LegalZoom.com(LZ) - 2025 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements, including balance sheets, income, cash flows, and notes for Q2 2025 and 2024 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :----------------------------------- | :------------ | :------------------ | | Cash and cash equivalents | $217,035 | $142,064 | | Total current assets | $254,561 | $191,223 | | Goodwill | $139,570 | $63,318 | | Total assets | $543,030 | $373,883 | | Total current liabilities | $326,507 | $265,582 | | Total liabilities | $348,978 | $280,626 | | Total stockholders' equity | $194,052 | $93,257 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $192,509 | $177,362 | $375,619 | $351,576 | | Gross profit | $125,111 | $113,753 | $241,661 | $219,583 | | (Loss) income from operations | $(3,100) | $1,146 | $5,866 | $6,201 | | Net (loss) income | $(266) | $1,314 | $4,861 | $6,058 | | Net (loss) income per share — basic | $(0.00) | $0.01 | $0.03 | $0.03 | | Net (loss) income per share — diluted | $(0.00) | $0.01 | $0.03 | $0.03 | Condensed Consolidated Statements of Comprehensive (Loss) Income Condensed Consolidated Statements of Comprehensive (Loss) Income (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net (loss) income | $(266) | $1,314 | $4,861 | $6,058 | | Total comprehensive (loss) income | $(846) | $1,464 | $4,361 | $6,504 | Condensed Consolidated Statements of Stockholders' Equity - Total stockholders' equity increased from $93.3 million at December 31, 2024, to $194.1 million at June 30, 2025, driven by common stock issuance for stock options and acquisition, stock-based compensation, and net income, partially offset by stock repurchases and accumulated deficit[22][23] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $89,842 | $61,440 | | Net cash used in investing activities | $(26,818) | $(19,351) | | Net cash provided by (used in) financing activities | $11,800 | $(148,981) | | Net increase (decrease) in cash and cash equivalents | $74,971 | $(106,924) | | Cash and cash equivalents, at end of the period | $217,035 | $118,795 | Notes to Condensed Consolidated Financial Statements Note 1. Description of the Business - LegalZoom.com, Inc. is a leading online platform for legal services, offering tools and guidance for business formation, compliance, estate planning, and ongoing legal support through intuitive technology and access to experienced attorneys[29] Note 2. Summary of Significant Accounting Policies - Revenue is primarily derived from two sources: Transaction revenue (customized legal document services, lead generation) and Subscription revenue (registered agent, compliance, attorney advice, SaaS, etc.)[41][42] - Payments are generally collected upfront, with unearned amounts recorded as deferred revenue[43] Revenue by Type (in thousands) | Revenue Type | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Transaction | $72,611 | $68,537 | $139,464 | $134,854 | | Subscription | $119,898 | $108,825 | $236,155 | $216,722 | | Total revenue | $192,509 | $177,362 | $375,619 | $351,576 | - The company early adopted ASU 2024-01 (Stock Compensation) and ASU 2024-02 (Codification Improvements) effective January 1, 2024, with no material impact[46][47] - It is currently evaluating the impact of ASU 2023-09 (Income Tax Disclosures), ASU 2024-03 (Expense Disaggregation), ASU 2024-04 (Convertible Debt), and ASU 2025-05 (Credit Losses for Accounts Receivable), which are effective in future periods[48][49][50][51][52] Note 3. Other Financial Statement Information - Goodwill increased significantly from $63.3 million at December 31, 2024, to $139.6 million at June 30, 2025, primarily due to the acquisition of Formation Nation, Inc[55] - Deferred revenue increased from $175.0 million at December 31, 2024, to $214.2 million at June 30, 2025[58] Total Depreciation and Amortization Expense (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total depreciation and amortization expense | $11,339 | $8,426 | $21,745 | $16,096 | Note 4. Sale of Assets Held for Sale - The company completed the sale of its operational headquarters property in Austin, Texas, on March 31, 2025, for net cash proceeds of approximately $37.1 million, recognizing a gain of $14.3 million[62][63] Note 5. Acquisition (Formation Nation, Inc.) - On February 10, 2025, LegalZoom acquired Formation Nation, Inc. (including Inc Authority, LLC and Nevada Corporate Headquarters, Inc.) for $83.5 million, comprising cash, net working capital adjustments, and 2.2 million restricted common shares[64] - The acquisition aims to accelerate the strategy of attracting higher-value customers, expand offerings, and reach a broader customer base by leveraging Formation Nation's customer service teams[65] Preliminary Allocation of Purchase Consideration (in thousands) | Asset/Liability | Amount | | :----------------------------------- | :----- | | Cash and cash equivalents | $1,953 | | Intangible assets | $17,300 | | Goodwill | $76,251 | | Total assets acquired | $101,892 | | Deferred revenue | $9,582 | | Net assets acquired | $83,527 | - Formation Nation contributed approximately $12.6 million in revenue and a net loss of $1.7 million for the three months ended June 30, 2025, and $21.2 million in revenue and a net loss of $2.5 million for the six months ended June 30, 2025, since the acquisition date[74] Note 6. Long-term Debt - The company has a Revolving Facility, initially for $150.0 million, with no amounts outstanding as of June 30, 2025, and was in compliance with all financial covenants[76][81] Note 7. Commitments and Contingencies - The company is not currently a party to any material legal proceedings and is unaware of any pending or threatened litigation that could materially adversely affect its financial condition[82] - Indemnification obligations under third-party service provider agreements are considered immaterial, with no amounts accrued or paid during the periods presented[83][84] Note 8. Stockholders' Equity - In May 2025, the board approved a $100.0 million increase to the stock repurchase program, bringing the total authorized to $315.0 million[85] - As of June 30, 2025, approximately $129.6 million remained available under the stock repurchase program[86] - During the three and six months ended June 30, 2025, the company repurchased 2.2 million shares for $20.4 million at an average price of $9.33 per share[86] - No excise tax liability was recognized as of June 30, 2025, as stock issuances exceeded repurchases during the six-month period[87] Note 9. Stock-based Compensation Stock-based Compensation Expense (in thousands) | Category | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenue | $1,478 | $1,747 | $2,738 | $3,340 | | Sales and marketing | $4,473 | $1,906 | $8,240 | $3,485 | | Technology and development | $4,658 | $6,525 | $8,682 | $12,228 | | General and administrative | $20,029 | $8,737 | $40,734 | $14,718 | | Total stock-based compensation expense | $30,638 | $18,915 | $60,394 | $33,771 | | Amount capitalized to internal-use software | $1,580 | $1,627 | $2,920 | $3,044 | | Total stock-based compensation | $32,218 | $20,542 | $63,314 | $36,815 | - Total stock-based compensation expense increased for both the three and six months ended June 30, 2025, compared to the prior year, primarily due to RSU grants in 2024 and 2025[88][89] Note 10. Income Taxes Income Tax (Benefit from) Provision and Effective Tax Rate | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | (Benefit from) provision for income taxes | $(278) | $2,046 | $5,209 | $5,276 | | Effective tax rate | 51% | 61% | 52% | 47% | - The difference from the federal statutory rate of 21% is primarily due to significant non-deductible stock-based compensation and other discrete adjustments[91] - Gross unrecognized tax benefits were $15.7 million at June 30, 2025, an increase from $13.4 million at December 31, 2024[92] Note 11. Net (Loss) Income Per Share Net (Loss) Income Per Share (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net (loss) income per share — basic | $(0.00) | $0.01 | $0.03 | $0.03 | | Net (loss) income per share — diluted | $(0.00) | $0.01 | $0.03 | $0.03 | - For the three and six months ended June 30, 2025, 42.2 million and 32.2 million potentially dilutive securities (options, RSUs, ESPP) were excluded from diluted EPS calculation as they were anti-dilutive[95] Note 12. Fair Value Measurements - As of June 30, 2025, financial assets recorded at fair value on a recurring basis consist of $187.9 million in money market funds (Level 1 inputs)[98] - During the three months ended June 30, 2025, the company sold its available-for-sale debt security (investment in LegalVision Pty Ltd) for $1.5 million, recognizing a net gain of $0.6 million[97] Note 13. Segment Information - The company operates as a single operating segment, providing an online platform for business formation in the U.S., generating revenue from customized legal document services and subscriptions[102] Revenue by Reportable Segment (in thousands) | Revenue Type | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Transaction | $72,611 | $68,537 | $139,464 | $134,854 | | Subscription | $119,898 | $108,825 | $236,155 | $216,722 | | Total revenue | $192,509 | $177,362 | $375,619 | $351,576 | Note 14. Subsequent Events - In July 2025, the 'One Big Beautiful Bill' (H.R.1) was signed into law, permanently extending certain Tax Cuts and Jobs Act provisions and modifying international tax frameworks, with the company evaluating its impact[106] - On July 14, 2025, the Revolving Facility was amended, reducing the commitment from $150.0 million to $100.0 million and extending the maturity date from July 2, 2026, to July 14, 2030, also adjusting interest rate margins and commitment fees[107] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition, operations, liquidity, and non-GAAP measures for Q2 2025 and 2024 Overview - LegalZoom is a leading online platform for legal services, assisting individuals and small businesses with business formation, compliance, estate planning, and ongoing legal support across the U.S. through technology and attorney networks[110] Key Factors Affecting Our Performance - Future performance depends on macroeconomic factors, the company's share of business formations, ability to enhance customer lifetime value through new products and subscriptions, and effective integration of expert offerings[112] Key Business Metrics Number of business formations Number of Business Formations (in thousands) | Period | 2025 | 2024 | | :----- | :--- | :--- | | Three Months Ended June 30 | 131 | 134 | | Six Months Ended June 30 | 262 | 273 | - Business formations decreased by 2% for the three months and 4% for the six months ended June 30, 2025, year-over-year, primarily due to a reduction in direct channel formations, partially offset by the Formation Nation acquisition[116] Number of transactions Number of Transactions (in thousands) | Period | 2025 | 2024 | | :----- | :--- | :--- | | Three Months Ended June 30 | 278 | 292 | | Six Months Ended June 30 | 619 | 628 | - The number of transactions decreased by 5% for the three months and 1% for the six months ended June 30, 2025, year-over-year, mainly due to the elimination of beneficial ownership information report filings following a FinCEN ruling, partially offset by the Formation Nation acquisition[118][119] Average order value Average Order Value | Period | 2025 | 2024 | | :----- | :--- | :--- | | Three Months Ended June 30 | $262 | $234 | | Six Months Ended June 30 | $225 | $215 | - Average order value increased by 12% for the three months and 5% for the six months ended June 30, 2025, year-over-year, primarily driven by a decrease in lower-value beneficial ownership information report filings[121] Number of subscription units Number of Subscription Units (in thousands) | As of June 30, | 2025 | 2024 | | :------------- | :--- | :--- | | Subscription units | 1,955 | 1,609 | - Subscription units increased by 22% from June 30, 2024, to June 30, 2025, mainly due to forms and e-signature and accounting solution subscriptions bundled into business formation offerings, and the inclusion of Formation Nation's subscription units[124] Average revenue per subscription unit Average Revenue Per Subscription Unit (ARPU) | As of June 30, | 2025 | 2024 | | :------------- | :--- | :--- | | ARPU | $256 | $271 | - ARPU decreased by 6% as of June 30, 2025, compared to June 30, 2024, primarily due to a shift in mix towards lower-priced subscription offerings, such as forms and e-signature, bundled into business formation offerings[128] Annual small business retention rate - The annual small business retention rate was approximately 59% as of June 30, 2025, impacted by non-renewing annual forms and e-signature subscriptions bundled into business formation offerings[130] Key Components of our Results of Operations Revenue - Revenue is generated from Transaction services (customized legal documents, filing fees, lead generation) and Subscription services (registered agent, compliance, attorney advice, SaaS)[133][134] Cost of revenue - Cost of revenue includes government filing fees, fulfillment costs, customer care (including credentialed professionals), independent contractor costs, data center costs, amortization of acquired technology, depreciation, and credit/debit card fees[137] Gross profit and gross margin - Gross profit and margin are influenced by the mix of transaction and subscription revenue, with long-term expansion expected from automation and digitization[138] - Acquisitions can negatively impact gross margin[138] Operating expenses - Operating expenses primarily consist of sales and marketing, technology and development, general and administrative expenses, and gains/impairments on asset sales[139] Sales and marketing - Sales and marketing expenses include customer acquisition media costs (search engine, TV, social media), personnel costs, public relations, and business development[140] - These are expected to remain the largest operating expense category[141] Technology and development - Technology and development expenses cover personnel, consultants, depreciation, and overhead for product development, website/app maintenance, R&D, and infrastructure[142] - Excluding stock-based compensation, these are expected to remain consistent as a percentage of revenue[143] General and administrative - General and administrative expenses include compensation for executive and corporate personnel, professional fees, depreciation, and legal costs[144] - These are expected to decrease as a percentage of revenue over the longer term[145] Gain on sale of assets held for sale - This gain relates to the sale of the company's operational headquarters on March 31, 2025[146] Interest expense - Interest expense primarily consists of amortization of debt issuance costs related to the Revolving Facility[147] - It is expected to remain insignificant in the near term due to no outstanding indebtedness[147] Interest income - Interest income is primarily generated from investments in money market funds[148] Income taxes - Income tax provision includes current and deferred federal, state, and foreign income taxes[149] - The effective tax rate can fluctuate due to pre-tax income/loss, tax law changes, audit outcomes, and non-deductible expenses[150] Results of Operations Comparison of the Three Months Ended June 30, 2025 and 2024 Revenue Comparison (Three Months Ended June 30, in thousands) | Revenue Type | 2025 | 2024 | $ Change | % Change | | :------------- | :--- | :--- | :------- | :------- | | Transaction | $72,611 | $68,537 | $4,074 | 6% | | Subscription | $119,898 | $108,825 | $11,073 | 10% | | Total revenue | $192,509 | $177,362 | $15,147 | 9% | - Transaction revenue increased 6% due to $8.4 million from Formation Nation acquisition, partially offset by a decline in beneficial ownership information report revenue[155] - Subscription revenue increased 10% due to a 6% rise in compliance-related subscriptions and revenue from the 1-800 Accountant partnership[156] - Cost of revenue increased by $3.8 million (6%) due to higher filing fees and third-party fulfillment costs, partially offset by a decrease in payroll and related benefits[157][158] - Sales and marketing expenses increased by $9.5 million (16%) due to higher payroll (Formation Nation acquisition) and depreciation, partially offset by a decrease in customer acquisition marketing spend[160] - Technology and development expenses decreased by $4.2 million (16%) primarily due to a reduction in headcount[161] - General and administrative expenses increased by $10.3 million (39%) mainly due to an $11.3 million increase in stock-based compensation[162] - Other income, net, increased significantly due to a gain on the sale of an available-for-sale debt security (LegalVision Pty Ltd)[165] Comparison of the Six Months Ended June 30, 2025 and 2024 Revenue Comparison (Six Months Ended June 30, in thousands) | Revenue Type | 2025 | 2024 | $ Change | % Change | | :------------- | :--- | :--- | :------- | :------- | | Transaction | $139,464 | $134,854 | $4,610 | 3% | | Subscription | $236,155 | $216,722 | $19,433 | 9% | | Total revenue | $375,619 | $351,576 | $24,043 | 7% | - Transaction revenue increased 3% due to $14.3 million from Formation Nation acquisition, offset by a decline in beneficial ownership information report revenue[169] - Subscription revenue increased 9% due to a 6% rise in compliance-related subscriptions and the 1-800 Accountant partnership, partially offset by discontinuation of a tax offering[170] - Cost of revenue increased by $2.0 million (1%) due to higher filing fees (Formation Nation), third-party fulfillment, and depreciation, partially offset by decreased payroll and stock-based compensation[171] - Sales and marketing expenses increased by $17.1 million (15%) due to higher payroll (Formation Nation), stock-based compensation, customer acquisition marketing, and depreciation[173] - Technology and development expenses decreased by $6.8 million (14%) due to reduced payroll and headcount[174] - General and administrative expenses increased by $26.5 million (53%) primarily due to increased stock-based compensation[175] - A $14.3 million gain on sale of assets held for sale was recognized from the sale of the operational headquarters[176] - Other income, net, increased significantly due to the gain on the sale of an available-for-sale debt security (LegalVision Pty Ltd)[179] Liquidity and Capital Resources Overview - As of June 30, 2025, cash and cash equivalents were $217.0 million, an increase of $75.0 million from December 31, 2024, primarily from stock option exercises, asset sales, and operating activities, partially offset by the Formation Nation acquisition[181][182] - The company expects current cash, cash equivalents, and operating cash flows to meet operational needs for at least the next twelve months[182] - The stock repurchase program was increased by $100.0 million in May 2025, totaling $315.0 million authorized, with $129.6 million remaining available as of June 30, 2025[184] Borrowings (Revolving Facility) - The Revolving Facility, amended in July 2025 to $100.0 million and extended to July 14, 2030, had no outstanding borrowings as of June 30, 2025[185] - The facility includes covenants, such as a total net first lien leverage ratio not to exceed 4.50 to 1.00, tested quarterly if usage exceeds 35% of total commitments[191] Cash flows Summary of Cash Flows (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2025 | 2024 | | :----------------------------------- | :--- | :--- | | Net cash provided by operating activities | $89,842 | $61,440 | | Net cash used in investing activities | $(26,818) | $(19,351) | | Net cash provided by (used in) financing activities | $11,800 | $(148,981) | | Net increase (decrease) in cash and cash equivalents | $74,971 | $(106,924) | - Net cash provided by operating activities increased to $89.8 million in H1 2025, driven by net income adjusted for non-cash expenses ($62.9 million) and changes in operating assets/liabilities ($22.1 million), primarily deferred revenue growth[194] - Net cash used in investing activities was $26.8 million in H1 2025, mainly for the Formation Nation acquisition ($48.5 million) and property/equipment purchases ($16.9 million), partially offset by $37.1 million from asset sales[196] - Net cash provided by financing activities was $11.8 million in H1 2025, primarily from stock option exercises ($44.7 million), offset by common stock repurchases ($20.4 million) and tax withholdings ($11.2 million)[198] Material Cash Requirements - The company has non-cancelable vendor agreements requiring $26.9 million in payments over five years as of June 30, 2025[199] - Total minimum operating lease maturities are $16.3 million as of June 30, 2025, with $2.1 million maturing within six months[200] Non-GAAP Financial Measures Adjusted EBITDA and Adjusted EBITDA Margin - Adjusted EBITDA is a key performance measure used by management to evaluate financial performance, excluding interest, taxes, depreciation, amortization, other income/expense, stock-based compensation, and certain non-recurring items[202][203] Adjusted EBITDA and Margin (in thousands, except percentages) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Adjusted EBITDA | $38,965 | $28,912 | $75,977 | $56,814 | | Adjusted EBITDA margin | 20% | 16% | 20% | 16% | - Adjusted EBITDA increased by $10.1 million (QoQ) and $19.2 million (YoY) due to revenue growth, partially offset by increases in cost of revenue and operating expenses (excluding non-cash/non-recurring items)[206][207] Free cash flow - Free cash flow is a liquidity measure representing cash generated by operations after capital expenditures, used for strategic opportunities[208] Free Cash Flow Reconciliation (Six Months Ended June 30, in thousands) | Metric | 2025 | 2024 | | :----------------------------------- | :--- | :--- | | Net cash provided by operating activities | $89,842 | $61,440 | | Purchase of property and equipment | $(16,908) | $(19,351) | | Free cash flow | $72,934 | $42,089 | - Free cash flow increased from $42.1 million in H1 2024 to $72.9 million in H1 2025, driven by a $28.4 million increase in net cash from operating activities and a $2.4 million decrease in capital expenditures[210] Critical Accounting Estimates - There were no significant changes to critical accounting estimates during the three and six months ended June 30, 2025[211] Recent Accounting Pronouncements - Refer to Note 2 for information on accounting standards adopted and those not yet required to be implemented[212] Item 3. Quantitative and Qualitative Disclosures about Market Risk Discusses exposure to market risks, including interest rate, foreign currency, and inflation, and their financial impact - The company's interest rate risk is low due to no outstanding debt as of June 30, 2025, but would be subject to fluctuations if it draws on its Revolving Facility[214][215] - Foreign currency exchange risk is related to revenue, expenses, and intercompany balances denominated in GBP, but the transaction gain was immaterial for the six months ended June 30, 2025[216][217] - Inflation has not had a material effect on the business to date, but sustained inflationary pressures could adversely impact costs, small business success, and new business formations[218] Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures, with no material changes in internal control over financial reporting - Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2025[219] - There were no changes in internal control over financial reporting during the three months ended June 30, 2025, that materially affected or are reasonably likely to materially affect internal control over financial reporting[220] Part II. OTHER INFORMATION Item 1. Legal Proceedings States the company is not involved in any material legal proceedings or aware of any significant pending litigation - The company is not a party to any material legal proceedings and is unaware of any pending or threatened litigation that could have a material adverse effect on its results of operations, cash flows, and financial condition[222] Item 1A. Risk Factors Outlines significant risks and uncertainties affecting business, financial condition, operations, growth, and stock price Risks Relating to Our Business and Industry - The business heavily relies on business formations, which are subject to unpredictable declines due to macroeconomic factors, competition, and regulatory changes[224] - Future performance depends on converting transactional customers to subscribers and retaining existing subscribers, with subscription revenue growth rate potentially decelerating[225] - Failure to effectively manage growth, including integrating new acquisitions like Formation Nation, could adversely impact service quality, customer satisfaction, and costs[227] - The legal solutions market is highly competitive, with risks from law firms, online services, and new entrants using technologies like generative AI[239][240] - Incorporating generative AI into offerings presents compliance and reputational risks due to potential accuracy issues, biases, and UPL allegations[245] - Reliance on third-party providers (government agencies, independent attorneys, cloud infrastructure like AWS) for fulfillment and operations exposes the company to risks from service disruptions or failures[256][257][258] Risks Relating to Our Financial Condition, Indebtedness and Capital Requirements - Revenue recognition over subscription terms means downturns in sales may not be immediately reflected, and growth in new customers can lead to higher costs and lower revenue in earlier periods[273] - Inaccuracies in internally tracked financial and operating metrics (e.g., transactions, subscription units, ARPU) could harm reputation and business[274][275] - Past material weaknesses in internal control over financial reporting, if recurring, could lead to loss of investor confidence and regulatory sanctions[276][279] - The revolving credit facility imposes covenants and restrictions that could limit operational and financial flexibility, with potential for default if not met[280][281][283] - The ability to use Net Operating Loss (NOL) carryforwards may be limited by ownership changes (Section 382) or state-level restrictions[286] Risks Relating to Legal, Compliance and Regulatory Matters - The business is subject to complex and evolving U.S. and foreign laws and regulations, including those related to labor, advertising, consumer protection, and subscription billing, with non-compliance potentially leading to regulatory inquiries, claims, and significant costs[293][294][297] - The Arizona Alternative Business Structure (ABS) subsidiary may not fully insulate the company from unauthorized practice of law (UPL) claims and is subject to restrictions under the Arizona Code of Judicial Administration, including ownership limits[298][299][300][301] - Mischaracterizing independent professionals (attorneys, accountants) or contractors as non-employees could lead to employment and withholding liabilities, penalties, and UPL/CPL allegations[302][303] - Compliance with U.S. and foreign privacy and data security requirements (e.g., CCPA, GDPR) is costly and complex, with potential for significant fines, penalties, and reputational harm from non-compliance or data breaches[304][306][309] Risks Relating to Intellectual Property - The use of open-source software (OSS) could obligate the company to release proprietary source code or license it under open-source terms, leading to potential litigation or increased development costs[321][322] - Inadequate protection of intellectual property (trademarks, copyrights, trade secrets) could diminish brand value, allow competitors to mimic services, and adversely affect business[323] Risks Relating to Ownership of Our Common Stock - The market price of common stock may be volatile due to fluctuations in revenue, strategic changes, competition, analyst expectations, and broader macroeconomic conditions[324][328] - Sales of a substantial number of outstanding shares by existing holders could depress the market price and impair the ability to raise capital[326] - Concentrated ownership by executive officers, directors, and affiliates (approximately 20%) may limit new investors' influence on significant corporate decisions[327] - Provisions in corporate charter documents and Delaware law could make an acquisition more difficult and prevent stockholders from replacing current management[330][331] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities Details the company's stock repurchase program and activity during the three months ended June 30, 2025 - The board approved a $100.0 million increase to the stock repurchase program in May 2025, bringing the total authorized to $315.0 million with no fixed expiration[339] Stock Repurchase Activity (Three Months Ended June 30, 2025) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans | | :----------------------------------- | :------------------------------- | :--------------------------- | :----------------------------------------------------------------------- | | April 1, 2025 through April 30, 2025 | — | $— | $149,986,329 | | May 1, 2025 through May 31, 2025 | 1,396,771 | $9.40 | $136,858,158 | | June 1, 2025 through June 30, 2025 | 791,205 | $9.21 | $129,567,711 | | Total | 2,187,976 | $9.33 | | Item 3. Defaults Upon Senior Securities States there were no defaults upon senior securities - None[341] Item 4. Mine Safety Disclosures Indicates mine safety disclosures are not applicable to the company - Not applicable[341] Item 5. Other Information Discloses Rule 10b5-1 trading arrangements adopted by the Chief Legal Officer and COO/CFO - Nicole Miller (Chief Legal Officer) adopted a Rule 10b5-1 trading arrangement for up to 98,874 shares, with sales permitted from August 18, 2025, to November 21, 2025[341] - Noel Watson (COO and CFO) adopted a Rule 10b5-1 trading arrangement for up to 241,816 shares, with sales permitted from August 18, 2025, to August 18, 2026[342] Item 6. Exhibits Lists exhibits filed or furnished as part of the Quarterly Report on Form 10-Q - Key exhibits include the Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Amendment No. 2 to the Revolving Facility, CEO and CFO certifications (31.1, 31.2, 32.1), and Inline XBRL financial statements[343] Signatures Contains signatures of the registrant's principal executive and financial officers, certifying the report - The report is signed by Jeffrey Stibel, Chief Executive Officer, and Noel Watson, Chief Financial Officer, on August 7, 2025[349]