☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
March 31, 2021
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
210 Broadway Cambridge, Massachusetts | 02139 | ||
(Address of principal executive offices) | (Zip Code) |
☐☐☒ No ☒and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation (§and post such files). Yes ☒ No ☐Large accelerated filer ☐☒ Accelerated filer ☐ Non-accelerated filer ☒ (Do not check if a smaller reporting company)☐ Smaller reporting company ☐ Emerging growth company ☒☐
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PART I. | ||||||||||
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Item 4. | ||||||||||
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PART II. | ||||||||||
Item 1A. | 7 | |||||||||
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Cautionary Note Regarding Forward-Looking Statements
our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses, cash flows and ability to achieve, and maintain, future profitability;
our ability to attract and retain consumers and insurance providers using our marketplace;
our ability to develop new and enhanced products and services to attract and retain consumers and insurance providers, and our ability to successfully monetize them;
our anticipated growth and growth strategies and our ability to effectively manage that growth;
our ability to maintain and build our brand;
our reliance on our third-party service providers;
our ability to expand internationally;
the impact of competition in our industry and innovation by our competitors;
our ability to hire and retain necessary qualified employees to expand our operations;
our ability to adequately protect our intellectual property;
our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business;
the increased expenses and administrative workload associated with being a public company;
failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud;
the future trading prices of our Class A common stock; and
our use of proceeds from our initial public offering.
While we may elect to update these forward-looking statements at some point in the future, whether as a result of any new information, future events, or otherwise, we have no current intention of doing so except to the extent required by applicable law.
Item 1. Condensed Financial Statements (Unaudited)
EVERQUOTE, INC.
(Unaudited)
(
June 30, 2018 | December 31, 2017 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 2,382 | $ | 2,363 | ||||
Accounts receivable | 17,719 | 14,694 | ||||||
Prepaid expenses and other current assets | 1,972 | 593 | ||||||
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Total current assets | 22,073 | 17,650 | ||||||
Property and equipment, net | 3,028 | 2,129 | ||||||
Deferred initial public offering costs | 3,712 | — | ||||||
Other assets | 728 | 740 | ||||||
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Total assets | $ | 29,541 | $ | 20,519 | ||||
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Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Deficit | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 17,991 | $ | 11,894 | ||||
Accrued expenses and other current liabilities | 3,028 | 1,775 | ||||||
Deferred revenue | 1,152 | 986 | ||||||
Current portion of long-term debt, net of discount | — | 361 | ||||||
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Total current liabilities | 22,171 | 15,016 | ||||||
Deferred rent, net of current portion | 1,185 | 860 | ||||||
Long-term debt, net of current portion | 6,983 | 4,250 | ||||||
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Total liabilities | 30,339 | 20,126 | ||||||
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Commitments and contingencies (Note 9) | ||||||||
Redeemable convertible preferred stock (Series A, B andB-1), $0.001 par value; 1,867,886 shares authorized at June 30, 2018 and December 31, 2017; 1,574,508 shares issued and outstanding at June 30, 2018 and December 31, 2017; aggregate liquidation preference of $36,844 at June 30, 2018 and December 31, 2017 | 88,352 | 50,937 | ||||||
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Stockholders’ deficit: | ||||||||
Class A common stock, $0.001 par value; 30,004,760 shares authorized at June 30, 2018 and December 31, 2017; 164,400 and 24,000 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively | — | — | ||||||
Class B common stock, $0.001 par value; 27,566,096 shares authorized at June 30, 2018 and December 31, 2017; 8,924,440 and 8,670,992 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively | 9 | 9 | ||||||
Additionalpaid-in capital | — | 766 | ||||||
Accumulated deficit | (89,159 | ) | (51,319 | ) | ||||
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Total stockholders’ deficit | (89,150 | ) | (50,544 | ) | ||||
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Total liabilities, redeemable convertible preferred stock and stockholders’ deficit | $ | 29,541 | $ | 20,519 | ||||
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The accompanying notes are an integral part of these unaudited condensed financial statements.
EVERQUOTE, INC.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except share and per share amounts)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenue | $ | 41,092 | $ | 30,017 | $ | 81,822 | $ | 61,769 | ||||||||
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Cost and operating expenses: | ||||||||||||||||
Cost of revenue | 2,873 | 1,884 | 5,488 | 3,620 | ||||||||||||
Sales and marketing | 34,932 | 26,354 | 69,955 | 54,781 | ||||||||||||
Research and development | 3,181 | 2,100 | 5,795 | 4,231 | ||||||||||||
General and administrative | 1,733 | 1,259 | 3,446 | 2,268 | ||||||||||||
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Total cost and operating expenses | 42,719 | 31,597 | 84,684 | 64,900 | ||||||||||||
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Loss from operations | (1,627 | ) | (1,580 | ) | (2,862 | ) | (3,131 | ) | ||||||||
Interest expense | (103 | ) | (85 | ) | (196 | ) | (152 | ) | ||||||||
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Net loss and comprehensive loss | (1,730 | ) | (1,665 | ) | (3,058 | ) | (3,283 | ) | ||||||||
Accretion of redeemable convertible preferred stock to redemption value | (26,402 | ) | (995 | ) | (37,415 | ) | (12,779 | ) | ||||||||
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Net loss attributable to common stockholders | $ | (28,132 | ) | $ | (2,660 | ) | $ | (40,473 | ) | $ | (16,062 | ) | ||||
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Net loss per share attributable to common stockholders, basic and diluted | $ | (3.10 | ) | $ | (0.31 | ) | $ | (4.55 | ) | $ | (1.81 | ) | ||||
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Weighted average common shares outstanding, basic and diluted | 9,084,880 | 8,523,056 | 8,897,088 | 8,891,136 | ||||||||||||
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The accompanying notes are an integral part of these unaudited condensed financial statements.
EVERQUOTE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands, except share and per share amounts)
Six Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (3,058 | ) | $ | (3,283 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 612 | 731 | ||||||
Stock-based compensation expense | 1,290 | 939 | ||||||
Noncash interest expense | 14 | 10 | ||||||
Deferred rent | 325 | 108 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (3,025 | ) | (255 | ) | ||||
Prepaid expenses and other current assets | (1,379 | ) | (126 | ) | ||||
Other assets | — | (61 | ) | |||||
Accounts payable | 3,193 | (1,427 | ) | |||||
Accrued expenses and other current liabilities | 863 | 1,008 | ||||||
Deferred revenue | 166 | (40 | ) | |||||
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Net cash used in operating activities | (999 | ) | (2,396 | ) | ||||
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Cash flows from investing activities: | ||||||||
Acquisition of property and equipment, including costs capitalized for development ofinternal-use software | (1,395 | ) | (648 | ) | ||||
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Net cash used in investing activities | (1,395 | ) | (648 | ) | ||||
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Cash flows from financing activities: | ||||||||
Proceeds from exercise of stock options | 577 | 383 | ||||||
Repurchase of common stock | — | (9,229 | ) | |||||
Proceeds from borrowings on line of credit | 22,729 | 10,800 | ||||||
Repayments of borrowings on line of credit | (17,746 | ) | (9,300 | ) | ||||
Repayments of term loan | (2,625 | ) | (750 | ) | ||||
Payments of initial public offering costs | (522 | ) | — | |||||
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Net cash provided by (used in) financing activities | 2,413 | (8,096 | ) | |||||
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Net increase (decrease) in cash | 19 | (11,140 | ) | |||||
Cash at beginning of period | 2,363 | 12,400 | ||||||
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Cash at end of period | $ | 2,382 | $ | 1,260 | ||||
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Supplemental disclosure of noncash investing and financing information: | ||||||||
Purchases of property and equipment included in accounts payable | $ | 104 | $ | 77 | ||||
Deferred initial public offering costs included in accounts payable or accrued expenses | $ | 3,190 | $ | — | ||||
Conversion of Series A redeemable convertible preferred stock to common stock | $ | — | $ | 98 | ||||
Retirement of treasury stock | $ | — | $ | 9,229 | ||||
Accretion of redeemable convertible preferred stock to redemption value | $ | 37,415 | $ | 12,779 |
The accompanying notes are an integral part of these unaudited condensed financial statements.
EVERQUOTE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of the Business and Basis of Presentation
EverQuote, Inc. (the “Company”) was incorporated in the state of Delaware in 2008. Through its internet websites, the Company operates an online marketplace for consumers shopping for auto, home and life insurance quotes. The Company generates revenue by selling consumer referrals to insurance provider customers, consisting of carriers and agents, and indirect distributors in the United States.
The Company is subject to a number of risks and uncertainties common to companies in similar industries and stages of development including, but not limited to, rapid technological changes, competition from substitute products and services from larger companies, protection of proprietary technology, customer concentration, patent litigation, the need to obtain additional financing to support growth and dependence on third parties and key individuals.
On July 2, 2018, the Company completed an initial public offering (“IPO”), in which it issued and sold 3,125,000 shares of Class A common stock at a public offering price of $18.00 per share, resulting in net proceedsaddition to the Company of approximately $48.6 million after deducting underwriting discounts and commissions and estimated offering costs. Additionally, certain of the Company’s stockholders sold 1,562,500 shares of Class A common stock at the same public offering price of $18.00 per share. The Company did not receive any proceeds from the sale of shares by its stockholders. Upon closing of the IPO, the Company’s outstanding redeemable convertible preferred stock automatically converted into shares of Class B common stock (see Note 5 and Note 13).
The accompanying condensed financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. Since inception, the Company has incurred recurring losses, including net losses of $3.1 million for the six months ended June 30, 2018 and $5.1 million for the year ended December 31, 2017. As of June 30, 2018, the Company had an accumulated deficit of $89.2 million. The Company has primarily funded its operations through issuances of shares of redeemable convertible preferred stock and common stock, debt, including a revolving line of credit with Western Alliance Bank, cash flows from operations and, in July 2018, proceeds from the Company’s IPO. As of August 10, 2018, the issuance date of the interim financial statements, the Company expects that its cash, including net proceeds it received from the IPO, will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next 12 months from the issuance date of the interim financial statements, without considering available borrowings under the Company’s revolving line of credit.
The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may remain an emerging growth company until the last day of the fiscal year following the fifth anniversary of the IPO, subject to specified conditions. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company has elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company will adopt the new or revised standard at the time private companies adopt the new or revised standard, provided that the Company continues to be an emerging growth company.
2. Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The balance sheet at December 31, 2017 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying unaudited financial statements as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certainother information and footnote disclosures normally included in the financial statements prepared in accordance with
EVERQUOTE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2017 included in the Company’s Registration Statement onForm S-1, File No. 333-225379 on file with the SEC. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s financial position as of June 30, 2018 and results of operations for the three and six months ended June 30, 2018 and 2017 and cash flows for the six months ended June 30, 2018 and 2017 have been made. The Company’s results of operations for the three or six months ended June 30, 2018 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2018.
Use of 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, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, revenue recognition, the expensing and capitalization of website and software development costs, the valuation of common and preferred stock, and the valuation of stock-based awards and income taxes. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates, as there are changes in circumstances, facts and experience. Changes in estimates are recorded in periods in which they become known. Actual results may differ from those estimates or assumptions.
Concentrations of Credit Risk and of Significant Customers
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company maintains its cash at two accredited financial institutions. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
The Company sells its consumer referrals to insurance provider customers, consisting of carriers and agents, and indirect distributors in the United States. For the three months ended June 30, 2018 and 2017, one customer represented 22% and 20%, respectively, of total revenue. For the six months ended June 30, 2018 and 2017, one customer represented 19% and 23%, respectively, of total revenue. As of June 30, 2018, one customer accounted for 15% of the accounts receivable balance. As of December 31, 2017, four customers accounted for 12%, 11%, 11% and 11% of the accounts receivable balance.
Deferred Offering Costs
The Company capitalizes certain legal, professional, accounting and other third-party fees that are directly associated within-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ equity (deficit) as a reduction of additionalpaid-in capital generated as a result of the offering. Should thein-process equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the statements of operations and comprehensive loss.
Revenue Recognition
The Company derives its revenue by selling consumer referrals to its insurance provider customers, including insurance carriers and agents. The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”)Topic 605 Revenue Recognition (“ASC 605”). Accordingly, revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured. The Company recognizes revenue from the sale of consumer referrals upon delivery of the referral. The Company records revenue from the sales of consumer referrals net of credits or other applicable allowances in the same period in which the related sales are recorded, based on the underlying contract terms.
EVERQUOTE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Amounts received prior to satisfying the revenue recognition criteria listed above are recorded as deferred revenue in the accompanying balance sheets. Amounts expected to be recognized as revenue within 12 months of the balance sheet date are classified as current deferred revenue.
Advertising Expense
Advertising expense consists of variable costs that are related to attracting consumers to the Company’s marketplace, increasing downloads of its social safe-driving mobile app, EverDrive, and promoting its marketplace to insurance carriers and agents. The Company expenses advertising costs as incurred and such costs are included in sales and marketing expense in the accompanying statements of operations and comprehensive loss. For the three months ended June 30, 2018 and 2017, advertising expense totaled $28.9 million and $21.4 million, respectively. For the six months ended June 30, 2018 and 2017, advertising expense totaled $58.5 million and $44.6 million, respectively.
Accounts Receivable
The Company provides credit to customers in the ordinary course of business and believes its credit policies are prudent and reflect industry practices and business risk. Management reviews accounts receivable on a periodic basis and reserves for receivables in the Company’s allowance for doubtful accounts on a specific identification basis when they are determined to be uncollectible. After the Company has exhausted all collection efforts, the outstanding receivable is written off against the allowance. The Company had no allowance for doubtful accounts as of June 30, 2018 and December 31, 2017, as amounts were deemed to be collectible.
Recently Adopted Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board, (“FASB”) issued Accounting Standards Update (“ASU”)No. 2017-09,Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU2017-09”), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU2017-09 is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted the standard prospectively as of January 1, 2018. The adoption of ASU2017-09 had no net impact on the Company’s financial position, results of operations or cash flows.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASUNo. 2014-09,Revenue from Contracts with Customers (Topic 606) (“ASU2014-09”) and has since issued several additional amendments thereto, collectively referred to herein as ASC 606. ASC 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. The new standards require entities to apportion consideration from contracts to performance obligations on a relative standalone selling price basis, based on a five-step model. Under ASC 606, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration that the entity expects to receive in exchange for the good or service. In addition, ASC 606 provides guidance on accounting for certain revenue related costs including costs associated with obtaining and fulfilling a contract. ASC 606 may be applied using either a full retrospective approach, under which all years included in the financial statements will be presented under the revised guidance, or a modified retrospective approach, under which financial statements will be prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities will recognize a cumulativecatch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the entity at the date of adoption. For public entities, the guidance was effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Fornon-public entities and emerging growth companies that choose to take advantage of the extended transition periods, the guidance is effective for annual periods beginning after December 15, 2018. The Company is currently planning to adopt ASC 606 on January 1, 2019, in accordance with the non-public company requirements. The Company is currently evaluating the method of adoption and the potential impact to the Company’s financial statements.
EVERQUOTE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In February 2016, the FASB issued ASUNo. 2016-02,Leases (Topic 842) (“ASU2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record aright-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2018 and for interim periods within those fiscal years. Fornon-public entities and emerging growth companies that choose to take advantage of the extended transition periods, the guidance is effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU2016-02 will have on its financial statements.
In August 2016, the FASB issued ASUNo. 2016-15,Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230) (“ASU2016-15”), to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. For public entities, the standard was effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Fornon-public entities and emerging growth companies that choose to take advantage of the extended transition periods, the standard is effective for annual periods beginning after December 15, 2018. Early adoption is permitted for all entities. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact that the adoption of ASU2016-15 will have on its financial statements.
In November 2016, the FASB issued ASUNo. 2016-18,Statement of Cash Flows (Topic 230) (“ASU2016-18”), which requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling thebeginning-of-period andend-of-period total amounts shown on the statement of cash flows. For public entities, ASU2016-18 was effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Fornon-public entities and emerging growth companies that choose to take advantage of the extended transition periods, the standard is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact that the adoption of ASU2016-18 will have on its financial statements.
In July 2017, the FASB issued ASUNo. 2017-11,Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) I. Accounting for Certain Financial Instruments with Down Round Features II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU2017-11”). Part I applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that contain down-round features. Part II replaces the indefinite deferral for certain mandatorily redeemable noncontrolling interests and mandatorily redeemable financial instruments of nonpublic entities contained within ASC Topic 480 with a scope exception and does not impact the accounting for these mandatorily redeemable instruments. For public entities, ASU2017-11 is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Fornon-public entities and emerging growth companies that choose to take advantage of the extended transition periods, ASU2017-11 is effective for annual periods beginning after December 15, 2019. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact that the adoption of ASU2017-11 will have on its financial statements.
EVERQUOTE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In June 2018, the FASB issued ASU No.2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting(“ASU2018-07”). ASU2018-07 is intended to simplify aspects of share-based compensation issued tonon-employees by making the guidance consistent with the accounting for employee share-based compensation. For public entities, ASU2018-07 is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Fornon-public entities and emerging growth companies that choose to take advantage of the extended transition periods, ASU2018-07 is effective for annual periods beginning after December 15, 2019. Early adoption is permitted for all entities but no earlier than the Company’s adoption of ASU2014-09. The Company is currently evaluating the impact that the adoption of ASU2018-07 will have on its financial statements.
3. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
June 30, 2018 | December 31, 2017 | |||||||
Accrued advertising expenses | $ | 982 | $ | 721 | ||||
Accrued employee compensation and benefits | 1,062 | 433 | ||||||
Accrued professional fees | 230 | 154 | ||||||
Other current liabilities | 754 | 467 | ||||||
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$ | 3,028 | $ | 1,775 | |||||
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4. Loan and Security Agreement
As of December 31, 2017, the Company had outstanding borrowings under an amended Loan and Security Agreement including borrowings under a revolving line of credit and a term loan. The interest rate for the revolving line of credit was 5.0% as of December 31, 2017. The term loan was repayable in 36 equal monthly installments through August 2019 and accrued interest at an annual rate of 2.0% above the greater of 3.5% or the prime rate. The interest rate for the term loan was 6.5% as of December 31, 2017. Borrowings under the amended Loan and Security Agreement were collateralized by substantially all of the Company’s assets and property.
In March 2018, the Company executed the 2018 Loan Modification (the “2018 Loan Modification”) to modify the amended Loan and Security Agreement to increase the revolving line of credit from $6.0 million to $11.0 million, extend the maturity date of the revolving line of credit to March 2020 and eliminate the term loan. Pursuant to the 2018 Loan Modification, borrowings under the revolving line of credit cannot exceed 80% of eligible accounts receivable balances and continue to bear interest atone-half percent (0.5%) above the greater of 4.25% or the prime rate. Borrowings are collateralized by substantially all of the Company’s assets and property. The terms of the 2018 Loan Modification required that the existing outstanding term loan outstanding under the amended Loan and Security Agreement be repaid. Accordingly, on March 27, 2018, the Company used $2.3 million of proceeds from the revolving line of credit to repay all amounts then due on the term loan. The interest rate for the revolving line of credit was 5.5% as of June 30, 2018.
Under the 2018 Loan Modification, the Company is subject to specified affirmative and negative covenants until maturity. These covenants include limitations on the Company’s ability to incur additional indebtedness and engage in certain fundamental business transactions, such as mergers or acquisitions. In addition, pursuant to the 2018 Loan Modification, the Company is required to maintain a financial performance covenant: a minimum asset coverage ratio of 1.5 to 1, calculated as the sum of unrestricted cash and qualified accounts receivable divided by borrowings outstanding under the revolving line of credit. Events which would meet the criteria of a default under the 2018 Loan Modification include failure to make payments when due, insolvency events, failure to comply with covenants or material adverse events with respect to the Company. As of June 30, 2018, the Company was in compliance with all covenants related to the revolving line of credit. There can be no guarantee that these covenants will be met in the future, and if not met, that waivers will be obtained.
As of June 30, 2018, the Company had $7.0 million outstanding on the revolving line of credit, of which the full amount was classified within long-term debt, net of current portion. As of June 30, 2018, $4.0 million remained available for borrowing under the revolving line of credit. Amounts outstanding under the revolving line of credit are required to be repaid in March 2020. In July 2018, the Company repaid the $7.0 million outstanding under the revolving line of credit and, as of July 31, 2018, $11.0 million was available for borrowing under the revolving line of credit.
EVERQUOTE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
For the three months ended June 30, 2018 and 2017, the weighted average effective interest rate was 5.34% and 5.83%, respectively. For the six months ended June 30, 2018 and 2017, the weighted average effective interest rate was 5.54% and 5.83%, respectively.
5. Redeemable Convertible Preferred Stock
The Company issued Series A redeemable convertible preferred stock (the “Series A Preferred Stock”), Series B redeemable convertible preferred stock (the “Series B Preferred Stock”) and SeriesB-1 redeemable convertible preferred stock (the “SeriesB-1 Preferred Stock”). The Series A Preferred Stock, the Series B Preferred Stock and the SeriesB-1 Preferred Stock are collectively referred to as the “Preferred Stock.”
In February 2017, holders of 97,943 shares of Series A Preferred Stock converted their shares to 783,544 shares of common stock. No additional consideration was paid or received by the Company in connection with these conversions. In April 2017, the Company exchanged 132,749 shares of Series B Preferred Stock for an equal number of shares of SeriesB-1 Preferred Stock. No additional consideration was paid or received by the Company in connection with this exchange. The shares of SeriesB-1 Preferred Stock had all the same rights and preferences as the Series B Preferred Stock, with the exception of the SeriesB-1 Preferred Stock liquidation preference.
As of each balance sheet date, the Preferred Stock consisted of the following (in thousands, except share amounts):
June 30, 2018 | ||||||||||||||||||||
Preferred Stock Authorized | Preferred Stock Issued and Outstanding | Carrying Value | Liquidation Preference | Common Stock Issuable Upon Conversion | ||||||||||||||||
Series A Preferred Stock | 1,265,100 | 971,722 | $ | 972 | $ | 972 | 7,773,776 | |||||||||||||
Series B Preferred Stock | 470,037 | 470,037 | 68,137 | 27,972 | 3,760,296 | |||||||||||||||
SeriesB-1 Preferred Stock | 132,749 | 132,749 | 19,243 | 7,900 | 1,061,992 | |||||||||||||||
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1,867,886 | 1,574,508 | $ | 88,352 | $ | 36,844 | 12,596,064 | ||||||||||||||
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December 31, 2017 | ||||||||||||||||||||
Preferred Stock Authorized | Preferred Stock Issued and Outstanding | Carrying Value | Liquidation Preference | Common Stock Issuable Upon Conversion | ||||||||||||||||
Series A Preferred Stock | 1,265,100 | 971,722 | $ | 972 | $ | 972 | 7,773,776 | |||||||||||||
Series B Preferred Stock | 470,037 | 470,037 | 38,961 | 27,972 | 3,760,296 | |||||||||||||||
SeriesB-1 Preferred Stock | 132,749 | 132,749 | 11,004 | 7,900 | 1,061,992 | |||||||||||||||
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1,867,886 | 1,574,508 | $ | 50,937 | $ | 36,844 | 12,596,064 | ||||||||||||||
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In the three months ended June 30, 2018 and 2017, the Company recorded adjustments of $26.4 million and $1.0 million, respectively, to the carrying value of Series B andB-1 Preferred Stock, with corresponding offsets to additionalpaid-in capital and accumulated deficit representing the change in the redemption value from March 31, 2018 and 2017, respectively. In the six months ended June 30, 2018 and 2017, the Company recorded adjustments of $37.4 million and $12.8 million, respectively, to the carrying value of Series B andB-1 Preferred Stock, with corresponding offsets to additionalpaid-in capital and accumulated deficit representing the change in the redemption value from December 31, 2017 and 2016, respectively.
Upon the closing of the Company’s IPO in July 2018, all 1,574,508 shares of the Company’s then-outstanding Preferred Stock automatically converted into an aggregate of 12,596,064 shares of the Company’s Class B common stock (see Note 13).
EVERQUOTE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
6. Common Stock
On June 15, 2018, the Company effected aneight-for-one forward stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s Preferred Stock. Accordingly, all share and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this stock split and adjustment of the preferred stock conversion ratios. In connection with the stock split, the Company effected an increase in the number of authorized common shares to 57,570,856 shares.
Each share of Class A common stock entitles the holder to one vote for each share on all matters submitted to a vote of the Company’s stockholders at all meetings of stockholders and written actions in lieu of meetings. Each share of Class B common stock entitles the holder to ten votes for each share on all matters submitted to a vote of the Company’s stockholders at all meetings of stockholders and written actions in lieu of meetings.
Holders of both classes of common stock are entitled to receive dividends, when and if declared by the board of directors.
Each share of Class B common stock is convertible into one share of Class A common stock at the option of the holder at any time. Automatic conversion shall occur upon the occurrence of a transfer, of such share of Class B common stock or at the date and time, or the occurrence of an event, specified by a vote or written consent of the holders of a majority of the voting power of the then outstanding shares of Preferred Stock and Class B common stock, voting together as a single class. A transfer is described as a sale, assignment, transfer, conveyance, hypothecation or disposition of such share or any legal or beneficial interest in such share other than certain permitted transfers as described in the amended and restated Certificate of Incorporation, including a transfer to a holder of Preferred Stock. Each share of Class B common stock held by a stockholder shall automatically convert into one fully paid andnon-assessable share of Class A common stock nine months after the death or incapacity of the holder of such Class B common stock.
In the six months ended June 30, 2018, 140,400 shares of Class B common stock were automatically converted to 140,400 shares of Class A common stock pursuant to a transfer as described above. No additional consideration was paid or received by the Company in connection with this exchange.
In the six months ended June 30, 2017, the Company repurchased 1,341,216 shares of its common stock at a price of $6.89 per share for a total cost of $9.2 million. The repurchase was pursuant to a tender offer made by the Company to its stockholders, including employee stockholders. The price paid by the Company at the settlement date of each tender was the estimated fair value of the Company’s common stock at such settlement date. The Company immediately retired all outstanding treasury shares after the repurchase of common stock.
Acquisitions of treasury stock have been recorded at cost. Treasury stock held was reported as a deduction from stockholders’ deficit. When the treasury stock was retired, the carrying value of the treasury stock was allocated between additionalpaid-in capital and retained earnings. The portion allocated to additionalpaid-in capital was limited to the sum of (i) all additionalpaid-in capital arising from previous retirements and net gains on sales of treasury stock of the same issue and (ii) the pro rata portion of additionalpaid-in capital and voluntary transfers of retained earnings on the same issue. To date, the Company has not reissued any treasury stock.
7. Stock-Based Compensation
2008 Stock Incentive Plan
The Company’s 2008 Stock Incentive Plan, as amended (the “2008 Plan”), provided for the Company to issue equity awards to employees, consultants, advisors and directors. Under the 2008 Plan, the Company could grant stock-based incentive awards, including incentive or nonqualified stock options and restricted stock units, as determined by the board of directors.
The total number of shares of common stock that could have been issued under the 2008 Plan was 8,440,712 shares as of June 30, 2018. Upon effectiveness of the Company’s 2018 Equity Incentive Plan, (the “2018 Plan” and, together with the 2008 Plan, the “Plans”) on June 27, 2018, the remaining 583,056 shares that were available for grant under the 2008 Plan became available for grant under the 2018 Plan and no future grants will be made under the 2008 Plan. Additionally, shares underlying awards under the 2008 Plan that expire, terminate or are otherwise surrendered, canceled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right (subject, in the case of incentive stock options, to any limitations of the Internal Revenue Code) will be available for future grants under the 2018 Plan.
EVERQUOTE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2018 Equity Incentive Plan
On June 14, 2018, the Company’s board of directors adopted and its stockholders approved the 2018 Plan, which became effective on June 27, 2018. The 2018 Plan provides for the grant of incentive stock options,non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other stock-based awards. The number of shares initially reserved for issuance under the 2018 Plan is the sum of 2,149,480 shares of Class A common stock, plus the number of shares (up to 5,028,832 shares) equal to the sum of (i) the 583,056 shares of Class A common stock and Class B common stock that were available for grant under the 2008 Plan upon the effectiveness of the 2018 Plan and (ii) the number of shares of Class A common stock and Class B common stock subject to outstanding awards under the 2008 Plan that expire, terminate or are otherwise surrendered, canceled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right (subject, in the case of incentive stock options, to any limitations of the Internal Revenue Code). The number of shares of Class A common stock that may be issued under the 2018 Plan will automatically increase on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2019 and continuing for each fiscal year until, and including, the fiscal year ending December 31, 2028, equal to the least of (i) 2,500,000 shares of Class A common stock; (ii) 5% of the sum of the number of shares of Class A common stock and Class B common stock outstanding on the first day of such fiscal year; and (iii) an amount determined by the Company’s board of directors. The shares of common stock underlying any awards that are forfeited, canceled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, repurchased or are otherwise terminated by the Company under the 2018 Plan will be added back to the shares of common stock available for issuance under the 2018 Plan. As of June 30, 2018, 966,984 shares remain available for future grants under the 2018 Plan.
Shares of common stock issued upon exercise of stock options granted prior to September 8, 2017 will be issued as new Class B common stock. Shares of common stock issued upon exercise of stock options granted after September 8, 2017 will be issued as new Class A common stock. Options and restricted stock granted under the Plans vest over periods determined by the board of directors. Options granted under the Plans expire ten years from the date of the grant.
The exercise price for stock options granted is not less than the fair value of common shares as determined by the board of directors as of the date of grant. Prior to the Company’s IPO, the Company’s board of directors valued the Company’s common stock, taking into consideration its most recently available valuation of common stock performed by third parties as well as additional factors which may have changed since the date of the most recent contemporaneous valuation through the date of grant.
Award Issuances
During the six months ended June 30, 2018, the Company granted options to employees and directors for the purchase of 1,152,040 shares of Class A common stock with a weighted average exercise price of $9.68 per share and a weighted average grant-date fair value of $4.75 per share. During the six months ended June 30, 2018, the Company granted service- and performance-based RSUs to employees and directors for the right to receive 1,875,872 shares of Class A common stock with a weighted average grant date fair value of $17.58 per share.
Stock-Based Compensation
The Company recorded stock-based compensation expense in the following expense categories of its statements of operations and comprehensive loss (in thousands):
EVERQUOTE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Cost of revenue | $ | 10 | $ | 7 | $ | 17 | $ | 13 | ||||||||
Sales and marketing | 400 | 201 | 670 | 411 | ||||||||||||
Research and development | 168 | 116 | 292 | 219 | ||||||||||||
General and administrative | 145 | 144 | 311 | 296 | ||||||||||||
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$ | 723 | $ | 468 | $ | 1,290 | $ | 939 | |||||||||
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As of June 30, 2018, unrecognized compensation expense related to unvested options was $7.7 million, which is expected to be recognized over a weighted average period of 3.6 years.
8. Income Taxes
2017 U.S. Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was signed into United States law. The TCJA includes a number of changes to existing tax law, including, among other things, a permanent reduction in the federal corporate income tax rate from 35% to 21%, effective as of January 1, 2018, as well as a limitation of the deduction for net operating losses to 80% of current year taxable income and the elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such net operating losses may be carried forward indefinitely). The federal tax rate change resulted in a reduction of the Company’s deferred tax assets and liabilities, and a corresponding reduction to its valuation allowance. As a result, no income tax expense or benefit was recognized as of the enactment date of the TCJA. The other provisions of the TCJA did not have a material impact on the Company’s financial statements.
Income Taxes
The Company had no income tax expense for the three months ended June 30, 2018 and 2017 or for the six months ended June 30, 2018 and 2017. The Company has no foreign operations and therefore, has not provided for any foreign taxes.
9. Commitments and Contingencies
Operating Leases
The Company leases office space in Cambridge, Massachusetts under anon-cancelable operating lease that expires in September 2024. The Company leases office space in Woburn, Massachusetts under anon-cancelable operating lease that expires in January 2022.
Lease incentives, payment escalations and rent holidays specified in the lease agreements are accrued or deferred as appropriate such that rent expense per square foot is recognized on a straight-line basis over the terms of occupancy. As of June 30, 2018 and December 31, 2017, the Company had a deferred rent liability of $1.2 million and $0.9 million, respectively.
As of June 30, 2018 and December 31, 2017, the Company maintained security deposits of $0.4 million with the landlords of its leases, which amounts are included in other assets (long-term) on the Company’s balance sheets.
Future minimum lease payments under the operating leases as of June 30, 2018 are as follows (in thousands):
EVERQUOTE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Year Ending December 31, | ||||
2018 | $ | 905 | ||
2019 | 1,861 | |||
2020 | 1,996 | |||
2021 | 2,075 | |||
2022 | 1,911 | |||
Thereafter | 3,405 | |||
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$ | 12,153 | |||
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In April 2017, the Company entered into a sublease agreement with a subtenant for 7,735 square feet of general office space. The sublease terminated in June 2018. The Company recognized $0.1 million under the sublease as a reduction in rent expense in the statements of operations and comprehensive loss for the three months ended June 30, 2018. The Company recognized $0.3 million under the sublease as a reduction in rent expense in the statements of operations and comprehensive loss for the six months ended June 30, 2018. For the three months ended June 30, 2018 and 2017, the Company recognized rent expense of $0.5 million and $0.4 million, respectively. For the six months ended June 30, 2018 and 2017, the Company recognized rent expense of $1.0 million and $0.7 million, respectively.
Indemnification Agreements
In the normal course of business, the Company may provide indemnification of varying scope and terms to third parties and enters into commitments and guarantees (“Agreements”) under which it may be required to make payments. The duration of these Agreements varies, and in certain cases, is indefinite. Furthermore, many of these Agreements do not limit the Company’s maximum potential payment exposure.
In addition, the Company has entered into indemnification agreements with members of its board of directors and executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers.
Through December 31, 2017 and June 30, 2018, the Company has not incurred any material costs as a result of such indemnifications. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its financial statements as of June 30, 2018 or December 31, 2017.
Legal Proceedings
The Company, from time to time, is subject to legal proceedings and claims that arise in the normal course of its business. In the opinion of management, the amount of ultimate liability with respect to any such actions should not have a material adverse effect on the Company’s results of operations of financial position. As of June 30, 2018 and December 31, 2017, the Company does not have any contingency reserves established for any litigation liabilities.
10. Net Loss per Share
The Company has two classes of common stock. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. As a result, basic and diluted net loss per share of Class A common stock and share of Class B common stock are equivalent. Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):
EVERQUOTE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Numerator: | ||||||||||||||||
Net loss | $ | (1,730 | ) | $ | (1,665 | ) | $ | (3,058 | ) | $ | (3,283 | ) | ||||
Accretion of redeemable convertible preferred stock to redemption value | (26,402 | ) | (995 | ) | (37,415 | ) | (12,779 | ) | ||||||||
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Net loss attributable to common stockholders | $ | (28,132 | ) | $ | (2,660 | ) | $ | (40,473 | ) | $ | (16,062 | ) | ||||
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Denominator: | ||||||||||||||||
Weighted average common shares outstanding, basic and diluted | 9,084,880 | 8,523,056 | 8,897,088 | 8,891,136 | ||||||||||||
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Net loss per share attributable to common stockholders, basic and diluted | $ | (3.10 | ) | $ | (0.31 | ) | $ | (4.55 | ) | $ | (1.81 | ) | ||||
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The Company’s potentially dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share attributable to common stockholders. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the three and six months ended June 30, 2018 and 2017 because including them would have had an anti-dilutive effect:
June 30, | ||||||||
2018 | 2017 | |||||||
Redeemable convertible preferred stock (as converted to common stock) | 12,596,064 | 12,596,064 | ||||||
Options to purchase common stock | 4,092,960 | 3,681,400 | ||||||
Unvested restricted stock units | 2,118,368 | 192,000 | ||||||
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18,807,392 | 16,469,464 | |||||||
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11. Retirement Plan
The Company has established a defined-contribution plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers all employees who meet defined minimum age and service requirements, and allows participants to defer a portion of their annual compensation on apre-tax basis. As currently established, the Company is not required to make any contributions to the 401(k) Plan. The Company contributed $0.1 million for both the three months ended June 30, 2018 and 2017 and contributed $0.2 million and $0.1 million for the six months ended June 30, 2018 and 2017, respectively.
12. Related Party Transactions
Related party referrals
The Company has, in the ordinary course of business, entered into arrangements with other companies who have shareholders in common with the Company. Pursuant to these arrangements, related-party affiliates receive payments for providing website visitor referrals. During the three months ended June 30, 2018 and 2017, the Company recorded sales and marketing expenses of $2.1 million and $2.3 million, respectively, related to these arrangements. During the six months ended June 30, 2018 and 2017, the Company recorded sales and marketing expenses of $4.4 million and $4.2 million, respectively, related to these arrangements. During the three months ended June 30, 2018 and 2017, the Company paid $2.4 million and $2.8 million, respectively, related to these arrangements. During the six months ended June 30, 2018 and 2017, the Company paid $5.0 million and $4.4 million, respectively, related to these arrangements. As of June 30, 2018 and December 31, 2017, amounts due to related-party affiliates totaled $1.0 million and $1.6 million, respectively, which amounts were included in accounts payable on the balance sheets.
EVERQUOTE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
13. Subsequent Events
On July 2, 2018, the Company completed the IPO, and issued and sold 3,125,000 shares of Class A common stock at a public offering price of $18.00 per share, resulting in net proceeds of approximately $48.6 million after deducting underwriting discounts and commissions and estimated offering costs.
Upon closing of the IPO on July 2, 2018, the Company’s outstanding redeemable convertible preferred stock automatically converted into shares of Class B common stock (see Note 5). Upon conversion of the redeemable convertible preferred stock, the Company reclassified the carrying value of the Preferred Stock to common stock and additionalpaid-in capital.
Upon closing of the IPO on July 2, 2018, the Company’s authorized shares of common stock were increased to 220,000,000 shares of Class A common stock and 30,000,000 shares of Class B common stock. The Company also authorized 10,000,000 shares of undesignated preferred stock.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read together with our condensed financial statements and related notes and other financial information included elsewhere in this Quarterly Report on Formfinancial statements andbusiness. A summary of the related notes and other financial information includedprincipal factors that create risk in investing in our final prospectus filed with the Securitiessecurities and Exchange Commission pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, on June 28, 2018. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Ourmight cause actual results couldto differ materially from those discussed in the forward-looking statements. Factors that could cause or contributeis set forth below:
Overview
EverQuote makes insurance shopping easy, efficientmaintain, future profitability;
We operate the largest online marketplaceusing our marketplace;
Consumers may view insurance as a simple commodity with standard pricing. However, finding the right insurance product is often challenging for consumers, who face limited online options, complex, variable and opaque pricing, and myriad coverage configurations. We present consumers with a single starting point for a comprehensive and cost-effective insurance shopping experience. Our marketplace reduces the time consumers spend searching across multiple sites by delivering broader and more relevant results than consumers may find on their own. Our service is free for consumers, and we derive our revenue from sales of consumer referrals to insurance providers.
Insurance providers operate in a highly competitive and regulated industry and typically specialize onpre-determined subsets of consumers. As a result, not every consumer is a good match for every provider, and providers struggle to efficiently reach the segments that are most desirable for their business models. Traditional offline and online advertising channels reach broad audiences but lack the fine-grained consumer acquisition capabilities needed for optimally matching consumers to specific insurance products. We connect providers to a large volume of high-intent,pre-validated consumer referrals that match the insurers’ specific requirements. The transparency of our marketplace, as well as the campaign management tools we offer, make it easy for insurance providers to evaluate the performance of their marketing spend on our platform and manage their own return on investment.
Since our founding in 2011, our core mission has been to make finding insurance easy and more personal, savingretain consumers and insurance providers, time and money. We are workingour ability to successfully monetize them;
In 2011, we launched the EverQuote marketplace for auto insurance.
In 2013, we launched EverQuote Pro, our provider portal, for carriers.
In 2015, we launched EverQuote Pro for agents.
In 2016, we added home and life insurancecompetition in our marketplaceindustry and launched EverDrive,innovation by our social safe-driving mobile app.
In 2017, we reached 500,000 downloads of EverDrive.
In 2018, we exceeded 35 million cumulative
Key Business Metrics
We regularly review a number of metrics, including United States generally accepted accounting principles,and comply with new or GAAP, operating resultsmodified laws and the key metrics listed below, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make operating and strategic decisions. Some of these metrics arenon-financial metricsregulations that currently apply or are financial metrics that are not defined by GAAP.
Quote Requests
Quote requests are consumer-submitted website forms that contain the data required to provide an insurance quote. As we attract more consumersbecome applicable to our platformbusiness;
Non-GAAP Financial Measures
To supplementaccurately or timely report our financial statements presented in accordance with GAAP andcondition or results of operations;
Variable Marketing Margin. We define variable marketing margin, or VMM, as revenue as reported in our statements of operations and comprehensive loss, less online advertising costs related to attracting consumers to our marketplace (which are a component of total advertising expense, which is a component of sales and marketing expense). The most directly comparable GAAP measure for VMM is revenue less advertising expense. We utilize VMM to measure
Adjusted EBITDA. We define adjusted EBITDA as our net loss, excluding the impact of stock-based compensation expense; depreciation and amortization expense; interest expense; and our provision for (benefit from) income taxes. The most directly comparable GAAP measure is net income (loss). We monitor and have presented in this Quarterly Report on Form10-Q adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, to establish budgets and to develop operational goals for managing our business. In particular, we believe that excluding the impact of these expenses in calculating adjusted EBITDA can provide a useful measure forperiod-to-period comparisons of our core operating performance.
We use thesenon-GAAP financial measures to evaluate our operating performance and trends and make planning decisions. We believe that each of thesenon-GAAP financial measures helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in the calculations of eachnon-GAAP financial measure. Accordingly, we believe that these financial measures provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects.
Ournon-GAAP financial measures are not prepared in accordance with GAAP and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of thesenon-GAAP financial measures rather than revenue less advertising expense and net income (loss), which are the most directly comparable financial measures calculated and presented in accordance with GAAP. Some of these limitations are:
VMM excludes general advertising costs that are designed to promote our business, attract insurance providers or produce results other than generating revenue or online marketplace traffic, which costs can represent significant cash expenditures;
adjusted EBITDA excludes stock-based compensation expense as it has recently been, and will continue to be for the foreseeable future, a significant recurringnon-cash expense for our business;
adjusted EBITDA excludes depreciation and amortization expense and, although this is anon-cash expense, the assets being depreciated and amortized may have to be replaced in the future;
adjusted EBITDA does not reflect the cash requirements necessary to service interest on our debt which affects the cash available to us;
adjusted EBITDA does not reflect income tax expense (benefit) that affects cash available to us; and
the expenses and other items that we exclude in our calculations of VMM and adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from VMM and adjusted EBITDA when they report their operating results.
In addition, other companies may use other measures to evaluate their performance, all of which could reduce the usefulness of ournon-GAAP financial measures as tools for comparison.
The following tables reconcile VMM and adjusted EBITDA to revenue less advertising expense and net loss, respectively, the most directly comparable financial measures calculated and presented in accordance with GAAP.
Reconciliation of revenue less advertising expense to variable marketing margin:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue | $ | 41,092 | $ | 30,017 | $ | 81,822 | $ | 61,769 | ||||||||
Less: total advertising expense | (28,946 | ) | (21,429 | ) | (58,538 | ) | (44,590 | ) | ||||||||
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Revenue less advertising expense | 12,146 | 8,588 | 23,284 | 17,179 | ||||||||||||
Add: other advertising expense(1) | 673 | 520 | 1,229 | 785 | ||||||||||||
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Variable marketing margin | $ | 12,819 | $ | 9,108 | $ | 24,513 | $ | 17,964 | ||||||||
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Reconciliation of Net Loss to Adjusted EBITDA:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Net loss | $ | (1,730 | ) | $ | (1,665 | ) | $ | (3,058 | ) | $ | (3,283 | ) | ||||
Stock-based compensation | 723 | 468 | 1,290 | 939 | ||||||||||||
Depreciation and amortization | 318 | 327 | 612 | 731 | ||||||||||||
Interest expense | 103 | 85 | 196 | 152 | ||||||||||||
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Adjusted EBITDA | $ | (586 | ) | $ | (785 | ) | $ | (960 | ) | $ | (1,461 | ) | ||||
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Key Components of Our Results of Operations
Revenue
We generate our revenue by selling consumer referrals to insurance provider customers, consisting of carriers and agents, as well as to indirect distributors. To simplify the quoting process for the consumer and improve performance for the provider, we are able to provide consumer-submitted quote request data along with each referral. We support three secure consumer referral formats:
Clicks: Anonline-to-online referral, with a handoff of the consumer to the provider’s website.
Data: Anonline-to-offline referral, with quote request data transmitted to the provider forfollow-up.
Calls: Anonline-to-offline referral, with the consumer and provider connected by phone.
We recognize revenue from consumer referrals at the time of delivery. Our revenue is comprised of consumer referral fees from the automotive and home and life insurance verticals as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Automotive | $ | 35,509 | $ | 28,943 | $ | 71,434 | $ | 59,711 | ||||||||
Home and Life | 5,583 | 1,074 | 10,388 | 2,058 | ||||||||||||
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Total Revenue | $ | 41,092 | $ | 30,017 | $ | 81,822 | $ | 61,769 | ||||||||
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Cost and Operating Expenses
Our cost and operating expenses consist of cost of revenue, sales and marketing, research and development, and general and administrative expenses.
We allocate certain overhead expenses, such as rent, utilities, office supplies and depreciation and amortization of general office assets to cost of revenue and operating expense categories based on headcount. As a result, an overhead expense allocation is reflected in cost of revenue and each operating expense category. Personnel-related costs included in cost of revenue and each operating expense category include wages, fringe benefit costs and stock-based compensation expense.
Cost of Revenue
Cost of revenue is comprised primarily of the costs of operating our marketplace and delivering consumer referrals to our customers. These costs consist primarily of technology service costs including hosting, software, data services, and third-party call center costs. In addition, cost of revenue includes depreciation and amortization of our platform technology assets and personnel-related costs.
Sales and Marketing
Sales and marketing expense consists primarily of advertising and marketing expenditures as well as personnel-related costs for employees engaged in sales, marketing, data analytics and consumer acquisition functions. Advertising consists of variable costs that are related to attracting consumers to our marketplace, increasing downloads of our social safe-driving mobile app EverDrive and promoting our marketplace to carriers and agents. Our advertising costs consist of online ad spend, including search, display and social media advertisements, as well as the costs to create and produce these advertisements. Advertising costs are expensed as incurred. Marketing costs consist primarily of content development, public relations, memberships, and event costs. In order to continue to grow our business and brand awareness, we expect that we will continue to commit substantial resources to our sales and marketing efforts. However, we expect our sales and marketing expense as a percentage of revenue will continue to decline over the longer term as we scale our business.
Research and Development
Research and development expenses consist primarily of personnel-related costs for software development, product management and data analytics. We have focused our research and development efforts on improving ease of use and functionality of our existing marketplace platform and developing new offerings and internal tools. We primarily expense research and development costs. Direct development costs related to software enhancements that add functionality are capitalized and depreciated as a component of cost of revenue. We expect that research and development expenses will increase as we continue to enhance and expand our platform technology.
General and Administrative
General and administrative expenses consist of personnel-related costs and related expenses for executive, finance, legal, human resources, technical support and administrative personnel as well as the costs associated with professional fees for external legal, accounting and other consulting services, insurance premiums and payment processing and billing costs. We expect general and administrative expenses to increase as we incur the costs of compliance associated with being a publicly traded company, including legal, audit and consulting fees.
Interest Expense
Interest expense consists of interest expense associated with outstanding borrowings under our loan and security agreements and the amortization of deferred financing costs and debt discount associated with such arrangements. See “—Liquidity and Capital Resources.”
Income Taxes
We have not recorded income tax benefits for the net losses we have incurred in the three and six months ended June 30, 2018 and 2017 or for our research and development tax credits generated, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. As of December 31, 2017, we had U.S. federal and state net operating loss carryforwards of $9.1 million and $7.1 million, respectively, which may be available to offset future taxable income and begin to expire in 2027. As of December 31, 2017, we also had U.S. federal and state research and development tax credit carryforwards of $1.8 million and $0.9 million, respectively, which may be available to offset future tax liabilities and begin to expire in 2029. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date.
On December 22, 2017, the Tax Cuts and Jobs Act, or the TCJA, was signed into United States law. The TCJA includes a number of changes to existing tax law, including, among other things, a permanent reduction in the federal corporate income tax rate from 35% to 21%, effective as of January 1, 2018, as well as a limitation of the deduction for net operating losses to 80% of annual taxable income and the elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such net operating losses may be carried forward indefinitely). The federal tax rate change resulted in a reduction in our deferred tax assets and liabilities, and a corresponding reduction of our valuation allowance. As a result, no income tax expense or benefit was recognized as of the enactment date of the TCJA. The other provisions of the TCJA did not have a material impact on our financial statements.
Results of Operations
Comparison of the Three and Six Months Ended June 30, 2018 and 2017
The following tables set forth our results of operations in dollar amounts and as percentage of revenue for the periods shown:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Revenue | $ | 41,092 | $ | 30,017 | $ | 81,822 | $ | 61,769 | ||||||||
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Cost and operating expenses: | ||||||||||||||||
Cost of revenue | 2,873 | 1,884 | 5,488 | 3,620 | ||||||||||||
Sales and marketing | 34,932 | 26,354 | 69,955 | 54,781 | ||||||||||||
Research and development | 3,181 | 2,100 | 5,795 | 4,231 | ||||||||||||
General and administrative | 1,733 | 1,259 | 3,446 | 2,268 | ||||||||||||
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Total cost and operating expenses | 42,719 | 31,597 | 84,684 | 64,900 | ||||||||||||
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Loss from operations | (1,627 | ) | (1,580 | ) | (2,862 | ) | (3,131 | ) | ||||||||
Interest expense | (103 | ) | (85 | ) | (196 | ) | (152 | ) | ||||||||
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Net loss | $ | (1,730 | ) | $ | (1,665 | ) | $ | (3,058 | ) | $ | (3,283 | ) | ||||
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Other Financial and Operational Data: | ||||||||||||||||
Quote requests | 3,018 | 2,950 | 6,475 | 5,911 | ||||||||||||
Variable Marketing Margin | $ | 12,819 | $ | 9,108 | $ | 24,513 | $ | 17,964 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
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Cost and operating expenses: | ||||||||||||||||
Cost of revenue | 7.0 | 6.3 | 6.7 | 5.9 | ||||||||||||
Sales and marketing | 85.0 | 87.8 | 85.5 | 88.7 | ||||||||||||
Research and development | 7.7 | 7.0 | 7.1 | 6.8 | ||||||||||||
General and administrative | 4.2 | 4.2 | 4.2 | 3.7 | ||||||||||||
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Total cost and operating expenses | 103.9 | 105.3 | 103.5 | 105.1 | ||||||||||||
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Loss from operations | (3.9 | ) | (5.3 | ) | (3.5 | ) | (5.1 | ) | ||||||||
Interest expense | (0.3 | ) | (0.3 | ) | (0.2 | ) | (0.2 | ) | ||||||||
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Net loss | (4.2 | )% | (5.6 | )% | (3.7 | )% | (5.3 | )% | ||||||||
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Other Financial Data: | ||||||||||||||||
Variable Marketing Margin | 31.2 | % | 30.3 | % | 30.0 | % | 29.1 | % |
Revenue:
Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||
2018 | 2017 | Amount | % | 2018 | 2017 | Amount | % | |||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Revenue | $ | 41,092 | $ | 30,017 | $ | 11,075 | 36.9 | % | $ | 81,822 | $ | 61,769 | $ | 20,053 | 32.5 | % |
Revenue increased by $11.1 million from $30.0 million for the three months ended June 30, 2017 to $41.1 million for the three months ended June 30, 2018. The increase was due to an increase in revenue of $6.6 million and $4.5 million from our automotive and home and life insurance marketplace verticals, respectively. Revenue increased by $20.1 million from $61.8 million for the six months ended June 30, 2017 to $81.8 million for the six months ended June 30, 2018. The increase was due to an increase in revenue of $11.7 million and $8.3 million from our automotive and home and life insurance marketplace verticals, respectively. The increase in revenue from our automotive vertical was primarily due to an increase in revenue per quote request as a result of increased demand for consumer referrals by our insurance providers and to a lesser extent an increase in the volume of quote requests resulting from increased advertising to attract consumers. The increase in revenue from our home and life vertical was primarily driven by an increase in the volume of quote requests resulting from increased advertising to attract consumers.
Cost of Revenue
Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||
2018 | 2017 | Amount | % | 2018 | 2017 | Amount | % | |||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Cost of revenue | $ | 2,873 | $ | 1,884 | $ | 989 | 52.5 | % | $ | 5,488 | $ | 3,620 | $ | 1,868 | 51.6 | % | ||||||||||||||||
Percentage of revenue | 7.0 | % | 6.3 | % | 6.7 | % | 5.9 | % |
Cost of revenue increased by $1.0 million from $1.9 million for the three months ended June 30, 2017 to $2.9 million for the three months ended June 30, 2018 and increased by $1.9 million from $3.6 million for the six months ended June 30, 2017 to $5.5 million for the six months ended June 30, 2018. For the three months ended June 30, 2018, cost of revenue increased in both dollars and as a percentage of revenue due primarily to increased third-party call center and hosting costs of $0.5 million each due to increased volume. For the six months ended June 30, 2018, cost of revenue increased in both dollars and as a percentage of revenue due primarily to third-party call center and hosting costs of $0.8 million each due to increased volume and increased software and data services costs of $0.3 million.
Sales and Marketing
Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||
2018 | 2017 | Amount | % | 2018 | 2017 | Amount | % | |||||||||||||||||||||||||
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Sales and marketing expense | $ | 34,932 | $ | 26,354 | $ | 8,578 | 32.5 | % | $ | 69,955 | $ | 54,781 | $ | 15,174 | 27.7 | % | ||||||||||||||||
Percentage of revenue | 85.0 | % | 87.8 | % | 85.5 | % | 88.7 | % |
Sales and marketing expenses increased by $8.6 million from $26.4 million for the three months ended June 30, 2017 to $34.9 million for the three months ended June 30, 2018 and increased by $15.2 million from $54.8 million for the six months ended June 30, 2017 to $70.0 million for the six months ended June 30, 2018. For the three months ended June 30, 2018, the $8.6 million increase in sales and marketing expense was primarily due to an increase in advertising and marketing expenditures of $7.7 million, and an increase in personnel-related costs of $0.6 million. For the six months ended June 30, 2018, the $15.2 million increase in sales and marketing expense was primarily due to an increase in advertising and marketing expenditures of $14.1 million and an increase in personnel-related costs of $0.8 million.
Research and Development
Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||
2018 | 2017 | Amount | % | 2018 | 2017 | Amount | % | |||||||||||||||||||||||||
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Research and development expense | $ | 3,181 | $ | 2,100 | $ | 1,081 | 51.5 | % | $ | 5,795 | $ | 4,231 | $ | 1,564 | 37.0 | % | ||||||||||||||||
Percentage of revenue | 7.7 | % | 7.0 | % | 7.1 | % | 6.8 | % |
Research and development expenses increased by $1.1 million from $2.1 million for the three months ended June 30, 2017 to $3.2 million for the three months ended June 30 2018 and increased by $1.6 million from $4.2 million for the six months ended June 30, 2017 to $5.8 million for the six months ended June 30 2018. For the three months ended June 30, 2018, the increase in research and development expense was primarily due to an increase in personnel-related costs of $0.7 million and an increase in consulting costs of $0.1 million as a result of our continued hiring of research and development employees and use of consultants to further develop and enhance our marketplace websites and technology. Office and occupancy costs also increased by $0.1 million as a result of the increase in headcount. For the six months ended June 30, 2018, the increase in research and development
expense was primarily due to an increase in personnel-related costs of $1.0 million as a result of our continued hiring of research and development employees to further develop and enhance our marketplace websites and technology. Office and occupancy costs also increased by $0.2 million as a result of the increase in headcount.
General and Administrative
Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||
2018 | 2017 | Amount | % | 2018 | 2017 | Amount | % | |||||||||||||||||||||||||
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General and administrative expense | $ | 1,733 | $ | 1,259 | $ | 474 | 37.6 | % | $ | 3,446 | $ | 2,268 | $ | 1,178 | 51.9 | % | ||||||||||||||||
Percentage of revenue | 4.2 | % | 4.2 | % | 4.2 | % | 3.7 | % |
General and administrative expenses increased by $0.5 million from $1.3 million for the three months ended June 30, 2017 to $1.7 million for the three months ended June 30, 2018 and increased by $1.2 million from $2.3 million for the six months ended June 30, 2017 to $3.4 million for the six months ended June 30, 2018. For the three months ended June 30, 2018, the increase was primarily due to increases in audit andtax-related fees as well as personnel related costs. The increase in audit andtax-related fees was primarily due to our preparation to operate as a public company. For the six months ended June 30, 2018, the increase was primarily due to increases in audit andtax-related fees and, to a lesser extent, an increase in personnel related costs and travel-related expenses. The increase in audit andtax-related fees was primarily due to our preparation to operate as a public company.
Interest Expense
Interest expense remained consistent at $0.1 million for the three months ended June 30, 2018 and 2017 and $0.2 million for the six months ended June 30, 2018 and 2017 primarily due to consistent average outstanding borrowings for the comparative periods.
Quote requests
Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||
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2018 | 2017 | Amount | % | 2018 | 2017 | Amount | % | |||||||||||||||||||||||||
Quote requests | 3,018 | 2,950 | 68 | 2.3 | % | 6,475 | 5,911 | 564 | 9.5 | % |
Quote requests increased by 0.1 million for the three months ended June 30, 2018 and increased by 0.6 million for the six months ended June 30, 2018. Quote requests increased due to increased spending on online marketplace advertising.
Variable Marketing Margin
Three Months Ended June 30, | Change | Six Months Ended June 30, | Change | |||||||||||||||||||||||||||||
2018 | 2017 | Amount | % | 2018 | 2017 | Amount | % | |||||||||||||||||||||||||
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Variable Marketing Margin | $ | 12,819 | $ | 9,108 | $ | 3,711 | 40.7 | % | $ | 24,513 | $ | 17,964 | $ | 6,549 | 36.5 | % | ||||||||||||||||
Percentage of revenue | 31.2 | % | 30.3 | % | 30.0 | % | 29.1 | % |
Variable marketing margin increased by $3.7 million from $9.1 million for the three months ended June 30, 2017 to $12.8 million for the three months ended June 30, 2018 and increased by $6.5 million from $18.0 million for the six months ended June 30, 2017 to $24.5 million for the six months ended June 30, 2018. Variable marketing margin increased in both absolute dollars and as a percentage of revenue due primarily to increased revenue per quote request as a result of increased volume and demand for consumer referrals by our insurance providers, partially offset by increased cost per quote request.
Liquidity and Capital Resources
Since our inception, we have primarily funded our operations through issuances of shares of our convertible preferred stock and common stock, debt and cash flows from operations. As of June 30, 2018, we had cash of $2.4 million and availability of $4.0 million on a revolving line of credit under our amended Loan and Security Agreement. In July 2018, we closed our initial public offering, or IPO, of 3,125,000 shares of Class A common stock and received net proceedsstock.
Cash Flows
The following table shows a summary of our cash flows for each of the six months ended June 30, 2018 and 2017:
Six Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Net cash used in operating activities | $ | (999 | ) | $ | (2,396 | ) | ||
Net cash used in investing activities | (1,395 | ) | (648 | ) | ||||
Net cash provided by (used in) financing activities | 2,413 | (8,096 | ) | |||||
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Net increase (decrease) in cash | $ | 19 | $ | (11,140 | ) | |||
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Net cash used in operating activities
During the six months ended June 30, 2018, operating activities used $1.0 million of cash, primarily resulting from our net loss of $3.1 million and net cash used by changes in our operating assets and liabilities of $0.2 million, partially offset by netnon-cash charges of $2.2 million. Net cash used by changes in our operating assets and liabilities for the six months ended June 30, 2018 consisted primarily of a $3.0 million increase in accounts receivable and a $1.4 million increase in prepaid and other current assets, partially offset by an aggregate $4.1 million increase in accounts payable and accrued expenses and other current liabilities. Changes in accounts receivable, accounts payable and accrued expenses and other current liabilities were generally due to growth in our business, timing of customer and vendor invoicing and payments.
During the six months ended June 30, 2017, operating activities used $2.4 million of cash, primarily resulting from our net loss of $3.3 million and net cash used by changes in our operating assets and liabilities of $0.9 million, partially offset by netnon-cash charges of $1.8 million. Net cash used by changes in our operating assets and liabilities for the six months ended June 30, 2017 consisted primarily of an aggregate $0.4 million decrease in accounts payable and accrued expenses and other current liabilities and a $0.3 million net increase in accounts receivable. Changes in accounts receivable and accounts payable and accrued expenses were generally due to growth in our business, timing of customer and vendor invoicing and payments.
Net cash used in investing activities
Net cash used in investing activities was $1.4 million and $0.6 million for the six months ended June 30, 2018 and 2017, respectively. During the six months ended June 30, 2018, we used $1.4 million to acquire property and equipment, which included the capitalization of $1.1 million of software development costs. During the six months ended June 30, 2017, we used $0.6 million to acquire property and equipment, which included the capitalization of $0.3 million of software development costs. Acquisitions of property and equipment generally include the purchase of computer equipment for our operations and employees, equipment, furniture and leasehold improvements and the capitalization of certain software development costs.
Net cash provided by (used in) financing activities
During the six months ended June 30, 2018, net cash provided by financing activities was $2.4 million, consisting primarily of $5.0 million of net borrowings from our revolving line of credit and $0.6 million of proceeds received from the exercise of stock options, partially offset by a $2.6 million repayment of our previously outstanding term loan and $0.5 million in payments of deferred offering costs.
During the six months ended June 30, 2017, net cash used in financing activities was $8.1 million, consisting primarily of cash used to repurchase common stock of $9.2 million and principal payments made on our term loan of $0.8 million, partially offset by net borrowings from our revolving line of credit of $1.5 million and proceeds received from the exercise of common stock options of $0.4 million.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and commitments as of June 30, 2018:
Payments Due By Period | ||||||||||||||||||||
Total | Less Than 1 Year | 1 to 3 Years | 4 to 5 Years | More Than 5 Years | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating lease commitments(1) | $ | 12,153 | $ | 1,831 | $ | 3,965 | $ | 3,916 | �� | $ | 2,441 | |||||||||
Debt obligations(2) | 7,641 | 384 | 7,257 | — | — | |||||||||||||||
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Total | $ | 19,794 | $ | 2,215 | $ | 11,222 | $ | 3,916 | $ | 2,441 | ||||||||||
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Item 4. |
Controls and |
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Critical Accounting Policies and Significant Judgments and Estimates
We prepare our condensed financial statements in accordance with GAAP. The preparation of condensed financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management.
There have been no material changes to our critical accounting policies and estimates from those disclosed in our financial statements and the related notes and other financial information included in our final prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, on June 28, 2018.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, anyoff-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our unaudited condensed financial statements included in this Quarterly Report on Form10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We have a credit agreement that provides us with a revolving line of credit of up to $11.0 million. Borrowings bear interest at a floating rate, which is 0.5% above the greater of 4.25% or the prime rate.
As of June 30, 2018, we had outstanding borrowings under our revolving line of credit of $7.0 million bearing interest at a rate of 5.5%. Changes in interest rates could cause interest charges on our revolving line of credit to fluctuate. Based on the amount of total borrowings outstanding as of June 30, 2018, an increase or decrease of 10% in the prime rate as of June 30, 2018 would cause a corresponding increase or decrease to our net loss and cash flows of less than $0.1 million, assuming that such rate were to remain in effect for a year.
not effective as of that date because of such material weaknesses described below.
There were no
We are not currently a party to any material legal proceedings. From time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Regardless of the outcome, litigation can have a material adverse effect on us because of defense and settlement costs, diversion of management resources, and other factors.
Item 1A. | Risk Factors. |
with no notice. As a result, we cannot guarantee that insurance providers will continue to work with us, or, if they do, the number of referrals they will purchase from us, the price they will pay per referral or their total spend with us. In addition, we may not be able to attract new insurance providers to our marketplace or increase the amount of revenue we earn from insurance providers over time.
We compete with other media for advertising spend from our insurance provider customers, and if we are unable to maintain or increase our share of the advertising spend of our insurance provider customers, our business could be harmed.
We compete for insurance provider advertising spend with traditional offline media such as television, billboards, radio, magazines and newspapers, as well as online sources such as websites, social media and websites dedicated to providing multiple quote insurance information. Our ability to attract and retain insurance provider customers, and to generate advertising revenue from them, depends on a number of factors, including:
the ability of our insurance provider customers to earn an attractive return on investment from their spending with us;
our ability to increase the number of consumers using our marketplace;
our ability to compete effectively with other media for advertising spending; and
our ability to keep pace with changes in technology and the practices and offerings of our competitors.
We may not succeed in retaining or capturing a greater share of our insurance provider customers’ advertising spending compared to alternative channels. If our current insurance provider customers reduce or end their advertising spending with us and we are unable to increase the spending of our other insurance provider customers or attract new insurance provider customers, our revenue and business and financial results would be materially adversely affected.
In addition, insurance provider advertising spend remains concentrated in traditional offline media channels. Some of our current or potential insurance provider customers have little or no experience using the internet for advertising and marketing purposes and have allocated only limited portions of their advertising and marketing budgets to the internet. The adoption of online marketing may require a cultural shift among insurance providers as well as their acceptance of a new way of conducting business, exchanging information and evaluating new advertising and marketing technologies and services. This shift may not happen at all or at the rate we expect, in which case our business could suffer. Furthermore, we cannot assure you that the market for online marketing services will continue to grow. If the market for online marketing services fails to continue to develop or develops more slowly than we anticipate, the success of our business may be limited, and our revenue may decrease.
If consumers do not find value in our services or do not like the consumer experience on our platform, the number of referrals in our marketplace may decline, and our business, results of operations and financial condition could be materially adversely affected.
If we fail to provide a compelling insurance shopping experience to our consumers both through our web and mobile platforms, the number of consumer referrals purchased from us will decline, and insurance providers may terminate their relationships with us or reduce their spending with us. If insurance providers stop offering insurance in our marketplace, we may not be able to maintain and grow our consumer traffic, which may cause other insurance providers to stop using our marketplace. We believe that our ability to provide a compelling insurance shopping experience, both on the web and through mobile devices, is subject to a number of factors, including:
our ability to maintain a marketplace for consumers and insurance providers that efficiently captures user intent and effectively delivers relevant quotes to each individual insurance buyer;
our ability to continue to innovate and improve our marketplace;
our ability to launch new vertical offerings that are effective and have a high degree of consumer and insurance provider engagement;
our ability to maintain the compatibility of our mobile applications with operating systems, such as iOS and Android, and with popular mobile devices running such operating systems; and
our ability to access a sufficient amount of data to enable us to provide relevant quotes to consumers.
If the use of our marketplace declines or does not continue to grow, our business and operating results would be harmed.
We rely on the data provided to us by consumers and insurance providers to improve our product and service offerings, and if we are unable to maintain or grow such data we may be unable to provide consumers with a shopping experience that is relevant, efficient and effective, which could adversely affect our business.
Our business relies on the data provided to us by consumers and insurance providers using our marketplace. The large amount of information we use in operating our marketplace is critical to the insurance shopping experience we provide for consumers. If we are unable to maintain or grow the data provided to us, the value that we provide to consumers and insurance providers using our marketplace may be limited. In addition, the quality, accuracy and timeliness of this information may suffer, which may lead to a negative shopping experience for consumers using our marketplace and could materially adversely affect our business and financial results.
A significant portion of our revenue in recent periods was derived from one customer, and our results of operations could be adversely affected and stockholder value harmed if we lose business from this customer.
Sales to Progressive Casualty Insurance Company accounted for 23% and 20% of our revenue for the years ended December 31, 2016 and 2017, respectively, and for 23% and 19% of our revenue for the six months ended June 30, 2017 and 2018, respectively. This customer made purchases from us under short-term agreements and may cease doing business with us at any time with no notice. As a result, we have no assurances that this customer will continue to purchase from us at its historical levels or at all. If this customer were to reduce its levels of purchases from us or discontinue its relationship with us, the loss could have a material adverse effect on our results of operations in both the short and long term.
We depend on search engines, display advertising, social media, email, content-based online advertising and other online sources to attract consumers to our websites or marketplace, and if we are unable to cost-effectively attract consumers and convert them into quote requests in a cost-effective manner,that we can sell to our insurance provider customers, our business and financial results may be harmed.
Search engines, social media platforms and other online sources often revise their algorithms and introduce new advertising products. If one or more of the search engines or other online sources on which we rely for website traffic were to modify its general methodology for how it displays our advertisements, resulting in fewer consumers clicking through to our websites, our business could suffer. In addition, if our online display advertisements are no longer effective or are not able to reach certain consumers due to consumers’
Consumer traffic to our websites and the volume of quote requests generated by consumer traffic varies and can decline from to time. For example, quote requests increased to 4,113,000 in the three months ended March 31, 2019, increased to 4,519,000 in the three months ended June 30, 2019, increased to 5,516,000 in the three months ended September 30, 2019 and increased to 5,863,000 in the three months ended December 31, 2019. Quote requests increased to 7,392,000 in the three months ended March 31, 2020, decreased to 6,777,000 in the three months ended June 30, 2020 decreased to 6,291,000 in the three months ended September 30, 2020 and increased to 6,553,000 in the three months ended December 31, 2020. Quote requests increased to 7,720,000 in the three months ended March 31, 2021. Additionally, even if we are successful in generating traffic to our websites, we may not be able to convert these visits into consumer quote requests.
Because we do not have exclusive relationshipsagreements with insurance providers consumers may obtain quotes and purchaseare short-term agreements, insurance policies from them without having to use our marketplace. Insurance providers can attract consumers directly throughdecrease their own marketing campaignsbids or other traditional methods of distribution, such as referral arrangements, physical storefront operations or broker agreements. Insurancestop participating in our auctions at any time with no notice. In addition, insurance providers also may offer quotesfrequently change their bidding in our auctions, which can make it difficult to prospective customers online directly, through one or more online competitors of our business, or both. Ifpredict revenue from period to period. Because our insurance provider customers determine to compete directlycan stop buying from us, or spend less with us, or choose to favor one or more of our competitors, they could cease providing us with quote information and terminateat any direct interactions we have with their online workflows, customers relationship management systems and internal quoting platforms, which would reduce the breadth of the quoting information available to us and could put us at a competitive disadvantage against their direct marketing efforts or our competitors that retain such access. If consumers seek insurance policies directly from insurance providers or through our competitors, or if insurance providers cease providing us with access to their systems or information, the number of consumers searching for insurance on our marketplace may decline, andtime our business, financial condition and results of operations and financial condition could be materially adversely affected.
We are also dependent upon the economic success of the home and life insurance industries. Declines in demand for home and life insurancecase our revenue could cause fewer consumers to usedecline or our product offerings to shop for such policies. Downturns in either of these markets, whichoperating costs could be caused by a downturn in the economy at large, could materially adversely affect our business.
increase.
Many of our competitors have more resources than we do and can spend more advertising their brands and services. As a result, we are required to spend considerable money and other resources to create brand awareness and build our reputation. Should the need or competition formaintainmaintaining and enhancing our reputation could fail. Even if we are successful in our branding efforts, such efforts may not be cost-effective. If we are unable to maintain or enhance consumer awareness of our brand cost-effectively, our business, results of operations and financial condition could be materially adversely affected.
If we fail to manage future growth effectively, our business could be materially adversely affected.
We have at times experienced rapid growth and anticipate further growth. This growth has placed significant demands on management and our operational infrastructure. As we continue to grow, we must effectively integrate, develop and motivate a large number of new employees, while maintaining the beneficial aspects of our company culture. If we do not manage the growth of our business and operations effectively, the quality of our services and efficiency of our operations could suffer and we may not be able to execute on our business plan, which could harm our brand, results of operations and overall business.
We also expect that new competitors will enter the online insurance industry with competing marketplaces, products and services, which could have an adverse effect on our business and financial results.
Insurance providers on our marketplace
Our ability to providesuccessfully match these consumers with insurance providers.
We rely on third-party service providers for many aspects
Our success will depend upon our relationships with third parties, including those with our payment processor, our data center host, our customer relationship manager software provider and our general ledger provider. If these third parties experience difficulty meeting our requirements or standards, or if the license agreements we have entered into with such third parties are terminated or not renewed, it could make it difficult for us to operate some
aspects of our business, which could damage our business and reputation. In addition, if such third-party service providers were to cease operations, temporarily or permanently, face financial distress or other business disruptions, increase their fees, or if our relationships with these providers deteriorate, we could suffer increased costs and delays incommunication platforms, may reduce our ability to providecall or text message our consumers, with contentwhich could significantly decrease the number of quote requests and value of our data referrals and substantially harm our business.
business.
We are subject to risks associated with a corporate culture that promotes entrepreneurialism and decentralized decision making.
We have delegated considerable operational autonomy and responsibility to our employees, including by having flexible working hours. In addition, a central tenet of our culture is providing our employees with opportunities to grow, accept new challenges and take on new responsibilities.
As a consequence, we may have relatively inexperienced people in key positions, and we routinely rotate experienced employees to other jobs within our company. In addition, the autonomy we provide to our employees could result in poor decision making, which could have a material adverse effect on our business, results of operations, financial condition and prospects.
prove more expensive than we anticipate, and we may not succeed in increasing our revenue and margins sufficiently to offset these higher expenses. We incur significant expenses in acquiring consumers, developing our technology and marketing the products and services we offer. Our costs also may increase due to our continued new product development and general administrative expenses, such as legal and accounting expenses related to being a public company. If we fail to increase our revenue or manage these additional costs, we may continue to incur losses in the future.
Like all
privacy, data protection and cross-border transfers of consumer information could cause us to delay planned uses and disclosures of data to comply with applicable privacy and data protection requirements. Moreover, if third parties that we work with violate applicable laws or our policies, such violations also may put consumer or insurance provider information at risk and could in turn harm our reputation, business and operating results.
We may be unable to halt the operations of websites that aggregate or misappropriate our data.
From time to time, third parties may misappropriate our data through website scraping, robots or other means and aggregate this data on their websites with data from other companies. In addition, copycat websites may misappropriate data in our marketplace and attempt to imitate our brand or the functionality of our website. If we become aware of such websites, we intend to employ technological or legal measures in an attempt to halt their operations. However, we may be unable to detect all such websites in a timely manner and, even if we could, technological and legal measures may be insufficient to halt their operations. In some cases, particularly in the case of websites operating outside of the United States, our available remedies may not be adequate to protect us against the effect of the operation of such websites. Regardless of whether we can successfully enforce our rights against the operators of these websites, any measures that we may take could require us to expend significant financial or other resources, which could harm our business, results of operations or financial condition. In addition, to the extent that such activity creates confusion among consumers or advertisers, our brand and business could be harmed.
The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data are compromised due to a breach of data, we may be liable for significant costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. If we fail to adequately control fraudulent credit card transactions, we may face civil liability, diminished public perception of our security measures, and significantly higher credit card-related costs, each of which could harm our business, results of operations and financial condition.
If we are unable to maintain our chargeback rate or refund rates at acceptable levels, our processing vendor may increase our transaction fees or terminate its relationship with us. Any increases in our credit and debit card fees could harm our results of operations, particularly if we elect not to raise our rates for our service to offset the increase. The termination of our ability to process payments on any major credit or debit card would significantly impair our ability to operate our business.
Although we are not currently
As of July 31, 2018, we had $11.0
We may from
For example, the California Consumer Privacy Act, or CCPA, went into effect on January 1, 2020. The CCPA creates new individual privacy rights for California consumers (as the word is broadly defined in the law) and places increased privacy and security
For example, we were contacted by a representative from a state tax assessor’s office requesting remittance of uncollected sales taxes. While we do not believe our services are taxable in this state, if we do not prevail in our position, uncollected sales taxes due for the period could amount to approximately $1.5 million including interest and penalties.
consumers. TheCAN-SPAM Act regulates commercial email messages and specifies penalties for the transmission of commercial email messages that do not comply with certain requirements, such as providing anopt-out mechanism for stopping future emails from senders. We, along with third parties we acquire quote requests from, and the insurance providers who use our marketplace may need to comply with such laws and any associated rules and regulations. States and other countries have similar laws related to telemarketing and commercial emails. Additional or modified laws and regulations, or interpretations of existing, modified or new laws, regulations and rules, could prohibit or increase the cost of engaging with consumers and impair our ability to expand the use of our products, including our demand response solution, to more users. FailureAlleged failure to comply with obligations and restrictions related to telephone, text message and email marketing could subject us to lawsuits, fines, statutory damages, consent decrees, injunctions, adverse publicity and other losses that could harm our business. Moreover, over the past several years there has been a sustained increase insignificant amount of litigation alleging violations of laws relating to telemarketing, which has increased the exposure of companies that operate telephone and text messaging campaigns to class action litigation alleging violations of the TCPA. If we, third parties we acquire quote requests from, or the insurance providers who use our marketplace become subject to such litigation, it could result in substantial costs to and materially adversely affect our business.
Risks from third-party products could adversely affect our businesses.
We offer third-party products and we provide marketing services with respect to other insurance products. Insurance, by its nature, involves a transfer
departure
Because we do not expect to pay any dividends on our Class A common stock for the foreseeable future, investors may never receive a return on their investment.
You should not rely on an investment in our Class A common stock to provide dividend income. We do not anticipate that we will pay any cash dividends to holders of our Class A common stock in the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing operations. Accordingly, investors must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any return on their investment. As a result, investors seeking cash dividends should not purchase our Class A common stock.
In addition, as of JulyMarch 31, 2018,2021, there were 1,265,480982,788 shares of Class A common stock subject to outstanding options, 2,535,848982,397 shares of either Class A common stock or Class B common stock subject to outstanding options, 1,875,8722,842,867 shares of Class A common stock subject to outstanding restricted stock unit awards, or RSUs, 242,496 shares of Class B common stock subject to outstanding RSUs and an additional 1,129,6322,414,810 shares of Class A common stock reserved for future issuance under our equity incentive plans.plan. Because we have registered all14,088,187 shares of our Class A common stock and Class B common stock that may be issued under our equity incentive plans pursuant to a Registration Statementregistration statements on FormS-8, on June 28, 2018, any such shares that we issue can be freely sold in the public market upon issuance, subject to thelock-up agreements and the restrictions imposed on our affiliates under Rule 144.
Our management team has limited experience managing a public company.
Most members of our management team have limited experience managing a publicly traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our management team and could divert their attention away from theday-to-day management of our business, which could materially adversely affect our business, financial condition and operating results.
We are currently evaluating our internal controls, identifying and remediating any deficiencies in those internal controls and documenting the results of our evaluation, testing and remediation. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting that we are unable to remediate before the end of the same fiscal year in which the material weakness is identified, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to attest to management’s report on the effectiveness of our internal controls, which will be required after we are no longer an emerging growth company, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our Class A common stock to decline.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expense and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
Failureestablishremediate these material weaknesses, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business and the market price of our common stock.
As a public company, we are required to comply with the rules of the Securities and Exchange Commission, or SEC, implementing Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, which will require management to certify financial andamong other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Though we are required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. As an emerging growth company, our independent registered public accounting firm will not be required to formally attest tothings, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting, pursuant tosuch as the material weaknesses described above.
To comply with the requirements of being a Consequently, we cannot assure you that our independent registered public company, we have undertaken various actions, and may needaccounting firm will be able to take additional actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal control can divert our management’s attention from other matters that are importantattest to the operationeffectiveness of our business. In addition, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be ablereporting.
We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our Class A common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company until the last day of our fiscal year following the fifth anniversary of our initial public offering, subject to specified conditions. For so long as we remain an emerging growth company, we are permitted, and intend, to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. We would cease to be an emerging growth company earlier if we have more than $1.07 billion in annual revenue, we have more than $700 million in market value of our stock held bynon-affiliates (and we have been a public company for at least 12 months and have filed one annual report onForm 10-K) or we issue more than $1 billion ofnon-convertible debt securities over a three-year period. These exemptions include reduced disclosure obligations regarding executive compensation and exemptions from the requirements to holdnon-binding advisory votes on executive compensation and golden parachute payments, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, not being required to comply with certain requirements of Auditing Standard 3101 relating to providing a supplement to the auditor’s report regarding critical audit matters and not being required to comply with any requirementreporting that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation. We cannot predict whether investors will find our Class A common stock less attractive if we rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.
In addition, the JOBS Act provides that an emerging growth company can take advantageidentified, or to implement or maintain other effective control systems required of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, while we are an emerging growth company we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies, that are not emerging growth companies. Accordingly, we will incur additional costs in connection with complying with the accounting standards applicable to public companies at such time or times as they become applicable to us.
Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affectalso restrict our financial condition and results of operations.
Accounting principles and related pronouncements, implementation guidelines and interpretations we apply to a wide range of matters that are relevant to our business, including, but not limited to, revenue recognition, stock-based compensation, the redemption value of our redeemable convertible preferred stock, income taxes and capitalization ofweb-site development costs are complex and involve subjective assumptions, estimates and judgments by our management. Changes in these accounting pronouncements or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
Accounting principles generally accepted in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the 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 particular, in May 2014, the FASB issued Accounting Standards Update, or ASU,No. 2014-09,Revenue from Contracts with Customers (Topic 606), or ASU2014-09, which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. The core principle ofASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As an “emerging growth company” the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act with respect to ASU2014-09, which will result in ASU2014-09 becoming applicable to us on January 1, 2019. We are evaluating ASU2014-09 and have not determined the impact it may have on our financial reporting.
Changes in lease accounting standards may materially and adversely affect us.
The FASB recently adopted new accounting rules, to be effective for our fiscal year beginning after December 2019, that will require companies to capitalize most leases on their balance sheets by recognizing a lessee’s rights and obligations. When the rules are effective, we will be required to account for the leases for our office space as assets and liabilities on our balance sheet, while previously we accounted for such leases on an “off balance sheet” basis. As a result, lease-related assets and liabilities will be recorded on our balance sheet, and we may be required to make other changesfuture access to the recording and classificationcapital markets.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Equity Securities
From April 1, 2018 through June 30, 2018, we granted under our Amended and Restated 2008 Stock Incentive Plan (i) options to purchase 884,000 shares of our Class A common stock, at an exercise price of $10.42 per share, and (ii) 103,984 restricted stock units to be settled in shares of our Class A common stock.
From April 1, 2018 through June 30, 2018, we issued and sold to one employee an aggregate of 6,936 shares of Class B common stock upon the exercise of stock options under our Amended and Restated 2008 Stock Incentive Plan at per share exercise price of $1.27.
The stock options and restricted stock units and the common stock issued upon the exercise of options described above were issued under our Amended and Restated 2008 Stock Incentive Plan in reliance on the exemption provided by Rule 701 promulgated under the Securities Act of 1933, as amended, or the Securities Act. Each of the recipients of securities in these transactions had adequate access, through employment, business or other relationships, to information about us. The foregoing transactions did not involve any underwriters, underwriting discounts or commissions, or any public offering.
Use of Proceeds
Our initial public offering of Class A common stock, or the IPO, was effected through a Registration Statement on FormS-1 (FileNo. 333-225379), which we refer to as the Registration Statement, that was declared effective by the Securities and Exchange Commission, or SEC, on June 27, 2018. The Registration Statement registered an aggregate of 5,390,625 shares of our Class A common stock, including 1,562,500 shares registered for sale by certain of our stockholders. Shares of our Class A common stock began trading on the Nasdaq Global Market on June 28, 2018.
J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as joint book-running managers of the IPO, with Canaccord Genuity LLC, JMP Securities LLC, Needham & Company LLC, Oppenheimer & Co. Inc., Raymond James & Associates, Inc. and William Blair & Company, L.L.C. acting asco-managers. The offering commenced on June 27, 2017 and terminated without the sale of the 703,125 shares registered for potential issuance upon exercise of the underwriters’ option to purchase additional shares in the IPO.
On July 2, 2018, 3,125,000 shares of Class A common stock were sold on our behalf and 1,562,500 shares of Class A common stock were sold on behalf of the selling stockholders at an initial public offering price to the public of $18.00 per share, resulting in aggregate gross proceeds of $56.3 million to us and $28.1 million to the selling stockholders. We paid to the underwriters of the IPO an underwriting discount of $3.9 million and the selling stockholders paid to the underwriters an aggregate underwriting discount of $2.0 million. In addition, we incurred expenses of approximately $3.7 million which, when added to the underwriting discount paid by us, amounted to total expenses to us of approximately $7.6 million. Thus, the net offering proceeds to us, after deducting underwriting discounts and offering expenses, were approximately $48.6 million. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning 10.0% or more of any class of our equity securities or to any other affiliates.
There has been no material change in the planned use of IPO proceeds from that described in the final prospectus for the IPO filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act on June 28, 2018.
Item 6. | Exhibits. |
* | Previously filed. |
** | Filed herewith. |
† |
The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q, are not 10-Q, irrespective of any general incorporation language contained in such filing. |
EVERQUOTE, INC. | ||||||
Date: August | By: | /s/ | ||||
Jayme Mendal Chief Executive Officer and President (Principal Executive Officer) | ||||||
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