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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the three months ended September 30, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from   to
Commission file number 001-35618
LegalZoom.com, Inc.
(Exact name of registrant as specified in its charter)
___________________________________
Delaware
95-4752856
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
101 North Brand Boulevard,
11th Floor, Glendale, California 91203

(Address of Principal Executive Offices, including Zip code)
(323) 962-8600
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareLZ
The Nasdaq Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No   
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
Smaller reporting company
o
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No  
As of November 4, 2022, the registrant had outstanding 192,649,274 shares of common stock, $0.001 par value per share, outstanding.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to statements regarding our future results of operations and financial position, industry and business trends, stock compensation, business strategy, plans, market growth and our objectives for future operations.
The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those factors discussed below under “Summary of Risk Factors” and in Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, as such risk factors may be amended, updated or superseded from time to time by our subsequent filings with the Securities and Exchange Commission, or SEC. The forward-looking statements in this Quarterly Report on Form 10-Q are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.
Summary of Risk Factors
Our business involves significant risks and you are urged to carefully consider the risks discussed under Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q prior to making an investment in us. These risks include, but are not limited to, the following:
Our recent growth may not be indicative of our future growth and, if we continue to grow, we may not be able to manage our growth effectively.
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 we may not be able to maintain profitability.
If we fail to provide high-quality services, customer care and customer experience and add new services that meet our customers’ expectations, we may not be able to attract and retain customers.
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 business primarily depends on business formations and fluctuations or declines in the number of business formations may adversely affect our business.
Our subscription services are highly dependent upon our transaction products, and if we are unable to maintain or attract subscribers, or convert our transactional customers to subscribers, our business, results of operations, financial condition and future prospects may be adversely affected.
Our business depends substantially on our subscribers renewing their subscriptions with us and expanding their use of our platform, but we cannot accurately predict renewal or expansion rates.
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Table of Contents
Our business depends on our ability to drive additional purchases and cross-sell to paying customers and our business, results of operations, financial condition or future prospects may be harmed if we are not successful.
The legal solutions market is highly competitive and our failure to compete successfully could materially and adversely affect our business, results of operations, financial condition and future prospects.
Our business depends on our brand and reputation, which could be adversely affected by numerous factors.
If our marketing efforts are unsuccessful, our ability to attract new customers or retain existing customers may be adversely affected, which may adversely affect our business, results of operations, financial condition and future prospects.
We depend on top talent, including our senior management team, to grow and operate our business, and if we are unable to hire, retain or motivate our employees, including as a result of our remote-first workforce policy, we may not be able to grow or operate 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.
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.
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, tax preparation and other related matters, and any failure or perceived failure by us to comply with applicable laws and regulations may subject us to regulatory inquiries, claims, suits, and prosecutions, as well as changes in our service offerings, potential liabilities, or additional costs.
Note Regarding Third-Party Information
This Quarterly Report on Form 10-Q includes market data and certain other statistical information and estimates that are based on reports and other publications from industry analysts, market research firms, and other independent sources, as well as management's own good faith estimates and analyses. We believe these third-party reports to be reputable, but have not independently verified the underlying data sources, methodologies, or assumptions. The reports and other publications referenced are generally available to the public and were not commissioned by LegalZoom.com, Inc. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information.




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Table of Contents
Part I
Item 1. Condensed Consolidated Financial Statements (Unaudited)
LegalZoom.com, Inc.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except par values)
September 30, 2022December 31, 2021
Assets
Current assets:
Cash and cash equivalents
$211,812 $239,297 
Accounts receivable, net
13,578 10,635 
Prepaid expenses and other current assets
16,624 16,589 
Current assets held for sale22,722  
Total current assets
264,736 266,521 
Property and equipment, net
29,012 47,013 
Goodwill
63,184 59,910 
Intangible assets, net
13,552 16,031 
Operating lease right-of-use assets 11,796 — 
Deferred income taxes
27,473 27,653 
Available-for-sale debt securities
1,183 1,122 
Other assets
12,877 12,765 
Total assets
$423,813 $431,015 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
$25,805 $31,788 
Accrued expenses and other current liabilities
59,916 50,817 
Deferred revenue
168,705 146,364 
Operating lease liabilities2,054 — 
Total current liabilities
256,480 228,969 
Operating lease liabilities, non-current
9,568 — 
Deferred revenue
1,013 1,554 
Other liabilities
2,926 2,941 
Total liabilities
269,987 233,464 
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.001 par value; 100,000 shares authorized at September 30, 2022, none issued or outstanding at September 30, 2022 and December 31, 2021
  
Common stock, $0.001 par value; 1,000,000 shares authorized; 193,848 shares and 198,084 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively
193 198 
Additional paid-in capital
1,015,068 947,160 
Accumulated deficit
(865,933)(748,012)
Accumulated other comprehensive income (loss)
4,498 (1,795)
Total stockholders’ equity
153,826 197,551 
Total liabilities and stockholders’ equity
$423,813 $431,015 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)

Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Revenue$154,416 $147,879 $472,492 $432,943 
Cost of revenue50,050 47,267 163,383 141,086 
Gross profit104,366 100,612 309,109 291,857 
Operating expenses:
Sales and marketing66,145 72,572 215,964 209,364 
Technology and development17,457 26,865 51,613 65,790 
General and administrative30,103 28,192 88,560 75,202 
Impairment of long-lived and other assets237 493 237 872 
Total operating expenses113,942 128,122 356,374 351,228 
Loss from operations(9,576)(27,510)(47,265)(59,371)
Interest income (expense), net535 (9,957)511 (27,923)
Other (expense) income, net(2,536)(368)(6,102)300 
Loss on debt extinguishment (7,748) (7,748)
Loss before income taxes(11,577)(45,583)(52,856)(94,742)
(Benefit from) provision for income taxes(1,469)(5,908)1,040 (6,849)
Net loss$(10,108)$(39,675)$(53,896)$(87,893)
Net loss per share attributable to common stockholders—basic and diluted:(0.05)(0.20)(0.27)(0.59)
Weighted-average shares used to compute net loss per share attributable to common stockholders—basic and diluted:194,906196,351196,984149,207
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Net loss$(10,108)$(39,675)$(53,896)$(87,893)
Other comprehensive income, net of tax:
Change in foreign currency translation adjustments2,644 1,452 6,255 1,101 
Change in available-for-sale debt securities due to unrealized gains 72 38 44 
Change in unrealized gain on cash flow hedges:
Unrealized (loss) gain on interest rate cap and swaps (903) 1,448 
Reclassification of prior hedge effectiveness and losses from interest rate cap and swaps to net loss   2,315 
Reclassification to net loss upon discontinuance of interest rate swaps and prior hedge effectiveness 7,295  7,295 
Total net changes in cash flow hedges 6,392  11,058 
Total other comprehensive income2,6447,9166,29312,203
Total comprehensive loss$(7,464)$(31,759)$(47,603)$(75,690)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In thousands)
 Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
(Loss) Income
Total
Stockholders’
Equity
 SharesAmount
Balance at December 31, 2021198,084 $198 $947,160 $(748,012)$(1,795)$197,551 
Issuance of common stock upon exercise of stock options202 — 225 — — 225 
Issuance of common stock upon vesting of restricted stock awards 392 — — — — — 
Stock-based compensation— — 22,346 — — 22,346 
Repurchased common stock (79)— — (1,102)— (1,102)
Other comprehensive income— — — — 1,440 1,440 
Net loss— — — (30,609)— (30,609)
Balance at March 31, 2022198,599 $198 $969,731 $(779,723)$(355)$189,851 
Issuance of common stock upon exercise of stock options and ESPP1741,2621,262
Issuance of common stock upon vesting of restricted stock awards2681(1) 
Shares surrendered for settlement of minimum statutory tax withholdings(1)(30)(30)
Stock-based compensation23,59623,596
Repurchased common stock (2,961)(3)(38,050)(38,053)
Other comprehensive income2,2092,209
Net loss(13,179)(13,179)
Balance at June 30, 2022196,079 $196 $994,558 $(830,952)$1,854 $165,656 
Issuance of common stock upon exercise of stock options and ESPP46 — 195 — — 195 
Issuance of common stock upon vesting of restricted stock awards350 — — — — — 
Shares surrendered for settlement of minimum statutory tax withholdings(2)— (11)— — (11)
Stock-based compensation— — 20,326 — — 20,326 
Repurchased common stock(2,625)(3)— (24,873)— (24,876)
Other comprehensive income— — — — 2,644 2,644 
Net loss— — — (10,108)— (10,108)
Balance at September 30, 2022193,848 $193 $1,015,068 $(865,933)$4,498 $153,826 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements







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LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)(continued)
(In thousands)
 Series A Redeemable
Convertible Preferred
Stock
Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’ (Deficit) Equity
 SharesAmountSharesAmount
Balance at December 31, 202023,081 $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 — — — — — 
Shares surrendered for settlement of minimum statutory tax withholdings— — (9)— (100)— — (100)
Stock-based compensation— — — — 3,799 — — 3,799 
Net issuance and repayments of full recourse notes receivable— — — — 44 — — 44 
Special dividends— — — — (23)— — (23)
Other comprehensive income— — — — — — 2,964 2,964 
Net loss— — — — — (9,823)— (9,823)
Balance at March 31, 202123,081 $70,906 125,299 $126 $106,288 $(649,171)$(10,863)$(553,620)
Issuance of common stock upon exercise of stock options— — 213 — 136 — — 136 
Issuance of common stock upon vesting of restricted stock awards— — 32 — — — — — 
Shares surrendered for settlement of minimum statutory tax withholdings— — (6)— (109)— — (109)
Stock-based compensation— — — — 44,810 — — 44,810 
Special dividends— — — — (16)— — (16)
Other comprehensive income— — — — — — 1,323 1,323 
Net loss— — — — — (38,395)— (38,395)
Balance at June 30, 202123,081 $70,906 125,538 $126 $151,109 $(687,566)$(9,540)$(545,871)
Issuance of common stock upon exercise of stock options— — 82 — 93 — — 93 
Issuance of common stock upon vesting of restricted stock awards— — 112 — — — — — 
Shares surrendered for settlement of minimum statutory tax withholdings— — (49)— (1,669)— — (1,669)
Stock-based compensation— — — — 38,150 — — 38,150 
Conversion of redeemable convertible preferred stock to common stock in connection with initial public offering(23,081)(70,906)46,162 46 70,859 — — 70,905 
Issuance of common stock in connection with initial public offering, net of underwriting discounts and commissions— — 21,989 22 581,811 — — 581,833 
Private placement of common stock, net of underwriting discounts and commissions— — 3,214 3 85,047 — — 85,050 
Deferred offering costs— — — — (5,636)— — (5,636)
Special dividends— — — — (52)— — (52)
Other comprehensive income— — — — — — 7,916 7,916 
Net loss— — — — — (39,675)— (39,675)
Balance at September 30, 2021 $ 197,048 $197 $919,712 $(727,241)$(1,624)$191,044 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended September 30,
20222021
Cash flows from operating activities
Net loss$(53,896)$(87,893)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization16,187 11,604 
Amortization of right-of-use assets1,290  
Amortization of debt issuance costs170 1,335 
Amortization of prior hedge effectiveness 3,095 
Impairment of other equity securities170  
Impairment of long-lived assets237 872 
Loss on debt extinguishment 7,955 
Discontinuance of interest rate swaps and write-off of prior hedge effectiveness 8,688 
Stock-based compensation64,490 86,725 
Deferred income taxes166 (7,218)
Change in fair value of financial guarantee (150)
Change in fair value of derivative instruments 392 
Change in fair value of other equity security (1,031)
Change in fair value of contingent consideration(150) 
Unrealized foreign exchange loss 5,958 1,002 
Other(1)4 
Changes in operating assets and liabilities, net of effects of business combination:
Accounts receivable(2,902)(3,040)
Prepaid expenses and other current assets(560)(5,562)
Other assets(864)(2,283)
Accounts payable(6,417)14,635 
Accrued expenses and other liabilities7,606 7,416 
Operating lease liabilities(1,599) 
Income tax payable22 (368)
Deferred revenue22,108 23,978 
Net cash provided by operating activities52,015 60,156 
Cash flows from investing activities
Acquisition, net of cash acquired(2,532) 
Proceeds from acquisition working capital adjustment307  
Purchase of property and equipment(16,441)(8,500)
Payment upon extinguishment of interest rate swaps (3,283)
Net cash used in investing activities(18,666)(11,783)
Cash flows from financing activities
Repayment of capital lease obligations (24)
Payment of debt issuance costs (767)
Repayment of 2018 Term Loan (524,300)
Repayment of hybrid debt (1,332)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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LegalZoom.com, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows (continued)
(In thousands)
Nine Months Ended September 30,
20222021
Payment upon extinguishment of hybrid debt (9,774)
Payment of contingent consideration (600)(1,049)
Payment of special dividends (115)
Proceeds from issuance of common stock in initial public offering, net of underwriting discounts and commissions 581,833 
Proceeds from private placement, net of underwriting discounts and commissions 85,050 
Payment of stock issuance costs (5,634)
Repurchase of common stock(61,736)(1,462)
Shares surrendered for settlement of minimum statutory tax withholding (41) 
Proceeds from issuance of stock under employee stock plans1,682 412 
Net cash (used in) provided by financing activities(60,695)122,838 
Effect of exchange rate changes on cash and cash equivalents (139)23 
Net (decrease) increase in cash and cash equivalents, and restricted cash equivalents (27,485)171,234 
Cash and cash equivalents, and restricted cash equivalents, at beginning of the period239,297 139,470 
Cash and cash equivalents at end of the period$211,812 $310,704 
Non-cash investing and financing activities:
Conversion of Series A redeemable convertible preferred stock into common stock in connection with initial public offering 70,906 
Purchase of property and equipment included in accounts payable and accrued expenses and other current liabilities1,124 486 
Change in fair value of hedged interest rate swaps and interest rate cap (5,817)
Capitalized stock-based compensation1,779 35 
Right-of-use assets under operating leases13,165  
Contingent consideration for acquired business850  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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LegalZoom.com, Inc.
Notes to Unaudited Condensed 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 owned subsidiaries, 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 and San Antonio, Texas, Beaverton, Oregon 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. Our 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, our offerings include ongoing compliance and tax advice and filings, trademark filings, and estate plans. Additionally, we have insights into our customers and leverage our offerings as a channel to introduce small businesses to leading brands in our partner ecosystem, solving even more of their business needs.
Initial Public Offering
The registration statement related to our initial public offering, or IPO, was declared effective on June 29, 2021, and our common stock began trading on the Nasdaq Global Select Market on June 30, 2021. On July 2, 2021, we completed our IPO for the sale of 19,121,000 shares of our common stock, $0.001 par value per share at an offering price of $28.00 per share, for proceeds of $505.9 million, net of underwriting discounts and commissions. In addition, we sold 2,868,150 shares of our common stock for net proceeds of $75.9 million pursuant to the full exercise of the underwriter’s option to purchase additional shares in connection with the IPO. In addition, on July 2, 2021, we sold 3,214,285 shares of our common stock in a private placement with an existing related party stockholder for proceeds of $85.0 million, net of underwriting discounts and commissions. We raised aggregate proceeds of $666.9 million from our IPO and private placement after deducting underwriting discounts and commissions. We incurred stock issuance costs of $5.6 million. Proceeds raised from our IPO were used to repay the full outstanding balance of $521.6 million on our prior 2018 term loan, or 2018 Term Loan.
Upon the completion of our IPO, 23,081,080 outstanding shares of redeemable convertible preferred stock with a carrying value of $70.9 million converted into 46,162,160 shares of common stock. Following the completion of the IPO, we have one class of authorized and outstanding common stock. Immediately upon the completion of our IPO, we filed an Amended and Restated Certificate of Incorporation, which authorized a total of 1,000,000,000 shares of common stock, $0.001 par value per share and 100,000,000 shares of preferred stock, par value $0.001 per share.
Note 2. Summary of Significant Accounting Policies
A summary of the significant accounting policies we follow in the preparation of the accompanying unaudited condensed consolidated financial statements is set forth below.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the related notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2021. The December 31, 2021 unaudited condensed consolidated balance sheet was derived from our audited consolidated financial statements as of that date. Our unaudited condensed consolidated financial statements include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of the unaudited condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. There have been no significant changes in accounting policies during the three and nine months ended September 30, 2022 from those disclosed in the annual consolidated financial statements for the year ended December 31, 2021 and the related notes, except as noted below in the Recently Adopted Accounting Pronouncements.
The operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results expected for the full year ending December 31, 2022.
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 consolidated financial statements and accompanying notes. Estimates are used for, among other things, revenue recognition, sales allowances and credit reserves, available-for-sale debt securities, valuation of long-lived
11


assets and goodwill, income taxes, commitments and contingencies, valuation of assets and liabilities acquired in business combinations and stock-based compensation. Actual results could differ materially from those estimates.
The extent to which COVID-19 continues to impact 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 September 30, 2022 and through the date of the issuance of these unaudited condensed consolidated financial statements. The accounting matters assessed included, but were not limited to, the carrying value of goodwill and other long-lived assets. While there was not a material impact as a result of COVID-19 on our unaudited condensed consolidated financial statements at and for the three and nine months ended September 30, 2022, 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.
Significant accounting policies
Significant accounting policies are detailed in "Note 2: Summary of Significant Accounting Policies" of our Annual Report on Form 10-K for the year ended December 31, 2021. On January 1, 2022, we adopted Financial Accounting Standards Board, or FASB, Accounting Standard Codification No. 842, Leases, or ASC 842, with application to leases that existed as of the adoption date.
Segment and Geographic Information
Our Chief Executive Officer, as the Chief Operating Decision Maker, organizes our company, manages resource allocations, and measures performance on the basis of one operating segment.
Revenue outside of the U.S., based on the location of the customer, represented less than 1% of our unaudited consolidated revenue for each of the three and nine months ended September 30, 2022 and 2021. Our property and equipment located outside of the U.S. was less than 1% of our consolidated property and equipment as of September 30, 2022 and December 31, 2021.
Foreign Currency
The British Pound Sterling 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) as a component of our unaudited consolidated statements of redeemable convertible preferred stock and stockholders’ equity (deficit). We recognized foreign currency transaction losses of $2.6 million and $1.4 million during the three months ended September 30, 2022 and 2021, respectively, and losses of $6.0 million and $1.0 million during the nine months ended September 30, 2022 and 2021, respectively.
Concentrations of Credit Risk
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 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.
Due to a large and diverse customer base, no individual customer represented more than 1% of total revenue for the three and nine months ended September 30, 2022 and 2021. At September 30, 2022 and December 31, 2021, there were no customers with an outstanding balance of 10% or more of our accounts receivable balance.
Held for sale
We classify long-lived assets or asset groups we plan to sell as held for sale on our consolidated balance sheets only after certain criteria have been met including: (i) management has the authority and commits to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and the plan to sell the asset have been initiated, (iv) the sale of the asset is probable within 12 months, (v) the asset is being actively marketed at a reasonable sales price relative to its current fair value, and (vi) it is unlikely that the plan
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to sell will be withdrawn or that significant changes to the plan will be made. We record assets or asset groups held for sale at the lower of their carrying value or fair value less costs to sell.
Leases
Financial information related to periods prior to adoption will be as originally reported under ASC No. 840, Leases. On January 1, 2022, we recorded operating lease right-of-use, or ROU assets of $5.7 million and operating lease liabilities of $5.9 million. The difference between the leased assets and lease liabilities represents the existing deferred rent liabilities balance at adoption, resulting from historical straight-line recognition of operating leases, which was reclassified upon adoption to reduce the measurement of the leased assets. The adoption of the standard did not have a material impact on our stockholders’ equity, results of operations, or cash flows.
The new standard provides several optional practical expedients in transition. We elected the package of practical expedients permitted under the transition guidance, which eliminates the requirement to reassess whether a contract contains a lease and lease classification.
We have also made accounting policy elections, including a short-term lease exception policy, permitting us to not apply the recognition requirements of this standard to short-term leases, which are leases with expected terms of 12 months or less, and an accounting policy to account for lease and certain non-lease components as a single component for certain classes of assets. Additionally, we used the portfolio approach when applying the discount rate selected based on the dollar amount and term of the obligation.
We determined whether an arrangement is a lease, or contains a lease, at inception if we are able to identify an asset and can conclude we have the right to control the identified asset for a period of time. Leases are included in operating lease ROU assets and operating lease liabilities in the accompanying unaudited condensed consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet.
ROU assets represent our right to control an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use the incremental borrowing rate based on the information available at commencement date in determining the discount rate used to present value lease payments. We used the incremental borrowing rate on January 1, 2022 for operating leases that commenced on or prior to that date. The incremental borrowing rate used is estimated based on what we would be required to pay for a collateralized loan over a similar term. Our leases typically do not include any residual value guarantees, bargain purchase options, or asset retirement obligations.
Our lease terms are only for periods in which we have enforceable rights. A lease is no longer enforceable when both the lessee and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty. Our lease terms are impacted by options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We generally use the base, non-cancelable lease term when determining the lease assets and liabilities.
Our agreements may contain variable lease payments. We include variable lease payments that depend on an index or a rate and exclude those which depend on facts or circumstances occurring after the commencement date, other than the passage of time.
Revenue Recognition
We derive our revenue 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 is net of cancellations, promotional discounts and sales allowances.
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 U.K. We generally recognize revenue from our subscriptions ratably over the subscription term. Subscription terms generally range from thirty days to one year. Subscription revenue includes the value allocated to bundled free-trials for our subscription services and is net of promotional discounts, cancellations, sales allowances and credit reserves and payments to third-party service providers such as legal plan law firms and tax service providers.
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.
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Revenue from our transaction, subscription and partner revenue is as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Transaction
$57,550 $66,873 $188,166 $201,621 
Subscription
91,397 73,317 267,069 208,194 
Partner
5,469 7,689 17,257 23,128 
Total revenue
$154,416 $147,879 $472,492 $432,943 
Recent Accounting Pronouncements
Under the Jumpstart our Business Startups Act, or JOBS Act, we currently 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, which we expect to occur on December 31, 2022, 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 February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We adopted this guidance effective January 1, 2022. Refer to Note 8 for further details.
In March 2020, the FASB issued Accounting Standards Update, or ASU No. 2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting, or Topic 848, that provides optional relief to applying reference rate reform to contracts, hedging relationships, and other transactions that reference the LIBOR, which has been discontinued as of 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. Topic 848 is effective immediately and may be applied through December 31, 2022. We have adopted the provisions of Topic 848 and the adoption did not have a material impact to our unaudited condensed consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit losses: Measurement of Credit Losses on Financial Instruments (Topic 326), or Topic 326, 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. Based upon our current filing status, Topic 326 is effective for our annual reporting period beginning on January 1, 2023. We are currently evaluating the impact of the adoption of Topic 326 on our consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. This standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation. Based upon our current filing status, the amendments are effective for the reporting period beginning on January 1, 2023, including interim periods within those fiscal years. We are currently evaluating the impact of the adoption on our consolidated financial statements.
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement—Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (Topic 820), or Topic 820, which clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. Based upon our current filing status, the amendments are effective for fiscal years, beginning after December 15, 2023. We are currently evaluating the impact of the adoption on our consolidated financial statements.
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Note 3. Other Financial Statement Information
Accounts Receivable
Changes in the allowance consisted of the following (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Beginning balance$4,508 $5,114 $4,060 $5,256 
Add: amounts recognized as a reduction of revenue2,099 1,884 6,292 4,911 
Add: bad debt expense recognized in general and administrative expense2 146 142 177 
Less: write-offs, net of recoveries(2,190)(2,415)(6,075)(5,615)
Ending balance$4,419 $4,729 $4,419 $4,729 
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):
September 30, 2022December 31, 2021
Prepaid expenses$11,377 $10,968 
Deferred cost of revenue2,029 1,819 
Capitalized cloud computing development costs1,016 867 
Other current assets2,202 2,935 
Total prepaid expenses and other current assets$16,624 $16,589 
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
September 30, 2022December 31, 2021
Accrued payroll and related expenses$21,574 $21,858 
Accrued vendor payables16,557 18,239
Accrued advertising8,543 426
Sales allowances4,287 4,862
Accrued sales, use and business taxes3,745 2,678
Other5,210 2,754
Total accrued expenses and other current liabilities$59,916 $50,817 
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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 September 30,Nine Months Ended September 30,
2022202120222021
Cost of revenue$1,966 $1,403 $6,220 $4,479 
Sales and marketing1,754 1,401 5,508 4,199 
Technology and development694 538 2,112 1,709 
General and administrative840 433 2,347 1,217 
Total depreciation and amortization expense$5,254 $3,775 $16,187 $11,604 
Deferred revenue
Deferred revenue as of September 30, 2022 and December 31, 2021 was $