 | | | | (147 | ) |
Unrealized gains from available-for-sale debt securities: | | | — | | | | 13 | |
Change in unrealized (loss) gain on cash flow hedges: | | | | | | | | |
Unrealized (loss) gain on interest rate cap and swaps | | | (7,286 | ) | | | 2,081 | |
Reclassification of prior hedge effectiveness and losses from interest rate cap to net loss | | | 122 | | | | 1,017 | |
| | | | | | | | |
Total net changes in cash flow hedges | | | (7,164 | ) | | | 3,098 | |
| | | | | | | | |
Total other comprehensive (loss) income | | | (4,892 | ) | | | 2,964 | |
| | | | | | | | |
Total comprehensive loss | | $ | (9,770 | ) | | $ | (6,859 | ) |
| | | | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit
Three Months Ended March 31, 2020 and 2021
(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 | | | 23,081 | | | $ | 70,906 | | | | 124,382 | | | $ | 125 | | | $ | 92,916 | | | $ | (644,305 | ) | | $ | (5,727 | ) | | $ | (556,991 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock upon exercise of stock options | | | — | | | | — | | | | 410 | | | | — | | | | 158 | | | | — | | | | — | | | | 158 | |
Issuance of common stock upon vesting of restricted stock awards | | | — | | | | — | | | | 136 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Shares surrendered for settlement of minimum statutory tax withholdings | | | — | | | | — | | | | (197 | ) | | | — | | | | (2,124 | ) | | | — | | | | — | | | | (2,124 | ) |
Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | 4,102 | | | | — | | | | — | | | | 4,102 | |
Net issuance and repayments of full recourse notes receivable | | | — | | | | — | | | | — | | | | — | | | | (6 | ) | | | — | | | | — | | | | (6 | ) |
Special dividends | | | — | | | | — | | | | — | | | | — | | | | (73 | ) | | | — | | | | — | | | | (73 | ) |
Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (4,892 | ) | | | (4,892 | ) |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (4,878 | ) | | | — | | | | (4,878 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2020 | | | 23,081 | | | $ | 70,906 | | | | 124,731 | | | $ | 125 | | | $ | 94,973 | | | $ | (649,183 | ) | | $ | (10,619 | ) | | $ | (564,704 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
Balance at December 31, 2020 | | | 23,081 | | | $ | 70,906 | | | | 125,037 | | | $ | 126 | | | $ | 102,417 | | | $ | (639,348 | ) | | $ | (13,827 | ) | | $ | (550,632 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock upon exercise of stock options | | | — | | | | — | | | | 244 | | | | — | | | | 151 | | | | — | | | | — | | | | 151 | |
Issuance of common stock upon vesting of restricted stock awards | | | — | | | | — | | | | 27 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | 3,799 | | | | — | | | | — | | | | 3,799 | |
Shares surrendered for settlement of minimum statutory tax withholdings | | | — | | | | — | | | | (9 | ) | | | — | | | | (100 | ) | | | — | | | | — | | | | (100 | ) |
Net interest and repayment of full recourse notes receivables | | | — | | | | — | | | | — | | | | — | | | | 44 | | | | — | | | | — | | | | 44 | |
Special dividends | | | — | | | | — | | | | — | | | | — | | | | (23 | ) | | | — | | | | — | | | | (23 | ) |
Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,964 | | | | 2,964 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (9,823 | ) | | | — | | | | (9,823 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2021 | | | 23,081 | | | $ | 70,906 | | | | 125,299 | | | $ | 126 | | | $ | 106,288 | | | $ | (649,171 | ) | | $ | (10,863 | ) | | $ | (553,620 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2020 and 2021
(In thousands)
| | | | | | | | |
| | | Three Months Ended March 31, | |
| | | 2020 | | | 2021 | |
Cash flows from operating activities | | | | | | | | |
Net loss | | $ | (4,878 | ) | | $ | (9,823 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 4,920 | | | | 4,166 | |
Amortization of debt issuance costs | | | 647 | | | | 634 | |
Amortization of prior hedge effectiveness | | | 98 | | | | 1,328 | |
Stock-based compensation | | | 4,088 | | | | 3,786 | |
Impairment of long-lived assets | | | 555 | | | | — | |
Deferred income taxes | | | (2,389 | ) | | | (3,259 | ) |
Financial guarantee | | | (1,200 | ) | | | (75 | ) |
Change in fair value of derivative instruments | | | 73 | | | | 28 | |
Unrealized foreign exchange loss (gain) | | | 2,362 | | | | (107 | ) |
Other | | | (1 | ) | | | 4 | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (636 | ) | | | (2,156 | ) |
Prepaid expenses and other current assets | | | (2,014 | ) | | | (1,344 | ) |
Other assets | | | (99 | ) | | | (215 | ) |
Accounts payable | | | 3,335 | | | | 6,026 | |
Accrued expenses and other liabilities | | | 7,461 | | | | 14,062 | |
Income tax payable | | | 6 | | | | (1 | ) |
Deferred revenue | | | 9,561 | | | | 18,361 | |
| | | | | | | | |
Net cash provided by operating activities | | | 21,889 | | | | 31,415 | |
| | | | | | | | |
Cash flows from investing activities | | | | | | | | |
Purchase of property and equipment | | | (1,988 | ) | | | (2,911 | ) |
| | | | | | | | |
Net cash used in investing activities | | | (1,988 | ) | | | (2,911 | ) |
| | | | | | | | |
Cash flows from financing activities | | | | | | | | |
Repayment of capital lease obligations | | | (8 | ) | | | (8 | ) |
Repayment of 2018 Term Loan | | | (1,337 | ) | | | (1,337 | ) |
Repayment of hybrid debt | | | — | | | | (546 | ) |
Proceeds from 2018 Revolving Facility | | | 40,000 | | | | — | |
Deferred offering costs | | | — | | | | (8 | ) |
Payment of special dividends | | | (101 | ) | | | (25 | ) |
Shares surrendered for settlement of minimum statutory tax withholdings | | | (2,002 | ) | | | (100 | ) |
Proceeds from exercise of stock options, net of cash paid for employee tax withholding | | | 37 | | | | 190 | |
| | | | | | | | |
Net cash provided by (used in) financing activities | | | 36,589 | | | | (1,834 | ) |
| | | | | | | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash equivalent | | | (185 | ) | | | 35 | |
Net increase in cash, cash equivalents and restricted cash equivalent | | | 56,305 | | | | 26,705 | |
Cash, cash equivalents and restricted cash equivalent, at beginning of the period | | | 74,180 | | | | 139,470 | |
| | | | | | | | |
Cash, cash equivalents and restricted cash equivalent, at end of the period | | $ | 130,485 | | | $ | 166,175 | |
| | | | | | | | |
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows (continued)
Three Months Ended March 31, 2020 and 2021
(In thousands)
| | | | | | | | |
| | | Three Months Ended March 31, | |
| | | 2020 | | | 2021 | |
Reconciliation of cash, cash equivalents, and restricted cash equivalent reported in the consolidated balance sheets | | | | | | | | |
Cash and cash equivalents | | $ | 105,485 | | | $ | 141,175 | |
Restricted cash equivalent | | | 25,000 | | | | 25,000 | |
| | | | | | | | |
Total cash, cash equivalents, and restricted cash equivalent shown in the consolidated statements of cash flows | | $ | 130,485 | | | $ | 166,175 | |
| | | | | | | | |
Non-cash investing and financing activities | | | | | | | | |
Purchase of property and equipment included in accounts payable and accrued expenses and other current liabilities | | $ | 729 | | | $ | 1,009 | |
Change in fair value of hedged interest rate swaps and interest rate cap | | | (2,642 | ) | | | (2,771 | ) |
Transfer of interest rate swaps derivative liability to hybrid debt | | | 12,345 | | | | — | |
Deferred offering costs included in accounts payable and accrued expenses and other current liabilities | | | — | | | | 1,288 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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 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 the issuance of theGAAP 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, 2011,2020 and the Company evaluated subsequent events through April 5, 2012, the date therelated notes thereto. The December 31, 2020 condensed consolidated balance sheet was derived from our audited consolidated financial statements were issued. In connection with the issuanceas of the interimthat date. Our unaudited condensed consolidated financial statements include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the sixfair 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 months ended June 30, 2012,March 31, 2021 from those disclosed in the Company evaluated subsequent events through July 29, 2012. In connection with the reissuance of theannual consolidated financial statements for the year ended December 31, 2011,2020 and the sixrelated notes.
The operating results for the three months ended March 31, 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 CODM organizes our company, manages resource allocations, and measures performance on the basis of one operating segment.
Revenue outside of the United States, based on the location of the customer, represented 3% and 1% of our consolidated revenue for the three months ended March 31, 2020 and 2021, respectively. Our property and equipment located outside of the United States was 1% of our consolidated property and equipment as of December 31, 2020 and March 31, 2021.
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, available-for-sale 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.
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 March 31, 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 months ended March 31, 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 FDIC and the 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% or more of our total revenues for the three months ended March 31, 2020 and 2021. At December 31, 2020 there was one customer who accounted for 20% of our accounts receivable balance. No single customer had an account receivable balance of 10% or greater of the total receivable as of March 31, 2021.
Foreign Currency
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 losses of $2.4 million and gains of $0.1 million during the three months ended March 31, 2020 and 2021, respectively.
Revenue Recognition
For the three months ended March 31, 2020 and 2021, revenue comprises the following (in thousands):
| | | | | | | | |
| | | Three
Months Ended March 31, | |
| | | 2020 | | | 2021 | |
Transaction | | $ | 45,586 | | | $ | 61,388 | |
Subscription | | | 54,235 | | | | 65,493 | |
Partner | | | 5,974 | | | | 7,751 | |
| | | | | | | | |
Total revenue | | $ | 105,795 | | | $ | 134,632 | |
| | | | | | | | |
Deferred Offering Costs
Deferred offering costs of $1.3 million have been recorded as other assets on the unaudited condensed consolidated balance sheets as of March 31, 2021 and consist of costs incurred in connection with the anticipated
sale of our common stock in our IPO including certain legal, accounting, printing, and other IPO related costs. After completion of our IPO, deferred offering costs are recorded in stockholders’ deficit as a reduction from the proceeds of the offering. Should we terminate our planned IPO or if there is a significant delay, the deferred offering costs would be immediately expensed in our condensed consolidated statements of operations. There were no deferred offering costs as of December 31, 2020.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, or ASU 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 No. 2016-02,Leases, or ASU 2016-02. 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 2018-11,Leases (Topic 842): Targeted Improvements, which includes an option to not restate comparative periods in transition, however, to elect to use the effective date of ASU 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, 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 30, 2012,2020, FASB issued ASU 2020-05,Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities, which extended the effective date of this guidance for non-public entities to fiscal years beginning after December 15, 2021. The Update is effective for our annual reporting period beginning on January 1, 2022. We are currently evaluating the impacts the adoption of these Updates will have on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments – Credit losses: Measurement of Credit Losses on Financial Instruments (Topic 326), or ASU 2016-13, 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, available-for-sale debt securities and accounts receivable. These Updates are effective for our annual reporting period beginning on January 1, 2023. We are currently evaluating the impacts the adoption of these Updates will have on our consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting, that provides optional relief to applying reference rate reform to contracts, hedging relationships, and other transactions that reference LIBOR, which will be discontinued by the end of 2021. Also, in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848) — Scope, 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 2020-04. The amendments in these Updates are effective immediately and may be applied through December 31, 2022. We are currently evaluating the impacts the adoption of these Updates will have on our consolidated financial statements.
Note 3. Other Financial Statement Information
Accounts Receivable
Changes in the allowance consisted of the following (in thousands):
| | | | | | | | |
| | | Three Months
Ended March 31, | |
| | | 2020 | | | 2021 | |
Beginning balance | | $ | 2,461 | | | $ | 5,256 | |
Add: amounts recognized as a reduction of revenue | | | 1,725 | | | | 1,582 | |
Add: bad debt expense recognized in general and administrative expense | | | — | | | | 15 | |
Less: write-offs, net of recoveries | | | (2,820 | ) | | | (2,144 | ) |
| | | | | | | | |
Ending balance | | $ | 1,366 | | | $ | 4,709 | |
| | | | | | | | |
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):
| | | | | | | | |
| | | December 31,
2020 | | | March 31,
2021 | |
Prepaid expenses | | $ | 7,177 | | | $ | 8,127 | |
Deferred cost of revenue | | | 1,967 | | | | 2,399 | |
Other current assets | | | 1,392 | | | | 1,701 | |
| | | | | | | | |
Total prepaid expenses and other current assets | | $ | 10,536 | | | $ | 12,227 | |
| | | | | | | | |
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
| | | | | | | | |
| | | December 31,
2020 | | | March 31,
2021 | |
Accrued payroll and related expenses | | $ | 16,135 | | | $ | 13,759 | |
Accrued vendor payables | | | 10,854 | | | | 16,718 | |
Derivative liabilities and hybrid debt | | | 5,131 | | | | 5,472 | |
Sales allowances | | | 4,856 | | | | 4,309 | |
Accrued sales, use and business taxes | | | 1,789 | | | | 1,825 | |
Accrued advertising | | | 173 | | | | 12,143 | |
Other | | | 2,090 | | | | 2,189 | |
| | | | | | | | |
Total accrued expenses and other current liabilities | | $ | 41,028 | | | $ | 56,415 | |
| | | | | | | | |
Changes in sales allowances relating to chargebacks, sales credits and refunds consisted of the following (in thousands):
| | | | | | | | |
| | | Three Months
Ended March 31, | |
| | | 2020 | | | 2021 | |
Beginning balance | | $ | 4,651 | | | $ | 4,856 | |
Add: increase in sales allowances | | | 9,913 | | | | 7,583 | |
Less: utilization of reserves | | | (9,800 | ) | | | (8,130 | ) |
| | | | | | | | |
Ending balance | | $ | 4,764 | | | $ | 4,309 | |
| | | | | | | | |
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 March 31, | |
| | | 2020 | | | 2021 | |
Cost of revenue | | $ | 1,958 | | | $ | 1,678 | |
Sales and marketing | | | 1,849 | | | | 1,475 | |
Technology and development | | | 650 | | | | 587 | |
General and administrative | | | 463 | | | | 426 | |
| | | | | | | | |
Total depreciation and amortization expense | | $ | 4,920 | | | $ | 4,166 | |
| | | | | | | | |
Deferred Revenue
Deferred revenue as of December 31, 2020 and March 31, 2021 was $130.1 million and $148.5 million, respectively. The Company recognized $53.6 million and $66.6 million of revenues during the three months ended March 31, 2020 and 2021, respectively, that was included in the deferred revenue balances as of December 31, 2019 and 2020, 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 March 31, 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. Long-term Debt
A reconciliation of the scheduled maturities to the consolidated balance sheets is as follows (in thousands):
| | | | | | | | |
| | | December 31,
2020 | | | March 31,
2021 | |
Current portion of 2018 Term Loan | | $ | 5,350 | | | $ | 5,350 | |
Current portion of discount and unamortized debt issuance costs | | | (2,321 | ) | | | (2,315 | ) |
| | | | | | | | |
Total current portion of long-term debt | | $ | 3,029 | | | $ | 3,035 | |
| | | | | | | | |
Noncurrent portion of 2018 Term Loan | | $ | 518,950 | | | $ | 517,613 | |
Noncurrent portion of discount and unamortized debt issuance costs | | | (6,588 | ) | | | (6,019 | ) |
| | | | | | | | |
Total long-term debt, net of current portion | | $ | 512,362 | | | $ | 511,594 | |
| | | | | | | | |
At March 31, 2021, aggregate future principal payments are as follows(in thousands):
| | | | |
2021 (remaining nine months) | | $ | 4,013 | |
2022 | | | 5,350 | |
2023 | | | 5,350 | |
2024 | | | 508,250 | |
| | | | |
Total outstanding principal of 2018 Term Loan | | | 522,963 | |
Less: current portion of 2018 Term Loan | | | (5,350 | ) |
| | | | |
Outstanding principal of 2018 Term Loan, net of current portion | | $ | 517,613 | |
| | | | |
In March 2020, in response to the World Health Organization’s declaration of COVID-19, we drew down the full $40.0 million available from our 2018 Revolving Facility. The 2018 Revolving Facility was paid in full in May 2020.
As of March 31, 2021, total borrowings under our 2018 Term Loan was $523.0 million. We determined that the fair value of our long-term debt approximates its carrying value as of December 31, 2020 and March 31, 2021. 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 5.1% and 5.0% for December 31, 2020 and March 31, 2021, respectively. At December 31, 2020 and March 31, 2021, we had no amounts outstanding under our 2018 Revolving Facility or any outstanding letters of credit. We were in compliance with the financial covenants under the 2018 Credit Facility as of December 31, 2020 and March 31, 2021.
Note 5. Derivatives
Due to the impact of COVID-19 and decreases in LIBOR, in March 2020, we entered into two blend-and-extend 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 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 consolidated statements of operations.
Our interest rate cap matured on March 31, 2021.
Derivative financial instruments and hybrid debt consisted of the following (in thousands):
| | | | | | | | |
| | | December 31,
2020 | | | March 31,
2021 | |
Interest rate swaps derivative liability, current portion | | $ | 2,177 | | | $ | 2,253 | |
| | | | | | | | |
Interest rate swaps | | $ | 3,640 | | | $ | 793 | |
Financial guarantee | | | 150 | | | | 75 | |
| | | | | | | | |
Total derivative liability, net of current portion | | $ | 3,790 | | | $ | 868 | |
| | | | | | | | |
Hybrid debt, current portion | | $ | 2,954 | | | $ | 3,219 | |
| | | | | | | | |
Hybrid debt, net of current portion | | $ | 8,152 | | | $ | 7,342 | |
| | | | | | | | |
The impact from losses from our interest rate cap, interest rate swaps, and hybrid debt on our consolidated
statements of operations were as follows (in thousands):
| | | | | | | | |
| | | Three Months
Ended March, 31 | |
| | | 2020 | | | 2021 | |
Net payments upon settlement of interest rate swaps | | $ | 329 | | | $ | 444 | |
Amortization of prior hedge effectiveness | | | — | | | | 1,328 | |
Amortization of interest rate cap premium | | | 62 | | | | 28 | |
Interest expense on hybrid debt | | | 11 | | | | 188 | |
| | | | | | | | |
Total, recorded in interest expense, net | | $ | 402 | | | $ | 1,988 | |
| | | | | | | | |
Note 6. Commitments and Contingencies
Operating Leases
We conduct operations from certain leased facilities in various locations. At March 31, 2021, we had various non-cancelable operating leases for office space and equipment, which expire between December 2021 and December 2022. Future minimum payments under operating leases at March 31, 2021 are as follows (in thousands):
| | | | |
| | | Operating Leases | |
2021 (remaining nine months) | | $ | 2,457 | |
2022 | | | 1,786 | |
| | | | |
Total minimum lease payments | | $ | 4,243 | |
| | | | |
Advertising, Media and Other Commitments
We use a variety of media to advertise our services, including search engine marketing, television and radio. At March 31, 2021, we had non-cancelable minimum advertising and media commitments for future advertising spots of $3.4 million, substantially all of which will be paid during 2021. We also have non-cancelable agreements with various vendors, which require us to pay $13.4 million over a five-year period, of which $8.9 million remains to be paid as of March 31, 2021.
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. 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 consolidated financial statements at March 31, 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 consolidated financial statements at March 31, 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 seeks damages on behalf of the purported class as well as injunctive and declaratory relief. We filed a motion to compel arbitration on April 16, 2021. 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 consolidated financial statements at March 31, 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.
Note 7. Stock-based Compensation
Stock-based Compensation Cost
We recorded stock-based compensation cost in the following categories in the accompanying consolidated statements of operations and balance sheets (in thousands):
| | | | | | | | |
| | | Three Months
Ended March 31, | |
| | | 2020 | | | 2021 | |
Cost of revenue | | $ | 37 | | | $ | 59 | |
Sales and marketing | | | 2,697 | | | | 3,150 | |
Technology and development | | | 643 | | | | 207 | |
General and administrative | | | 950 | | | | 526 | |
| | | | | | | | |
Total stock-based compensation expense | | | 4,327 | | | | 3,942 | |
Amount capitalized to internal-use software | | | 15 | | | | 13 | |
| | | | | | | | |
Total stock-based compensation | | $ | 4,342 | | | $ | 3,955 | |
| | | | | | | | |
Stock Options
Stock option activity for the three months ended March 31, 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 | | | 15,235 | | | $ | 8.78 | | | | 8.7 | | | $ | 15,873 | |
Granted | | | — | | | | — | | | | | | | | | |
Exercised | | | (244 | ) | | | 0.61 | | | | | | | | | |
Cancelled/forfeited | | | (38 | ) | | | 1.76 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at March 31, 2021 | | | 14,953 | | | $ | 8.93 | | | | 8.5 | | | $ | 113,655 | |
| | | | | | | | | | | | | | | | |
Vested and expected to vest at March 31, 2021 | | | 10,416 | | | $ | 8.56 | | | | 8.1 | | | $ | 82,985 | |
Exercisable at March 31, 2021 | | | 2,753 | | | $ | 5.45 | | | | 6.7 | | | $ | 30,503 | |
We did not grant stock options during the three months ended March 31, 2021. The weighted-average assumptions that were 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
March 31, 2020 | |
Expected life (years) | | | 5.1 | |
Risk-free interest rate | | | 1.6 | % |
Expected volatility | | | 43 | % |
Expected dividend yield | | | — | |
At March 31, 2021, total remaining stock-based compensation expense for unvested awards is $34.5 million, of which $17.9 million for time-based options are expected to be recognized over a weighted-average period of 2.6 years, up to $8.2 million for various performance options, which will only vest upon the consummation of a CIC event and $8.4 million for a performance option, which is expected to be recognized over a remaining period of 2.5 years unless a CIC event occurs beforehand.
Restricted Stock Units
A summary of RSU activity for the three months ended March 31, 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 | | | 2,499 | | | $ | 9.53 | |
Granted | | | 864 | | | | 11.15 | |
Cancelled/forfeited | | | (19 | ) | | | 11.01 | |
Vested | | | (35 | ) | | | 10.84 | |
| | | | | | | | |
Unvested at March 31, 2021 | | | 3,309 | | | $ | 9.93 | |
| | | | | | | | |
The fair value of vested RSUs for the three months ended March 31, 2020 and 2021 was $1.7 million and $0.4 million, respectively. Our RSUs consist of time-based RSUs and various performance RSUs. At March 31, 2021,
total remaining stock-based compensation expense for unvested RSU awards is $32.2 million, of which $4.1 million for time-based RSUs is expected to be recognized over a weighted-average period of 2.3 years, and up to $28.1 million for various performance RSUs, which will vest upon the consummation of a CIC event and subsequently thereafter for any remaining service period.
In March 2021, we granted 833,541 LERSUs and 30,434 performance RSUs to various employees. The LERSUs have a weighted-average grant-date fair value of $11.50 per share. The performance RSUs have a weighted-average grant-date fair value of $1.57 per share and will be recognized upon the consummation of a CIC event, which includes an IPO, merger, acquisition, or sale of more than 50% of our assets.
Note 8. Income Taxes
We account for income taxes in accordance with ASC 740, Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the interim period, taking into account year-to-date amounts and projected results for the full year. Our effective tax rate could fluctuate significantly from quarter to quarter based on recurring and nonrecurring factors including, but not limited to: variations in the estimated and actual level of pre-tax income or loss by jurisdiction; changes in enacted tax laws and regulations, and interpretations thereof, including with respect to tax credits and state and local income taxes; developments in tax audits and other matters; recognition of excess tax benefits and tax deficiencies from stock-based compensation and certain nondeductible expenses. Changes in judgment from the evaluation of new information resulting in the recognition, derecognition, or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.
We recorded a benefit from income taxes of $2.1 million and $2.9 million for the three months ended March 31, 2020 and 2021, respectively. The effective tax rate for the three months ended March 31, 2020 of 30% differed from the federal statutory rate of 21% primarily due to the valuation allowance against foreign losses, the recognition of significant excess tax benefits of stock-based compensation and other discrete adjustments. The effective tax rate for the three months ended March 31, 2021 of 23% differed from the federal statutory rate of 21% primarily due to the valuation allowance against foreign losses and recognition of excess tax benefits of stock-based compensation.
Gross unrecognized tax benefits were $7.2 million and $7.5 million as of December 31, 2020 and March 31, 2021, respectively. The gross unrecognized tax benefits, if recognized by us, will result in a reduction of approximately $7.4 million to the provision for income taxes thereby favorably impacting our effective tax rate. Our policy is to recognize interest and penalties related to income tax matters in income tax expense. For the periods presented, interest and penalties related to income tax positions were not material to our unaudited condensed consolidated financial statements.
We are subject to taxation and file income tax returns in the U.S. federal, state, and foreign jurisdictions. The federal income tax return for the years 2017 through 2019 and state income tax returns for the tax years 2008 through 2019 remain open to examination. We are under examination in one state and it is not expected to have an impact on our results of operations, cash flows and financial condition.
Note 9. Basic and Diluted Earnings Per Share
Basic net loss attributable to common stockholders per share is computed by dividing the net loss by the weighted average number of common stock outstanding for the period. For periods in which we have reported net losses, diluted net loss per share attributable to common stockholders is the same as basic net loss per share, since the impact of potentially dilutive common stock and other equity instruments is anti-dilutive.
The following table presents the number of options, restricted stock units and restricted stock excluded from the calculation of diluted net loss per share attributable to common stockholders because they are anti-dilutive (in thousands):
| | | | | | | | |
| | | As of March 31, | |
| | | 2020 | | | 2021 | |
Options to purchase common stock | | | 12,490 | | | | 14,953 | |
Restricted stock units | | | 1,002 | | | | 3,309 | |
Restricted stock | | | 150 | | | | 50 | |
| | | | | | | | |
Total | | | 13,642 | | | | 18,312 | |
| | | | | | | | |
Note 10. Fair Value Measurements
Fair value is defined as the price that would be received from selling an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
Level 1 — Quoted prices in active markets for identical assets and liabilities.
Level 2 — Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
At December 31, 2020 and March 31, 2021, our financial assets and liabilities recorded at fair value on a recurring basis consist of cash equivalents, a restricted cash equivalent, available-for-sale debt securities, interest rate swaps, an interest rate cap and a financial guarantee derivative. Cash equivalents and the restricted cash equivalent consist of money market funds valued using quoted prices in active markets, which represent Level 1 inputs in the fair value hierarchy. Our interest rate swaps and interest rate cap are valued using observable market inputs including LIBOR, swap rates and third-party dealer quotes, which represent Level 2 inputs in the fair value hierarchy. The available-for-sale debt securities and financial guarantee derivative are valued using a Monte Carlo simulation, which include inputs that represent Level 3 inputs in the fair value hierarchy.
The carrying amounts of accounts receivable, accounts payable and accrued expenses and other current liabilities approximate fair values because of the short-term nature of these items. The fair value of our long-term debt is estimated by using quoted or sales prices of similar debt instruments, which represent Level 2 inputs in the fair value hierarchy.
The following tables summarizes our assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy (in thousands):
| | | | | | | | | | | | |
| | | December 31, 2020 | |
| | | Level 1 | | | Level 2 | | | Level 3 | |
Available-for-sale debt securities | | $ | — | | | $ | — | | | $ | 1,050 | |
Money market fund | | | 5,208 | | | | — | | | | — | |
Restricted money market fund | | | 25,000 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total assets | | $ | 30,208 | | | $ | — | | | $ | 1,050 | |
| | | | | | | | | | | | |
Interest rate caps and swaps | | $ | — | | | $ | 5,817 | | | $ | — | |
Financial guarantee | | | — | | | | — | | | | 150 | |
Contingent consideration | | | — | | | | — | | | | 1,250 | |
| | | | | | | | | | | | |
Total liabilities | | $ | — | | | $ | 5,817 | | | $ | 1,400 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | March 31, 2021 | |
| | | Level 1 | | | Level 2 | | | Level 3 | |
Available-for-sale debt securities | | $ | — | | | $ | — | | | $ | 1,073 | |
Money market fund | | | 5,210 | | | | — | | | | — | |
Restricted money market fund | | | 25,000 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total assets | | $ | 30,210 | | | $ | — | | | $ | 1,073 | |
| | | | | | | | | | | | |
Interest rate caps and swaps | | $ | — | | | $ | 3,046 | | | $ | — | |
Financial guarantee | | | — | | | | — | | | | 75 | |
Contingent consideration | | | — | | | | — | | | | 1,250 | |
| | | | | | | | | | | | |
Total liabilities | | $ | — | | | $ | 3,046 | | | $ | 1,325 | |
| | | | | | | | | | | | |
Note 11. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive income (loss) consisted of the following:
| | | | | | | | | | | | |
| | | Three Months Ended March 31, 2020 | |
| (in thousands) | | Before
Tax
Amount | | | Tax
Effect | | | Net of
Tax
Amount | |
| | | |
Foreign currency translation adjustments: | | | | | | | | | | | | |
Beginning balance | | $ | (1,718 | ) | | $ | — | | | $ | (1,718 | ) |
Change during period | | | 2,272 | | | | — | | | | 2,272 | |
| | | | | | | | | | | | |
Ending balance | | $ | 554 | | | $ | — | | | $ | 554 | |
| | | |
Available-for-sale debt securities: | | | | | | | | | | | | |
Beginning balance | | $ | 231 | | | $ | — | | | $ | 231 | |
Unrealized gains | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Ending balance | | $ | 231 | | | $ | — | | | $ | 231 | |
| | | |
Cash flow hedges: | | | | | | | | | | | | |
Beginning balance | | $ | (5,627 | ) | | $ | 1,387 | | | $ | (4,240 | ) |
Unrealized loss on interest rate swaps and cap | | | (9,704 | ) | | | 2,418 | | | | (7,286 | ) |
Reclassification of losses from interest rate cap to net loss | | | 64 | | | | (16 | ) | | | 48 | |
Reclassification of prior hedge effectiveness to net loss | | | 98 | | | | (24 | ) | | | 74 | |
| | | | | | | | | | | | |
Ending balance | | $ | (15,169 | ) | | $ | 3,765 | | | $ | (11,404 | ) |
| | | |
Accumulated other comprehensive loss: | | | | | | | | | | | | |
Beginning balance | | $ | (7,114 | ) | | $ | 1,387 | | | $ | (5,727 | ) |
Other comprehensive loss | | | (7,270 | ) | | | 2,378 | | | | (4,892 | ) |
| | | | | | | | | | | | |
Ending balance | | $ | (14,384 | ) | | $ | 3,765 | | | $ | (10,619 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Three Months Ended March 31, 2021 | |
| (in thousands) | | Before
Tax
Amount | | | Tax
Effect | | | Net of
Tax
Amount | |
| | | |
Foreign currency translation adjustments: | | | | | | | | | | | | |
Beginning balance | | $ | (3,014 | ) | | $ | — | | | $ | (3,014 | ) |
Change during period | | | (147 | ) | | | — | | | | (147 | ) |
| | | | | | | | | | | | |
Ending balance | | $ | (3,161 | ) | | $ | — | | | $ | (3,161 | ) |
| | | |
Available-for-sale debt securities: | | | | | | | | | | | | |
Beginning balance | | $ | 281 | | | $ | (36 | ) | | $ | 245 | |
Unrealized gain | | | 17 | | | | (4 | ) | | | 13 | |
| | | | | | | | | | | | |
Ending balance | | $ | 298 | | | $ | (40 | ) | | $ | 258 | |
| | | |
Cash flow hedges: | | | | | | | | | | | | |
Beginning balance | | $ | (14,708 | ) | | $ | 3,650 | | | $ | (11,058 | ) |
Unrealized gains on interest rate swaps and cap | | | 2,772 | | | | (691 | ) | | | 2,081 | |
Reclassification of losses from interest rate cap to net loss | | | 28 | | | | (8 | ) | | | 20 | |
Reclassification of prior hedge effectiveness to net loss | | | 1,328 | | | | (331 | ) | | | 997 | |
| | | | | | | | | | | | |
Ending balance | | $ | (10,580 | ) | | $ | 2,620 | | | $ | (7,960 | ) |
| | | |
Accumulated other comprehensive loss: | | | | | | | | | | | | |
Beginning balance | | $ | (17,441 | ) | | $ | 3,614 | | | $ | (13,827 | ) |
Other comprehensive income | | | 3,998 | | | | (1,034 | ) | | | 2,964 | |
| | | | | | | | | | | | |
Ending balance | | $ | (13,443 | ) | | $ | 2,580 | | | $ | (10,863 | ) |
| | | | | | | | | | | | |
Note 12. Subsequent Events
Contingent consideration of $0.5 million was paid in April 2021 in connection with our acquisition of Pure.
In April and May 2021, we granted 322,998 and 181,489 LERSUs, respectively, to various employees. The LERSUs have a weighted-average grant-date fair value of $16.53 per share.
On May 7, 2021, the plaintiffs of the class action complaint set forth in Note 6, filed a notice of dismissal without prejudice. Should the plaintiffs refile in court or arbitration, we believe we have meritorious defenses to the claims and will vigorously defend any action.
We evaluated all subsequent events through July 31, 2012.May 17, 2021, the date these condensed consolidated financial statements were available to be issued.
Shares
Table of ContentsCommon stock
Table of ContentsPreliminary Prospectus
| | | | |
| J.P. Morgan | | Morgan Stanley | | Barclays |
| | | | | | |
| BofA Securities | | Citigroup | | Credit Suisse | | Jefferies |
| | | | | | |
| JMP Securities | | Raymond James | | William Blair |
, 2021
Table of Contents
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Unless the context otherwise requires, the terms “LegalZoom.com,” “LegalZoom,” “the Company,” “we,” “us,” “our” and similar references refer to LegalZoom.com, Inc. and, where appropriate, its subsidiaries.
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable in connection with the sale and distribution of the securities being registered. All amounts are estimatedestimates except for the U.S. Securities and Exchange Commission, or the SEC, registration fee, the Financial Industry Regulatory Authority, or FINRA, filing fee and the FINRA filingexchange listing fee. All the expenses below will be paid by the Registrant.
| Item | | Amount | | |
|---|
| | | | Amount Paid
or To Be Paid | |
SEC registration fee | | $ | 13,752 | | | $ | 10,910 | |
FINRA filing fee | | 12,500 | | | | 15,500 | |
Initial NYSE listing fee | | 194,000 | | |
Nasdaq listing fee | | | | 25,000 | |
Printing and engraving expenses | | | | * | |
Legal fees and expenses | | 1,950,000 | | | | * | |
Accounting fees and expenses | | 800,000 | | | | * | |
Printing and engraving expenses | | 350,000 | | |
Transfer agent and registrar fees and expenses | | 15,500 | | | | * | |
Blue Sky fees and expenses | | 15,000 | | |
Miscellaneous fees and expenses | | 75,000 | | | | * | |
| | | | | | | |
Total | | $ | 3,425,752 | | | | * | |
| | | | | | | |
| * | To be filed by amendment |
Item 14. Indemnification of Directors and Officers
We are incorporated under the laws of the State of Delaware. As permitted by Section 102 of the Delaware General Corporation Law, we have adopted provisions in our amended and restated certificate of incorporation and bylaws that limit or eliminate the personal liability of our directors for a breach of their fiduciary duties as a director, which includes a director’s duty of care, to the fullest extent permitted under Delaware law. The duty of care generally requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director will not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for:
any breach of the director’s duty of loyalty to us or our stockholders;
any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
any act related to unlawful stock repurchases, redemptions or other distributions or payment of dividends; or
any transaction from which the director derived an improper personal benefit.
These limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission. Our amended and restated certificate of incorporation also authorizes us to indemnify our officers, employees directors and other agents to the fullest extent permitted under Delaware law.
Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation'scorporation’s board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such
II-1
indemnification under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act of 1933, as amended, or the Securities Act.
Our amended and restated certificate of incorporation to be in effect uponimmediately after the completion of this offering provides for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law, and our amended and restated bylaws to be in effect uponimmediately prior to the completion of this offering provide for indemnification ofthat we will indemnify our directors, officers, employees and other agents, in each case to the maximum extent permitted by the Delaware General Corporation Law.
In addition, we have entered or will enter into indemnification agreements with our directors and officers containing provisions which arethat may in some respects be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. TheThese indemnification agreements generally require us, among other things, to indemnify our directors and officers against certain liabilities that may arise by reason of their status or service as directors and officers, other than liabilities arising from willful misconduct. These indemnification agreements also generally require us to advance their expenses incurred by the directors and officers as a result of any proceeding against them as to which they could be indemnified. These indemnification provisions and the indemnification agreements may be sufficiently broad to permit indemnification of our directors and officers for liabilities, including reimbursement of expenses incurred, arising under the Securities Act. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and executive officers as required by these indemnification provisions.
We have purchased and currently intend to maintain insurance on behalf of each and every person who is or was our director or officer against any loss arising from any claim asserted against him or her and incurred by him or her in any such capacity, subject to certain exclusions.
The form of underwriting agreement for this initial public offering, filed as Exhibit 1.1, to this registration statement provides for indemnification by the underwriters of the Registrantus and itsour directors and officers and directorswho sign this registration statement for certainspecified liabilities, including matters arising under the Securities Act and otherwise.Act.
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Table of Contents
Item 15. Recent Sales of Unregistered Securities
Since June 30, 2009, we have made theThe following sales ofsets forth information regarding all unregistered securities (after giving effect to a 3-for-1 forward stock split effected in July 2011sold since January 1, 2018:
| 1. | We have issued to our directors, officers, employees, consultants and other service providers an aggregate of 11,640,724 shares of our common stock at per share purchase prices ranging from $0.0716 to $2.4960 pursuant to exercises of options under our 2016 Stock Incentive Plan, or 2016 Plan. |
| 2. | We have granted to our directors, officers, employees, consultants and other service providers options to purchase 14,381,373 shares of our common stock with per share exercise prices ranging from $1.3725 to $9.82 under our 2016 Plan. |
| 3. | We have granted to our directors, officers, employees, consultants and other service providers 7,065,150 restricted stock units to be settled into shares of our common stock under our 2016 Plan. |
| 4. | In February 2018, we issued 200,000 shares of our common stock, subject to certain forfeiture events, to an employee of one of our subsidiaries in consideration for future services to be rendered. |
| 5. | In October 2018, we issued and sold an aggregate of 18,430,684 shares of our common stock to 11 accredited investors at a price per share of $10.48 for an aggregate purchase price of $193.2 million. |
The offers, sales and a 2-for-3 reverse stock split effected on July 31, 2012):
Plan-related Issuances
1.From June 30, 2009 through June 30, 2012, we issued to our directors, officers, employees, consultants and other service providers an aggregate of 498,113 shares of our common stock at per share purchase prices ranging from $0.03 to $1.79 pursuant to exercises of options under our 2000 Stock Option Plan.
2.From June 30, 2009 through June 30, 2012, we granted to our directors, officers, employees, consultants and other service providers options to purchase 2,990,663 shares of our common stock with per share exercise prices ranging from $1.14 to $10.59 under our 2010 Stock Incentive Plan.
3.From June 30, 2009 through June 30, 2012, we issued to our directors, officers, employees, consultants and other service providers an aggregate of 1,979,306 shares of our common stock at per share prices ranging from $1.14 to $3.23 pursuant to exercises of options under our 2010 Stock Incentive Plan.
4.From June 30, 2009 through June 30, 2012, we granted an officer 50,000 restricted stock units to be settled into shares of our common stock under our 2010 Stock Incentive Plan.
Unless otherwise stated, the salesissuances of the above securities described in paragraphs (1) through (3) were deemed to be exempt from registration under Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offering or pursuant tounder compensatory benefit plans and contracts relating to compensation, or under Section 4(a)(2) of the Securities Act as provided under Rule 701.a transaction by an issuer not involving a public offering. The recipients of such securities were our directors, officers, employees, consultants or other service providers and received the securities under our equity incentive
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plans. Appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions had adequate access, through employment, business or other relationships, to information about us.
The offers, sales and issuances of the securities described in paragraphs (4) and (5) were deemed to be exempt under Section 4(a)(2) of the Securities Act or Rule 506 of Regulation D under the Securities Act as a transaction by an issuer not involving a public offering. The recipients of securities in each of these transactions represented their intentions to acquireacquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were placed uponaffixed to the stock certificatessecurities issued in these transactions. AllEach of the recipients of securities in these transactions was an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act and had adequate access, through theiremployment, business or other relationships, with the Registrant, to information about the Registrant. The sales ofus. No underwriters were involved in these securities were made without any general solicitation or advertising.transactions.
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Table of Contents
Item 16. Exhibits and Financial Statements
The exhibits listed below are filed as part of this registration statement.
| | | |
| Exhibit
Number | | | | Description of Exhibit |
|---|
| |
| 1.1* | 1.1 | # | Form of Underwriting Agreement. |
| |
| 3.1 | # | Fourth Amended and Restated Certificate of Incorporation of LegalZoom.com, Inc., as amended, as currently in effect. |
| |
| 3.2* | 3.2 | # | Form of Amended and Restated Certificate of Incorporation of LegalZoom.com, Inc., to be in effect uponimmediately after the completion of the offering. |
| |
| 3.3 | # | Second Amended and Restated Bylaws of LegalZoom.com, Inc., as currently in effect. |
| |
| 3.4* | 3.4 | # | Form of Amended and Restated Bylaws of LegalZoom.com, Inc., to be in effect uponimmediately prior the completion of the offering. |
| 3.5 | | Fourth Certificate of Amendment of the Restated Certificate of Incorporation of LegalZoom.com, Inc. |
| 4.1* | 3.6 | # | Form of Third Amendment to the Bylaws of LegalZoom.com, Inc. |
| 4.1 | # | Form of LegalZoom.com, Inc.'s’s Common Stock Certificate. |
| 4.2 | # | Investors' Rights Agreement. |
| 4.2* | 5.1 | #Fourth Amended and Restated Investors’ Rights Agreement, by and among LegalZoom.com, Inc. and certain of its stockholders, dated June , 2021. |
| |
| 4.3 | | Registration Rights Side Letter, by and between LegalZoom.com, Inc. and Bryant Stibel Group, LLC, dated October 2, 2017. |
| |
| 5.1* | | Opinion of Sheppard, Mullin, Richter & HamptonCooley LLP. |
| 10.1 |
| 10.1+ | +# | 20002016 Stock OptionIncentive Plan as amended, and forms of award agreements. |
| 10.2 | +# | 2010 Stock Incentive Plan, as amended, and forms of award agreements. |
| 10.2+* | 10.3 | +# | 20122021 Equity Incentive Plan and forms of award agreements. |
| 10.4 |
| 10.3+* | +# | 2021 Employee Stock Purchase Plan. |
| |
| 10.4+ | | Form of Indemnification Agreement, by and between LegalZoom.com, Inc. and each of its directors and executive officers. |
| 10.5 |
| 10.5+* | +# | Amended and Restated Employment Agreement, dated May 8, 2012, by and between LegalZoom.com, Inc. and Chas Rampenthal.Dan Wernikoff, dated , 2021. |
| 10.6 | +# | 2012 Management Incentive Plan. |
| 10.6+* | 10.7 | +# | Board Member Offer Letter, dated April 30, 2012, by and between LegalZoom.com and Nehemia Zucker. |
| | 10.8 | +# | Amended and Restated Employment Agreement, dated May 8, 2012, by and between LegalZoom.com, Inc. and Edward Hartman.Shrisha Radhakrishna, dated , 2021. |
| 10.9 |
| 10.7+* | +# | Amended and Restated Employment Agreement, dated May 8, 2012, by and between LegalZoom.com, Inc. and Fred Krupica.Noel B. Watson, dated , 2021. |
II-3
| | |
Exhibit
Number | 10.10 | +#Description of Exhibit |
| Employment |
| 10.13+* | | Non-Employee Director Compensation Policy. |
| |
| 10.14* | | Amendment and Restatement Agreement, by and between LegalZoom.com, Inc., the other loan parties thereto and JPMorgan Chase Bank N.A., as administrative agent, dated May 8, 2012,November 23, 2018. |
| |
| 10.15 | | Office Lease by and between LegalZoom.com, Inc. and Frank Monestere.Legacy Partners II Glendale N Brand, LLC, effective August 26, 2010, as amended. |
| 10.11 |
| 10.16* | +# | EmploymentDirector Nomination Agreement, dated May 8, 2012, by and between LegalZoom.com, Inc. and John Suh.certain of its stockholders dated June , 2021. |
| 10.12 | +# | Employment Agreement, dated May 8, 2012, by and between LegalZoom.com, Inc. and Sheila Tan. |
| 10.13 | +# | Board Member Offer Letter, dated October 14, 2010, by and between LegalZoom.com, Inc. and Susan Decker. |
| 10.14 | # | Loan and Security Agreement, dated October 31, 2008, by and between LegalZoom.com, Inc. and Comerica Bank. |
II-3
Table of Contents
| | | |
Exhibit Number | | Description of Exhibit |
|---|
| 21.1 | | 10.15 | # | First Amendment to Loan and Security Agreement, dated February 24, 2009, betweenSubsidiaries of LegalZoom.com, Inc. and Comerica Bank. |
| 10.16 | # | Second Amendment to Loan and Security Agreement, dated March 6, 2009, between LegalZoom.com, Inc. and Comerica Bank. |
| 10.17 | # | Third Amendment to Loan and Security Agreement, dated July 7, 2009, between LegalZoom.com, Inc. and Comerica Bank. |
| 10.18 | # | Fourth Amendment to Loan and Security Agreement, dated July 27, 2009, between LegalZoom.com, Inc. and Comerica Bank. |
| 10.19 | # | Fifth Amendment to Loan and Security Agreement, dated January 8, 2010, between LegalZoom.com, Inc. and Comerica Bank. |
| 10.20 | # | Sixth Amendment to Loan and Security Agreement, dated October 29, 2010, between LegalZoom.com, Inc. and Comerica Bank. |
| 10.21 | # | Seventh Amendment to Loan and Security Agreement, dated March 1, 2011, between LegalZoom.com, Inc. and Comerica Bank. |
| 10.22 | # | Eighth Amendment to Loan and Security Agreement, dated May 17, 2011, between LegalZoom.com, Inc. and Comerica Bank. |
| 10.23 | # | Ninth Amendment to Loan and Security Agreement, dated July 20, 2011, between LegalZoom.com, Inc. and Comerica Bank. |
| 10.24 | # | Tenth Amendment to Loan and Security Agreement, dated December 9, 2011, between LegalZoom.com, Inc. and Comerica Bank. |
| 10.25 | # | California Office Lease—Glendale Galleria II, dated October 18, 2010, by and between Glendale II Mall Associates, LLC and LegalZoom.com, Inc. |
| 10.26 | # | Eleventh Amendment to Loan and Security Agreement, dated April 6, 2012, between LegalZoom.com, Inc. and Comerica Bank. |
| 10.27 | +# | Employment Agreement, dated May 8, 2012, by and between LegalZoom.com, Inc. and Tracy Terrill. |
| 10.28 | # | Office Lease, dated August 26, 2010, by and between Legacy Partners II Glendale N. Brand, LLC and LegalZoom.com, Inc. |
| 10.29 | # | Sublease Agreement, dated December 7, 2009, by and between Marsh USA Inc. and LegalZoom.com, Inc., as amended. |
| 10.30 | # | Lease Agreement, dated November 22, 2011, by and between John Hancock Life Insurance Company and LegalZoom.com, Inc. |
| 10.31 | +# | Board Member Offer Letter and Consent, dated June 21, 2012, by and between LegalZoom.com, Inc. and Daniel Cooperman. |
| 10.32 | +# | Board Member Offer Letter, dated July 17, 2012, by and between LegalZoom.com, Inc. and Jason Trevisan. |
| 10.33 | +# | Board Member Offer Letter, dated July 19, 2012, by and between LegalZoom.com, Inc. and Alan Spoon. |
| 10.34 | +# | Board Member Offer Letter and Consent, dated July 19, 2012, by and between LegalZoom.com, Inc. and Ken McBride. |
| 10.35 | +# | Board Member Offer Letter, dated July 19, 2012, by and between LegalZoom.com, Inc. and Brian Liu. |
II-4
Table of Contents
| | | |
Exhibit Number | | Description of Exhibit |
|---|
| 10.36 | +# | Board Member Offer Letter, dated July 19, 2012, by and between LegalZoom.com, Inc. and Susan Decker. |
| 10.37 | +# | Employment Agreement, dated February 15, 2007, by and between LegalZoom.com, Inc. and John Suh, as amended. |
| 10.38 | +# | Employment Agreement, dated March 25, 2004, by and between LegalZoom.com, Inc. and Edward Hartman, as amended. |
| 10.39 | +# | Employment Agreement, dated March 19, 2008, by and between LegalZoom.com, Inc. and Fred Krupica. |
| 10.40 | +# | Amended and Restated Board Member Offer Letter, dated July 23, 2012, by and between LegalZoom.com, Inc. and Daniel Cooperman. |
| 10.41 | # | Twelfth Amendment to Loan and Security Agreement, dated July 23, 2012, between LegalZoom.com, Inc. and Comerica Bank. |
| 21.1 | # | List of subsidiaries. |
| 23.1 | # | Consent of Sheppard, Mullin, Richter & Hampton LLP (included in Exhibit 5.1). |
| 23.2 | | Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm, dated July 31, 2012.firm. |
| 23.3 |
| 23.2* | # | Consent of nominated director Daniel CoopermanCooley LLP (included in Exhibit 10.40)5.1). |
| 23.4 | # | Consent of nominated director Ken McBride (included in Exhibit 10.34). |
| 24.1 | # | Power of Attorney (included on the signature page to this registration statement). |
| |
| 99.1 | | Consent of Kantar Consulting, dated April 5, 2012.26, 2019. |
| 24.2 |
| 99.2 | | Consent of Magid Consulting Inc., dated March 31, 2021. |
| * | To be submitted by amendment. |
| + | Indicates a management contract or compensatory plan. |
| # | Power of Attorney of Nehemia Zucker dated May 6, 2012. |
| 99.1 | # | Confidental Draft #1. |
| 99.2 | # | Consent of L.E.K. Consulting LLC. |
| 99.3 | # | Consent of United Sample, Inc.Previously filed. |
*To be filed by amendment.
+Indicates a management contract or compensatory plan.
#Previously filed.
(b)
- Financial Statement Schedules
SchedulesAll financial statement schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the consolidated financial statements or notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act may be permitted as to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, described in Item 14, or otherwise, we havethe registrant been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, wethe registrant will, unless in the opinion of ourits counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
II-5
Table of Contents
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus as filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities:
The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
II-6II-4
SIGNATURES
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, we havethe registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on August 1, 2012.June 4, 2021.
| | |
| LEGALZOOM.COM, INC. |
| |
By: | | LegalZoom.com, Inc./s/ Dan Wernikoff |
|
|
By:Dan Wernikoff |
|
|
/s/ JOHN SUH
John Suh
Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dan Wernikoff and Noel Watson, and each of them, as his or her true and lawful attorneys-in-fact and agents, each with the full power of substitution, for him or her and in his or her name, place or stead, in any and all capacities, to sign any and all amendments to this registration statement (including post-effective amendments), and to sign any registration statement for the same offering covered by this registration statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all post-effective amendments thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statementregistration statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated.
| | | | |
Signature | | Title | | Date |
| | |
/s/ Dan Wernikoff Dan Wernikoff | | Chief Executive Officer and Director (Principal Executive Officer) | | June 4, 2021 |
| | |
/s/ Noel Watson Noel Watson | | Chief Financial Officer (Principal Financial and Accounting Officer) | | June 4, 2021 |
| | |
/s/ Dipanjan Deb Dipanjan Deb | | Director | | June 4, 2021 |
| | |
/s/ Khai Ha Khai Ha | | Director | | June 4, 2021 |
| | |
/s/ John Murphy John Murphy | | Director | | June 4, 2021 |
| | |
/s/ Dipan Patel Dipan Patel | | Director | | June 4, 2021 |
II-5
| | | | | | |
Signature
| | Title
| | Date
|
|---|
|
|
|
|
|
|
|
/s/ JOHN SUH
John SuhSignature | | Chief Executive Officer and Director
(principal executive officer)Title | | August 1, 2012Date |
/s/ FRED KRUPICA
Fred Krupica |
|
Chief Financial Officer
(principal financial officer and principal
accounting officer) |
|
August 1, 2012 |
*
Brian Liu |
|
Chairman |
|
August 1, 2012 |
*
Susan Decker |
|
Director |
|
August 1, 2012 |
*
Alan Spoon |
|
Director |
|
August 1, 2012 |
*
Jason Trevisan |
|
Director |
|
August 1, 2012 |
*
Nehemia Zucker |
|
Director |
|
August 1, 2012 |
*By: |
|
/s/ FRED KRUPICA
Fred Krupica
Attorney-in-fact |
|
|
|
|
II-7
Table of Contents
EXHIBIT INDEX
| | | |
Exhibit Number | | Description of Exhibit |
|---|
/s/ Brian Ruder Brian Ruder | | 1.1Director | # | Form of Underwriting Agreement.June 4, 2021 |
|
3.1 |
# |
Restated Certificate of Incorporation of LegalZoom.com, Inc., as currently in effect. |
|
3.2 |
# |
Form of Amended and Restated Certificate of Incorporation of LegalZoom.com, Inc. to be in effect upon completion of the offering. |
|
3.3 |
# |
Bylaws of LegalZoom.com, Inc., as currently in effect. |
|
3.4 |
# |
Form of Amended and Restated Bylaws of LegalZoom.com, Inc., to be in effect upon completion of the offering. |
|
3.5 |
|
Fourth Certificate of Amendment of the Restated Certificate of Incorporation of LegalZoom.com, Inc. |
|
3.6 |
# |
Form of Third Amendment to the Bylaws of LegalZoom.com, Inc. |
|
4.1 |
# |
Form of LegalZoom.com, Inc.'s Common Stock Certificate. |
|
4.2 |
# |
Investors' Rights Agreement. |
|
5.1 |
# |
Opinion of Sheppard, Mullin, Richter & Hampton LLP. |
|
10.1 |
+# |
2000 Stock Option Plan, as amended, and forms of award agreements. |
|
10.2 |
+# |
2010 Stock Incentive Plan, as amended, and forms of award agreements. |
|
10.3 |
+# |
2012 Equity Incentive Plan and forms of award agreements. |
|
10.4 |
+# |
Form of Indemnification Agreement by and between LegalZoom.com, Inc. and each of its directors and executive officers. |
|
10.5 |
+# |
Employment Agreement, dated May 8, 2012, by and between LegalZoom.com, Inc. and Chas Rampenthal. |
|
10.6 |
+# |
2012 Management Incentive Plan. |
|
10.7 |
+# |
Board Member Offer Letter, dated April 30, 2012, by and between LegalZoom.com, Inc. and Nehemia Zucker. |
|
10.8 |
+# |
Employment Agreement, dated May 8, 2012, by and between LegalZoom.com, Inc. and Edward Hartman. |
|
10.9 |
+# |
Employment Agreement, dated May 8, 2012, by and between LegalZoom.com, Inc. and Fred Krupica. |
|
10.10 |
+# |
Employment Agreement, dated May 8, 2012, by and between LegalZoom.com, Inc. and Frank Monestere. |
|
10.11 |
+# |
Employment Agreement, dated May 8, 2012, by and between LegalZoom.com, Inc. and John Suh. |
|
10.12 |
+# |
Employment Agreement, dated May 8, 2012, by and between LegalZoom.com, Inc. and Sheila Tan. |
|
10.13 |
+# |
Board Member Offer Letter, dated October 14, 2010, by and between LegalZoom.com, Inc. and Susan Decker. |
|
10.14 |
# |
Loan and Security Agreement, dated October 31, 2008, by and between LegalZoom.com, Inc. and Comerica Bank. |
Table of Contents
| | | |
Exhibit Number | | Description of Exhibit |
|---|
/s/ Jeffrey Stibel Jeffrey Stibel | | 10.15Director | # | First Amendment to Loan and Security Agreement, dated February 24, 2009, between LegalZoom.com, Inc. and Comerica Bank.June 4, 2021 |
|
10.16 |
# |
Second Amendment to Loan and Security Agreement, dated March 6, 2009, between LegalZoom.com, Inc. and Comerica Bank. |
|
10.17 |
# |
Third Amendment to Loan and Security Agreement, dated July 7, 2009, between LegalZoom.com, Inc. and Comerica Bank. |
|
10.18 |
# |
Fourth Amendment to Loan and Security Agreement, dated July 27, 2009, between LegalZoom.com, Inc. and Comerica Bank. |
|
10.19 |
# |
Fifth Amendment to Loan and Security Agreement, dated January 8, 2010, between LegalZoom.com, Inc. and Comerica Bank. |
|
10.20 |
# |
Sixth Amendment to Loan and Security Agreement, dated October 29, 2010, between LegalZoom.com, Inc. and Comerica Bank. |
|
10.21 |
# |
Seventh Amendment to Loan and Security Agreement, dated March 1, 2011, between LegalZoom.com, Inc. and Comerica Bank. |
|
10.22 |
# |
Eighth Amendment to Loan and Security Agreement, dated May 17, 2011, between LegalZoom.com, Inc. and Comerica Bank. |
|
10.23 |
# |
Ninth Amendment to Loan and Security Agreement, dated July 20, 2011, between LegalZoom.com, Inc. and Comerica Bank. |
|
10.24 |
# |
Tenth Amendment to Loan and Security Agreement, dated December 9, 2011, between LegalZoom.com, Inc. and Comerica Bank. |
|
10.25 |
# |
California Office Lease—Glendale Galleria II, dated October 18, 2010, by and between Glendale II Mall Associates, LLC and LegalZoom.com, Inc. |
|
10.26 |
# |
Eleventh Amendment to Loan and Security Agreement, dated April 6, 2012, between LegalZoom.com, Inc. and Comerica Bank. |
|
10.27 |
+# |
Employment Agreement, dated May 8, 2012, by and between LegalZoom.com, Inc. and Tracy Terrill. |
|
10.28 |
# |
Office Lease, dated August 26, 2010, by and between Legacy Partners II Glendale N. Brand, LLC and LegalZoom.com, Inc. |
|
10.29 |
# |
Sublease Agreement, dated December 7, 2009, by and between Marsh USA Inc. and LegalZoom.com, Inc., as amended. |
|
10.30 |
# |
Lease Agreement, dated November 22, 2011, by and between John Hancock Life Insurance Company and LegalZoom.com, Inc. |
|
10.31 |
+# |
Board Member Offer Letter and Consent, dated June 21, 2012, by and between LegalZoom.com, Inc. and Daniel Cooperman. |
|
10.32 |
+# |
Board Member Offer Letter, dated July 17, 2012, by and between LegalZoom.com, Inc. and Jason Trevisan. |
|
10.33 |
+# |
Board Member Offer Letter, dated July 19, 2012, by and between LegalZoom.com, Inc. and Alan Spoon. |
|
10.34 |
+# |
Board Member Offer Letter and Consent, dated July 19, 2012, by and between LegalZoom.com, Inc. and Ken McBride. |
|
10.35 |
+# |
Board Member Offer Letter, dated July 19, 2012, by and between LegalZoom.com, Inc. and Brian Liu. |
Table of Contents
| | | |
Exhibit Number | | Description of Exhibit |
|---|
/s/ Christine Wang Christine Wang | | 10.36Director | +# | Board Member Offer Letter, dated July 19, 2012, by and between LegalZoom.com, Inc. and Susan Decker.June 4, 2021 |
|
10.37 |
+# |
Employment Agreement, dated February 15, 2007, by and between LegalZoom.com, Inc. and John Suh, as amended. |
/s/ David Yuan David Yuan |
10.38 |
+#Director |
Employment Agreement, dated March 25, 2004, by and between LegalZoom.com, Inc. and Edward Hartman, as amended. |
|
10.39 |
+# |
Employment Agreement, dated March 19, 2008, by and between LegalZoom.com, Inc. and Fred Krupica. |
|
10.40 |
+# |
Amended and Restated Board Member Offer Letter, dated July 23, 2012, by and between LegalZoom.com, Inc. and Daniel Cooperman. |
|
10.41 |
# |
Twelfth Amendment to Loan and Security Agreement, dated July 23, 2012, between LegalZoom.com, Inc. and Comerica Bank. |
|
21.1 |
# |
List of subsidiaries. |
|
23.1 |
# |
Consent of Sheppard, Mullin, Richter & Hampton LLP (included in Exhibit 5.1). |
|
23.2 |
|
Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm, dated July 31, 2012. |
|
23.3 |
# |
Consent of nominated director Daniel Cooperman (included in Exhibit 10.40). |
|
23.4 |
# |
Consent of nominated director Ken McBride (included in Exhibit 10.34). |
|
24.1 |
# |
Power of Attorney dated April 5, 2012. |
|
24.2 |
# |
Power of Attorney of Nehemia Zucker dated May 6, 2012. |
|
99.1 |
# |
Confidental Draft #1. |
|
99.2 |
# |
Consent of L.E.K. Consulting LLC. |
|
99.3 |
# |
Consent of United Sample, Inc.June 4, 2021 |
II-6
*To be filed by amendment.
+Indicates a management contract or compensatory plan.
#Previously filed.