Item 1A. Risk Factors
ITEM 1A. RISK FACTORS.
Our significant business risks are described in Part I, Item 1A “Risk Factors” in our 2021 Annual Report, which was filed with the SEC on March 1, 2022, and in our other filings with the SEC. The risk factors described in our filings with the SEC and other information may not describe every risk facing the Company. There have been no material changes in our risk factors from those disclosed in our 2021 Annual Report, except as discussed below:
Risk Factor Relating to the State Farm Strategic Investment
Our new strategic relationship with State Farm may fail to achieve its anticipated financial, strategic and other benefits and may affect our relationships with other insurance companies, which could adversely affect our business.
In September 2022, we entered into a strategic relationship with State Farm with the goal of expanding our customer base by developing integrated solutions for State Farm’s customers. As part of the strategic relationship, in October 2022, we entered into the State Farm Development Agreement, pursuant to which State Farm committed up to $300 million to fund product and technology innovation, customer growth, and marketing initiatives with us. Subject to the terms of the State Farm Development Agreement, we have agreed not to enter into any development, marketing, distribution or other arrangement with certain competitors of State Farm and to refrain from developing, marketing, distributing, or making available to certain competitors of State Farm any products or services developed in connection with the State Farm Development Agreement. If we fail to successfully develop products and services that are utilized by State Farm’s customer base pursuant to the State Farm Development Agreement, we may not achieve or realize the anticipated financial, strategic and other benefits of the strategic relationship with State Farm, and our growth prospects and our business, financial condition, results of operations, and cash flows could be materially adversely affected. Subject to termination rights related to breach and change of control, the State Farm Development Agreement has an initial term of three years from October 13, 2022.
It has been common practice in the insurance industry to provide a reduction in rates for policies written on homes that have monitored security systems. This practice benefits our business. As a result of our strategic relationship with State Farm, other insurance companies may favor our competitors or otherwise modify their practices. Any such actions could adversely affect customer acquisition or increase our attrition rates. In either case, the benefits we anticipate from our strategic relationship with State Farm may fail to materialize and our growth prospects and our business, financial condition, results of operations, and cash flows could be materially adversely affected.
In addition, our strategic relationship with State Farm has resulted in State Farm becoming one of our largest shareholders. Failure to realize the anticipated financial, strategic and other benefits of the strategic relationship with State Farm, as well as any sales of our common stock by State Farm, or the perception that such sales may occur, may adversely affect the market price of our common stock.
Risk Factor Relating to Material Weakness
We determined that our DCPs were ineffective as of September 30, 2022. A failure to maintain effective ICFR or DCPs could impact our ability to accurately and timely report our financial results and other material disclosures or otherwise cause us to fail to meet our reporting obligations, which could have a material adverse effect on our operations, investor confidence in our business, and the trading prices of our securities.
We determined that our DCPs were not effective as of September 30, 2022 as a result of the material weakness discussed in Part I, Item 4 of this Amended Third Quarter 2022 Quarterly Report. As of the date of this Amended Third Quarter 2022 Quarterly Report, this material weakness has not been remediated and accordingly our DCPs and ICFR remain ineffective. Management is actively engaged in the planning for, and implementation of, remediation efforts to address our material weakness but there can be no assurance those efforts will be successful. Refer to Part I, Item 4 for further details of the material weakness and remediation efforts.
A material weakness is a deficiency, or a combination of deficiencies, in ICFR such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
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As such, if we do not remediate this material weakness in a timely manner, or if additional material weaknesses in our ICFR are discovered, they may adversely affect our ability to record, process, summarize and report financial information timely and accurately and, as a result, our financial statements may contain material misstatements or omissions. Additionally, our internal control environment and remediation efforts do not provide absolute assurance with regard to timely detecting or preventing control deficiencies and thus do not insulate us from any failure to meet our financial reporting obligations.
It is possible that additional control deficiencies could be identified by our management or by our independent registered public accounting firm in the future or may occur without being identified. Such a failure could require us to incur the expense of remediation, result in regulatory scrutiny, investigations or enforcement actions, cause investors to lose confidence in our reported financial condition and have a negative effect on the trading price of our common stock, lead to a default under our indebtedness, and otherwise have a material adverse effect on our business, financial condition, results of operations, and cash flows.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.