UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020June 30, 2021
or
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-39142
Porch Group, Inc.
PropTech Acquisition Corporation
(Exact name of registrant as specified in its charter)
Delaware | 83-2587663 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification |
(847) 477-79632200 1
st Avenue S., Suite 300,Seattle, WA98134
(Address of Principal Executive Offices)
(855) 767-2400
(Registrant’s telephone number, including area code)number)
Not Applicable
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of | Trading symbol | Name of | ||
Common Stock, par value $0.0001 per share | PRCH | The Nasdaq Stock Market LLC | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | Accelerated filer | ☐ | | |
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Non-accelerated filer | ☒ | Smaller reporting company | ☒ | ||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☒☐ No ☐☒
AsThe number of May 12, 2020, there were 17,250,000outstanding shares of Class A common stock and 4,312,500 sharesthe Registrant’s Common Stock as of Class B common stock of the registrant issued and outstanding.August 12, 2021 was 96,734,221.
PROPTECH ACQUISITION CORPORATION
Form 10-Q
Table of Contents
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2 PART PORCH GROUP, INC. Condensed Consolidated Balance Sheets
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 PORCH GROUP, INC. Condensed Consolidated Statements of Operations
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 PORCH GROUP, INC. Condensed Consolidated Statements of Comprehensive Loss
5 PORCH GROUP, INC. Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (all numbers in thousands, except share amounts, unaudited)
(1) Issuance of redeemable convertible preferred stock and convertible preferred stock warrants have been retroactively restated to give effect to the recapitalization transaction. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 PORCH GROUP, INC. Condensed Consolidated Statements of Cash Flows
7 PORCH GROUP, INC.
Condensed Consolidated Statements of Cash Flows - Continued (all numbers in thousands, unaudited)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 8 PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements (unaudited) (all numbers in thousands, except share amounts and unless otherwise stated) 1. Description of Description of Business
On April 5, 2021, the Company acquired Homeowners of America Holding Corporation (“HAHC”), an insurance holding company
The Merger
COVID-19 Update The Unaudited Interim Financial Statements
9 derived from the The
Comprehensive Income (Loss)
Each reporting period, the fair value of the FVO Notes is determined and resulting gains and losses from the change in fair value of the FVO Notes associated with the Company’s own credit component is recognized in accumulated other comprehensive income (“AOCI”), while the resulting gains and losses associated with non-credit components are included in the unaudited condensed consolidated statements of operations. The FVO Notes were extinguished during the quarter ended June 30, 2020, resulting in a reversal of the previously recognized gain from the change in fair value of the FVO associated with the Company’s own credit component in AOCI. Use of Estimates The preparation of financial statements Segment Reporting The Company operates as a single reportable segment. Operating segments are components of an enterprise for which separate discrete financial information is available and operational results are regularly evaluated by the chief operating decision maker (“CODM”) for the purposes of making decisions regarding resource allocation and assessing performance. The Company has determined that its Chief Executive Officer (“CEO”) is the CODM, and to date, the CEO has made such decisions and assessed performance at the aggregated level. All the Company’s revenue is generated in the United States. As of June 30, 2021 and December 31, 2020, the Company did not have assets located outside of the United States. Concentration of Credit Risk Financial instruments which potentially subject the Company to credit risk consist principally of cash, money market accounts on deposit with financial institutions, money market funds, certificates of deposit and fixed- maturity securities, as well as receivable balance in the course of collection. The Company’s insurance subsidiary has exposure and remains liable in the event of an insolvency of one of its primary reinsurers. Management and its reinsurance intermediary regularly assess the credit quality and ratings of its 10 reinsurer base companies. No individual reinsurer represented more than 10% of the Company’s insurance subsidiary’s total reinsurance receivables as of the dates or for the periods presented. Substantially all of the Company’s insurance-related revenues are derived from customers in Texas, Arizona, Georgia, North Carolina, and South Carolina, which could be adversely affected by economic conditions, an increase in competition, or environmental impacts and changes. Cash, Cash Equivalents and Restricted Cash The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. The Company maintains cash balances that may exceed the insured limits by the Federal Deposit Insurance Corporation. Restricted cash equivalents as of June 30, 2021 includes $314 thousand held in certificates of deposits and money market mutual funds pledged to the Department of Insurance in certain states as a condition of its Certificate of Authority for the purpose of meeting obligations to policyholders and creditors and $1.9 million related to acquisition indemnification hold backs. Restricted cash as of December 31, 2020 includes $8.4 million related to the Paycheck Protection Program Loans held in escrow with a commercial bank (see Note 7) and a $3.0 million minimum cash balance required by the Company’s senior secured lender. The reconciliation of cash and cash equivalents to amounts presented in the consolidated statements of cash flows are as follows:
Accrued expenses and other current liabilities as of June 30, 2021, include $17.9 million of both claim and general operating expense checks issued in excess of cash book balances, not yet presented for payments. Investments The Company’s investments are primarily comprised of short-term certificates of deposit, U.S. Treasury notes, The Company evaluates whether declines in the fair value of its investments below amortized cost are other-than-temporary. This evaluation includes the Company's ability and intent to hold the security until an expected recovery occurs, the severity and duration of the unrealized loss, as well as all available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable forecasts, when developing estimates of cash flows expected to be collected. Realized gains and losses on sales of investments are determined using the specific-identification method. 11 Accounts Receivable and Long-term Insurance Commissions Receivable Accounts receivable represent amounts due from enterprise customers and other corporate partnerships, as well as due and deferred insurance premiums. Due and deferred premiums consist of uncollateralized premiums and agents’ balances which are in the process of collection as well as premiums earned but not yet due from customers. Long-term insurance commissions receivable balance consists of the estimated commissions from policy renewals expected to be collected. The Company estimates allowances for uncollectible receivables based on the credit worthiness of its customers, historical trend analysis, and general economic conditions. Consequently, an adverse change in those factors could affect the Company’s Deferred Policy Acquisition Costs The Company capitalizes deferred policy acquisitions costs (“DAC”) which consist of commissions, premium taxes and policy underwriting and production expenses that are directly related to the successful acquisition of new or renewal insurance contracts. DAC are amortized to expense on Fair Value of Financial Instruments Fair value, as defined by the accounting standards, represents the amount at which an asset or liability would be transferred in a current orderly transaction between willing market participants. Emphasis is placed on observable inputs being used to assess fair value. To reflect this approach the standards require a three-tiered fair value hierarchy be applied based on the nature of the inputs used when measuring fair value. The three hierarchical levels of inputs are as follows:
The level of the least observable significant input used in assessing the fair value determines the placement of the entire fair value measurement in the hierarchy. Management’s assessment of the significance of a particular input to the fair value measurement requires the use of judgment specific to the asset or liability. Losses and Loss Adjustment Expenses Reserves The liability for losses and loss adjustment expenses (“LAE”) is an estimate of the amounts required to cover known incurred losses and LAE, and is developed through the review and assessment of loss reports, along with the analysis of known claims. These reserves include management’s estimate of the amounts for losses incurred but not reported (“IBNR”), based on evaluation of overall loss reporting patterns as well as the loss development cycles of individual claim cases. Although management believes that the balance of these reserves is adequate, as such liabilities are necessarily dependent on estimates, the ultimate expense may be more or less than the amounts presented. The approach and methods for developing these estimates and for recording the resulting liability are continually reviewed. Any adjustments to this reserve are recognized in the statement of operations. Losses and LAE, less related reinsurance are charged to expense as incurred. 12 The following table provides the rollforward of the beginning and ending reserve balances for losses and LAE, gross of reinsurance for June 30, 2021:
Reinsurance In the normal course of business, the Company continually monitors its risk exposure and seeks to reduce the overall exposure to losses that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk with other insurance enterprises or reinsurers. The Company only engages quality, financially rated reinsurers and continually monitors the financial ratings of these companies through its brokers. The amount and type of reinsurance employed is based on management’s analysis of liquidity as well as its estimates of probable maximum loss and evaluation of the conditions within the reinsurance market. Reinsurance premiums, expense reimbursements, and reserves related to reinsured business are accounted for on a basis consistent with those used for the The effects of reinsurance on premiums written and earned were as follows, for the period since the acquisition date of April 5, 2021 to June 30, 2021:
Other Insurance Liabilities, Current The following table details the components of other insurance liabilities, current on the condensed consolidated balance sheets:
Earnout Shares Upon the Merger, 6,000,000 restricted common shares, subject to vesting and cancellation provisions, were issued to holders of pre-Merger Porch common stock (the “earnout shares”). The earnout shares were issued in 3 equal tranches with separate market vesting conditions. One-third of the earnout shares met the market vesting condition when 13 the Company’s common stock had a closing price of greater than or equal to $18.00 over 20 trading days within a 30-consecutive trading day period (see Note 9). An additional third will vest when the Company’s common stock has a closing price of greater than or equal to $20.00 over the same measurement criteria. The final third will vest when the Company’s common stock has a closing price of greater than or equal to $22.00 over the same measurement criteria. Additional earnout shares may also be issued to earnout stockholders, on a pro rata basis, depending on forfeitures of employee earnout shares that are subject to a continued service vesting condition (see Note 9). The earnout shares are accounted for as a derivative financial instrument, which is classified as a liability and periodically measured at fair value, with changes in fair value recognized in the statement of operations. Note 4 denotes the beginning and ending balances of the earnout share liability, and activity recognized during the period. Revenue Recognition The Company generates its Core Services Revenue from (1) fees received for connecting homeowners to individual contractors, small business service providers and large enterprise service providers, (2) commissions from third-party insurance carriers, and (3) insurance premiums, policy fees and other insurance-related fees generated through its own insurance carrier. The Company’s Managed Services Revenue is generated from fees received for providing select and limited services directly to homeowners. The Company’s Software and Service Subscription Revenue is generated from fees received for providing subscription access to the Company’s software platforms and subscription services across various industries. Core Services Revenue Core Services Revenue is generated by the Company connecting third-party service providers (“Service Providers”) with homeowners that meet pre-defined criteria and who may be looking for relevant services. Service Providers represent a broad variety of offerings across the construction and repair, utilities, and other connected services spaces, which includes movers, TV/Internet, warranties, security monitoring providers, plumbers, electricians, roofers, et al. The Company also connects homeowners with home and auto insurance policies from third-party insurance carriers, and in April 2021, began providing various forms of homeowners insurance through its own insurance carrier and managing general agency. Revenue generated from Service Providers is recognized at a point in time upon the connection of a homeowner to the Service Provider, at which point the Company’s performance obligation has been satisfied. The transaction price is generally either a fixed price per qualifying lead or activated service, or a percentage of the revenue the Service Provider ultimately generates through the homeowner connection. When the revenue to which the Company is entitled is based on the amount of revenue the Service Provider generates from the homeowner, the transaction price is considered variable and an estimate of the constrained transaction price is recorded by the Company upon delivery of the lead or upon the activation of the service. Amounts received in advance of delivery of leads to the Service Provider is recorded as deferred revenue. Certain Service Providers have the right to return leads in limited instances. An estimate of returns is included as a reduction of revenue based on historical experience or specific identification depending on the contractual terms of the arrangement. Estimated returns are not material in any period presented. In January 2020, the Company, through its wholly-owned subsidiary and licensed insurance agency, Elite Insurance Group (“EIG”), began selling homeowner and auto insurance policies for third-party insurance carriers. The transaction price for these arrangements is the estimated lifetime value (“LTV”) of the commissions to be paid by the third-party carrier for the policies sold. The LTV represents fixed first-year commission upon sale of the policy as well as the estimated variable future renewal commissions expected. The Company constrains the transaction price based on its best estimate of the amount which will not result in a significant reversal of revenue in a future period. After a policy is sold to an insurance carrier, the Company has no additional or ongoing contractual obligation to the policyholder or insurance carrier. 14 The Company estimates LTV by evaluating various factors, including commission rates for specific carriers and estimated average plan duration based on insurance carrier and market data related to policy renewals for similar insurance policies. On a quarterly basis, management reviews and monitors changes in the data used to estimate LTV as well as the cash received for each policy type compared to original estimates. The Company analyzes these fluctuations and, to the extent it identifies changes in estimates of the cash commission collections that it believes are indicative of an increase or decrease to prior period LTVs, the Company will adjust LTV for the affected policies at the time such determination is made. Changes in LTV may result in an increase or a decrease to revenue. Changes to the estimated variable consideration were not material for the periods presented. Starting in April 2021, through the newly-acquired HOA, the Company is authorized to write various forms of homeowners insurance. Insurance-related revenues included in Core Services Revenue primarily relate to premiums, policy fees, excess ceding commissions and reinsurance profit share, and loss adjustment income. Premiums are recognized as revenue on a daily pro rata basis of the policy term. The portion of premiums related to the unexpired term of policies in force as of the end of the measurement period and to be earned over the remaining term of these policies, is deferred and reported as deferred revenue. Policy fees are collected by HAMGA and include application fees, which are intended to offset the costs incurred in establishing the insurance policy. Policy fees on policies where premium is traditionally paid in full upon inception of the policy are recognized when written. Excess ceding commissions represent the commissions from reinsurers in excess of the portion which represents the reimbursement of acquisition costs associated with insurance risk ceded to reinsurers and is earned on a pro-rata basis over the life of the insurance policy. Reinsurance profit share is additional ceding commissions payable to the Company based on attaining specified loss ratios within individual treaty years. Reinsurance profit share income is recognized when earned, which includes adjustments to earned reinsurance profit share based on changes in incurred losses. Loss adjustment fee income is recognized when the claim file is opened, and other fee income is recognized when the related service is performed. Managed Services Revenue Managed services revenue includes fees earned from providing a variety of services directly to the homeowner, including handyman and moving services. The Company generally invoices for managed services projects on a fixed fee or time and materials basis. The transaction price represents the contractually agreed upon price with the end customer for providing the respective service. Revenue is recognized as services are performed based on an output measure of progress, which is generally over a short duration (e.g., same day). Fees earned for providing managed services projects are non-refundable and there is generally no right of return. The Company acts as the principal in managed services revenue as it is primarily responsible to the end customer for providing the service, has a level of discretion in establishing pricing, and controls the service prior to providing it to the end customer. This control is evidenced by the ability to identify, select, and direct the service provider that provides the ultimate service to end customers. Software and Service Subscription Revenue Software and Service Subscription Revenue is primarily generated from the vertical software sold to home inspectors and other home services companies. The Company does not provide the customer with the right to take possession of any part of the software supporting the cloud-based application services. However, the Company does provide certain data analytics and marketing services under subscription contracts. The Company’s standard subscription contracts are monthly contracts in which pricing is based on a specified volume of activity completed through the software. Fees earned for providing access to the subscription software and services are non-refundable and there is no right of return. Revenue is recognized based on the amount which the Company is entitled to for providing access to the subscription software and services during the monthly contract term. 15 Income Taxes Provisions for income taxes for the three months ended June 30, 2021 and 2020 were $7.7 million benefit and $3 thousand expense, respectively, and the effective tax rates for these periods were 30.94% and (0.11%), respectively. The difference between the Company’s effective tax rates for the 2021 period and the U.S. Other income (expense), net The following table details the components of other income (expense), net on the condensed consolidated statements of operations:
Emerging Growth Company Status The Company is an
Recent Accounting Pronouncements Not Yet Adopted In
16 defers the effective date of ASU No. 2016-13 for smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. In the event the Company no longer qualifies as an emerging growth company, it will no longer qualify for the deferral of the effective date available for emerging growth companies. The Company is currently evaluating the impact of the adoption of ASU No. 2016-13 on the consolidated balance sheets, statements of operations, and statements of cash flows. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard is effective for non-public companies for reporting periods beginning after December 15, 2021 and early adoption is permitted. The comprehensive new standard will amend and supersede existing lease accounting guidance and is intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. The guidance requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In the event the Company no longer qualifies as an emerging growth company, it will no longer qualify for the deferral of the effective date available for emerging growth companies. The Company is currently evaluating the impact that adoption will have on the consolidated balance sheets, statements of operations, and statements of cash flows and expects that the adoption of the ASU will increase assets and liabilities related to the Company’s operating leases on the consolidated balance sheets. The Company estimates that as of June 30, 2021, the adoption of Topic 842 would increase the Company’s total assets reflecting right of use asset of approximately $4.0 million and total liabilities reflecting the lease obligation payable of approximately $4.0 million. 2. Revenue Disaggregation of Revenue Total revenues consisted of the following:
Revenue from Divested Businesses There were 0 divestitures during the three months and six months ended June 30, 2021. Total revenue reported includes revenue from divested businesses of $1.8 million and $4.3 million for the three months ended June 30, 2020 and six months ended June 30, 2021 and 2020, respectively. Contracts with Customers Contract Assets - Long-term Insurance Commissions Receivable A summary of the activity impacting the contract assets during the six months ended June 30, 2021 is presented below:
As of June 30, 2021, $239 of contract assets are expected to be collected within the next 12 months and therefore are included in current accounts receivable on the consolidated balance sheets. The remaining $6,140 of contract assets 17 are expected to be collected in the following periods and are included in long-term insurance commissions receivable on the consolidated balance sheets. Contract Liabilities — Refundable Customer Deposits In September 2019, the Company entered into a Lead Buyer Agreement with a customer (“Buyer”) that provides residential security systems. Under the Lead Buyer Agreement, the Buyer pays the Company a referral fee for leads resulting in completed installations of certain residential security systems. At inception of this agreement, the Buyer made a prepayment of $7,000, which is to be credited over the term from October 2019 to September 2022, from earned referral fees for leads provided by the Company. This prepayment represents a contract liability since it is an advanced deposit for services the Company has yet A summary of the activity impacting the contract liabilities during the six months ended June 30, 2021 is presented below:
As of June 30, 2021, $2,299 of contract liabilities are expected to be transferred to revenue within the next 12 months and therefore are included in current refundable customer deposits on the unaudited condensed consolidated balance sheets. The remaining $378 of contract liabilities are expected to be transferred to revenue over the remaining term of the contract and are included in refundable customer deposits, non-current on the unaudited condensed consolidated balance sheets. Deferred Revenue Timing may differ between the satisfaction of performance obligations and collection of amounts from customers. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. To the extent the amounts relate to services or coverage performed by the Company over time, these liabilities are classified as deferred revenue. If the amounts collected related to a A summary of the activity impacting deferred revenue balances related to contracts with customers during the six months ended June 30, 2021 is presented below:
Deferred revenue presented on the Company’s
18 Remaining Performance Obligations
3. Investments The following table provides the Company’s investment income, and realized gains on investments for 2021:
The following table provides the amortized cost, fair value and unrealized gains and (losses) of
The amortized cost and fair value of
19 Other-than-temporary Impairment (“OTTI”) The Company regularly reviews its individual investment securities for OTTI. The Company considers various factors in determining whether each individual security is other-than-temporarily impaired, including:
Securities with gross unrealized loss position at June 30, 2021, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:
At June 30, 2021, there were 194 securities in an unrealized loss position. Of these securities, there were none that had been in an unrealized loss position for 12 months or longer. The Company believes there were no fundamental issues such as credit losses or other factors with respect to any of its available-for-sale securities. The unrealized losses on investments in fixed-maturity securities were caused primarily by interest rate changes. It is expected that the securities would not be settled at a price
20 4. Fair Value The following table details the fair value measurements of assets and liabilities that are measured at fair value on a recurring basis:
Financial Assets Money market mutual funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. As the funds are generally maintained at a net asset value which does not fluctuate, cost approximates fair value. These are included as a Level 1 measurement in the table above. The fair values for available-for-sale fixed-maturity securities are based upon prices provided by an independent pricing service. The Company has reviewed these prices for reasonableness and has not adjusted any prices received from the independent provider. Level 2 securities represent assets whose fair value is Contingent Consideration – Business Combinations The Company estimated the fair value of the The Company estimated the fair value of the business combination contingent consideration that is triggered by stock 21 value is based on the simulated stock price of the Company over the maturity date of the contingent consideration. As of June 30, 2021, the key inputs used in the determination of the fair value of $8.55 thousand included current stock price of $19.34, strike price of $20.00, discount rate of 5.3% and volatility of 70%. As of December 31, 2020, the key inputs used in the determination of the fair value of $1,749 included current price of $14.27, strike price of $20.00, discount rate of 9% and volatility of 60%. The Company estimated the fair value of the 2018 business combination contingent consideration using a variation of the income approach known as the real options method. The fair value is based on the present value of the contingent payments to be made using a weighted probability of possible payments. In January 2021, the 2018 business combination contingent consideration was settled in full for a cash payment of $2,063. As of December 31, 2020, the key inputs used in the determination of fair value of $1,800 include projected revenues and expenses, discount rate of 9.96% to 9.98%, revenue volatility of 18.0% and weighted-average cost of capital of 21.5%. Contingent Consideration - Earnout The Company estimated the fair value of the earnout contingent consideration using the Monte Carlo simulation method. The fair value is based on the simulated price of the Company over the maturity date of the contingent consideration and increased by the certain employee forfeitures. As of June 30, 2021, the key inputs used in the determination of the fair value included exercise price of $20 and $22, volatility of 65%, forfeiture rate of 15% and stock price of $19.34. As of December 31, 2020, the key inputs used in the determination of the fair value included exercise price of $18, $20 and $22, volatility of 60%, forfeiture rate of 16% and stock price of $14.27. Private Warrants The Company estimated the fair value of the private warrants using the Black-Scholes-Merton option pricing model. As of June 30, 2021, the key inputs used in the determination of the fair value included exercise price of $11.50, Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. The changes for Level 3 items measured at fair value on a recurring basis using significant unobservable inputs are as follows:
22
Fair Value Disclosure The fair value of debt approximates the unpaid principal balance and is considered a Level 2 measurement. See Note 7. 5. Property, Equipment, and Software Property, equipment, and software net, consists of the following:
Depreciation and amortization expense related to property, equipment, and software was $1,174 and $935 for the three months ended June 30, 2021 and 2020, respectively, and $2,296 and $1,917 for the six months ended June 30, 2021 and 2020, respectively. 23 6. Intangible Assets and Goodwill Intangible Assets Intangible assets are stated at cost or acquisition-date fair value less accumulated amortization, and consist of the following, as of June 30, 2021:
Intangible assets consist of the following, as of December 31, 2020:
The aggregate amortization expense related to intangibles was $2,720 and $662 for the three months ended June 30, 2021 and 2020, respectively, and $4,060 and $1,469 for the six months ended June 30, 2021 and 2020, respectively. Goodwill The following tables summarize the changes in the carrying amount of goodwill for the six months ended June 30, 2021:
24 7. Debt At June 30, 2021, debt comprised of the following:
Senior Secured Term Loans In January 2021, the Company entered into an amendment (the “Runway Amendment”) to the Loan and Security Agreement, dated as of July 22, 2020 (as amended, the “Runway Loan Agreement”), with Runway Growth Credit Fund, Inc., as agent for a syndicate of lenders. Among other things, the Runway Amendment includes a commitment for a supplemental term loan in the aggregate amount of up to $10.0 million, a reduction in the interest rate payable on borrowed amounts, a reduction to certain financial covenants related to minimum revenue, as well as amends the maturity date to December 15, 2024, and eliminates a minimum cash balance requirement of $3.0 million. Porch did not borrow any additional amounts in connection with entering into the Runway Loan Amendment. The Runway Loan is a first lien loan secured by any and all properties, rights and assets of the Company with a maturity date of December 15, 2024. Until the Runway Amendment, interest was payable monthly in arrears at a variable rate of interest based on the greater of 0.55% or LIBOR rate (as defined) plus an applicable margin of 8.50% plus 2% of PIK interest. As of December 31, 2020, the calculated interest rate was 11.05%. The Runway Amendment reduced the applicable margin from 8.5% to 8% and eliminated the PIK interest. As of June 30, 2021 the calculated interest rate was 8.55%. Principal payments are required beginning on August 15, 2022 in equal monthly installments through the maturity date. A prepayment fee of 2%, 1.5%, 1% or 0.5% of the outstanding loan amount is due if the loan is repaid prior to the 1st, 2nd, 3rd or 4th anniversary date, respectively. There is a final payment fee of $1,750 or 3.5% of any partial payment, which is reflected as a discount on the loan and is accreted to interest expense using the effective interest method over the term of the loan or until extinguishment of the related loan. Upon a default, the loan is immediately due and payable and bears interest at 5% higher than the applicable loan interest rate. The financial covenants require the Company to maintain minimum revenue of $15.4 million in the quarter ended December 31, 2020, and 70% of projected revenue in all future quarters. As of June 30, 2021, the Company is in compliance with all covenants of the Runway Loan Agreement. Paycheck Protection Program Loans In April 2020, the Company entered into a loan agreement with Western Alliance Bank pursuant to the Paycheck Protection Program established under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). The Company received loan proceeds of $8.1 million (the “Porch PPP Loan”). The term of the Porch PPP Loan was two years with a maturity date of April 18, 2022 and bore interest at a fixed rate of 1.00%. Payments of principal and interest on the Porch PPP Loan were deferred for the first nine months of the term of the Porch PPP Loan. Principal and interest were payable monthly, less the amount of any potential forgiveness. The Company submitted an application for forgiveness of the loan in December 2020, and in June 2021 the loan was forgiven in whole. As a result, the outstanding principal balance of $8.1 million and unpaid interest of $91 were written off and the Company recorded a gain on extinguishment in the consolidated statements of operations. In connection with an acquisition of DataMentors Holdings, LLC d/b/a V12 Data (“V12 Data”) on January 12, 2021 (see Note
25 of the loan was submitted in November 2020, and in June 2021 the loan was forgiven in whole. In accordance with the terms of the purchase agreement, the restricted cash held in escrow will be provided to the seller as consideration for the transaction and no gain will be recorded in the
In connection with the Collateral for the RLOC includes all assets of HAHC and its subsidiaries as well as the stock of HAIC. The credit agreement is subject to standard financial covenants and reporting requirements. At June 30, 2021, the Company was in compliance with all required covenants. Outstanding borrowings on the RLOC at June 30, 2021 were $4.0 million. These borrowings were utilized primarily to increase HAIC’s capital surplus. Term Loan Facility In connection with HOA acquisition on April 5, 2021, the Company assumed a nine-year, $10.0 million term loan facility with a local bank. As of June 30, 2021 the Company has made 0 borrowings on the term loan facility. Other Promissory Notes In connection with an acquisition on November 2, 2020, the Company issued a promissory note payable to the founder of the acquired entity. The promissory note has an initial principal balance of $750 thousand and a stated interest rate of 0.38% per annum. The promissory note shall be paid in 5 equal annual installments of $150 thousand each, plus accrued interest commencing on January 21, 2021. 8. Equity and Warrants Shares Authorized As of June 30, 2021, the Company had authorized a total of 410,000,000 shares of stock for issuance, with 400,000,000 shares designated as common stock, and 10,000,000 shares designated as preferred stock. Common Shares Outstanding and Common Stock Equivalents The following table summarizes our fully diluted capital structure at June 30, 2021:
26 Warrants Upon completion of the Merger with PTAC on December 23, 2020, the Company assumed 8,625,000 public warrants and 5,700,000 private warrants to purchase an aggregate 14,325,000 shares of
The Company may call the ●at any time while the public warrants are exercisable, ●upon not less than 30 days’ prior written notice of redemption to each public warrant holder,
The The public and private warrants are classified separately on our condensed consolidated balance sheets due to differences in each instrument’s contractual terms. The public warrants are classified in equity classified financial instruments and are not remeasured periodically. The private warrants are liability classified financial instruments measured at fair value, with periodic changes in fair value recognized through earnings. See Note 4. On March 23, 2021, the Company announced that it would redeem all outstanding public warrants on April 16, 2021 pursuant to a provision of the warrant agreement under which the public warrants were issued. During March 2021, certain holders of public warrants exercised their warrants to acquire 8,087,623 shares of common stock at a price of $11.50 per share, resulting in cash proceeds of $89.8 million in March and $3.2 million in April. During April 2021, certain warrant holders exercised their warrants to acquire 2,935,753 shares of common stock at a price of $11.50 per share, resulting in cash proceeds of $33.8 million. During April 2021, the Company also redeemed all of the public warrants that remained outstanding as of April 16, 2021 for a redemption price of $0.01 per public warrant. In connection with the redemption, the public warrants stopped trading on the Nasdaq Capital Market and were delisted, with the trading halt announced after close of market on April 16, 2021. 9. Stock-Based Compensation Under the Company’s 2020 Equity Incentive Plan (the “2020 Plan”), which replaced the Company’s 2012 Equity Incentive Plan upon the closing of the Merger in December 2020, the employees, directors and consultants of the Company, are eligible for grants of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards (“RSA”) and RSUs, collectively referred to as “Awards”. 27 Stock-based compensation consists of expense related to (1) equity awards in the normal course and (2) a secondary market transaction as described below:
2019 Secondary Stock Transactions In May 2019, the Company’s CEO and Founder purchased a total of 7,559,047 shares of legacy Porch.com redeemable convertible preferred stock from an existing investor for an aggregate purchase price of $4.0 million ($0.53 per legacy Porch.com share). The Company determined that the purchase price was below fair value of such shares and as result recorded compensation expense of $33.2 million in general and administrative expense for the difference between the purchase price and fair value, in accordance with the accounting standards. In July 2019, the Company’s CEO and Founder subsequently sold 901,940 shares of legacy Porch.com redeemable convertible preferred stock as an incentive to 11 executives of the Company at the same price at which the shares were initially acquired in the May 2019 transaction, which represents a $2.6 million discount to fair value. The original terms stated that the Company had the right to repurchase such shares if certain service vesting conditions and performance conditions are not met. In December 2020, the performance vesting conditions were met, and compensation expense of $1.6 million was recorded in 2020 related to these awards, of which $0.7 million was related to former employees and immediately recognized, as there is no continued service vesting requirement, and $0.9 million was related to current employees and recognized as a cumulative catch up related to the portion of the service period satisfied through December 31, 2020. In March 2021, the Porch board of directors (the “Board”) amended the original terms to accelerate the vesting of these awards and remove the Company’s repurchase right with the respect to the shares. The remaining stock compensation of $1.9 million related to the award was recognized in March 2021. 2020 Equity Incentive Plan The Stock-Based Compensation Awards granted under the 2020 Plan to employees typically vest 25% of During the Payroll Reduction Program In March 2020, in response to the adverse impact of COVID-19 on the Company’s operations and 28 implementation of a partial employee furlough and payroll reduction in exchange for RSUs. During the year ended December 31, 2020, the Company reduced cash payroll costs by $4.0 million in exchange for a commitment by the Company to provide up to 2,356,045 RSUs subject to (a) a performance (liquidity) vesting condition and (b) and ongoing employment until March 31, 2021 (or June 30, 2021, for certain awards) in order to be fully vested. The grant of these RSUs was approved by the Board of Directors in June, July, and August 2020 and 2,356,045 were issued during the year ended December 31, 2020. The performance vesting conditions, which were previously considered not probable of achievement were met in December 2020 as a result of the Merger. As a result, a cumulative catch up of $6.5 million of compensation expense was recorded in the fourth quarter of 2020. Compensation cost of $1,605 was recorded during the six months ended June 30, 2021, and 0 additional cost is expected to be recorded over the remaining service period in 2021. Employee Earnout Restricted Stock Upon the Merger, 1,003,317 restricted common shares, subject to vesting and forfeiture conditions, were issued to employees and service providers pursuant to their holdings of pre-Merger options, RSUs or restricted shares (the “employee earnout shares”). The employee earnout shares were issued in 3 equal tranches with separate market vesting conditions. One-third of the employee earnout shares will meet the market vesting condition when the closing price of the Company’s common stock During the six months ended June 30, 2021, 24,278 shares were forfeited due to employee terminations. This resulted in the grant of 4,773 additional shares to employee holders at a weighted-average grant date fair value of $16.78. During March 2021, 329,132 restricted employee earnout shares were fully vested, as the market condition for vesting was fully satisfied as a result of the Company’s stock price and trading activity. The Company recorded $8.5 million in stock compensation expense related to the employee earnout shares in the six months ended June 30, 2021, and $3.4 million is expected to be recorded over the remaining estimated service period in 2021. CEO Earnout Restricted Stock Prior to the closing of the Merger, the Company’s CEO and Founder, Matt Ehrlichman was granted a restricted stock award under the 2012 Plan which was converted into an award of 1,000,000 restricted shares of common stock upon the closing of the Merger. The award will vest in one-third installments if certain stock price triggers are achieved within 36-months following the closing of the Merger. One-third of the restricted shares will meet the market vesting condition when the Company’s common stock is greater than or equal to $18.00 over any 20 trading days within any 30 consecutive trading day period within 36 months of the closing date of the Merger. An additional third will vest when the Company’s common stock is greater than or equal to $20.00 over the same measurement period. The final third will vest when the Company’s common stock is greater than or equal to $22.00 over the same measurement period. If Mr. Ehrlichman’s employment with the Company is terminated prior to the During the six months ended June 30, 2021, 333,333 CEO restricted earnout shares were fully vested, as the first market condition for vesting was fully satisfied as a result of the 29 Company recorded $8.3 million in stock compensation expense related to the 10. Business Combinations During the six months ended June 30, 2021, the Company completed several transactions which have been accounted for as business combinations. The purpose of each of the The following table summarizes the total consideration and the
The estimated fair values assigned to tangible and intangible assets acquired and liabilities assumed are preliminary in nature and may be subject to change as additional information is received. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. 30 January 12, 2021 Acquisition On January 12, 2021, Porch acquired V12 Data, an omnichannel marketing platform. The purpose of the acquisition is to expand the scope and nature of Porch’s service offerings, add additional team members with important skillsets, and realize synergies. Porch acquired V12 Data for $20.3 million cash with an additional $1.4 million held as contingent consideration. The contingent consideration is based on the achievement of certain Revenue and EBITDA milestones over the two succeeding years and is paid in cash or common stock at Porch’s discretion. The consideration was paid to the sellers in exchange for net assets of $21.8 million. Goodwill is expected to be deductible for tax purposes. Acquisition-related costs of $274 thousand are included in general and administrative expenses on the consolidated statements of operations for the six months ended June 30, 2021. The following table summarizes the fair value of the intangible assets of V12 Data as of the date of the acquisition:
The weighted-average amortization period for the acquired intangible assets is 7.6 years. The estimated fair value of the customer relationships intangible asset was calculated through the income approach using the multi-period excess earnings methodology. The estimated fair value of the trademarks and tradenames as well as acquired technology intangible assets were calculated through the income approach using the relief from royalty methodology. The estimated fair value of the non-competition agreement is derived using the with and without method over the contractual term of the agreement. The estimated fair value of deferred revenue is derived using the cost-plus-profit method, which presumes that an acquirer of deferred revenue would not pay more than the costs and expenses to fulfill the obligation plus a profit for the effort employed. April 5, 2021 Acquisition On April 5, 2021, Porch acquired HOA. The purpose of the acquisition is to expand the scope and nature of Porch’s product offerings, add additional team members with important skillsets, and gain licenses to operate as an insurance carrier and managing general agent in 31 states. Total consideration related to this transaction included $113.4 million, consisting of $82 million in cash paid at closing, $21.7 million in Porch common stock, and acquisition hold backs and contingent consideration of $9.7 million. Acquisition-related costs of $2.9 million were primarily for legal and due-diligence related fees and are included in general and administrative expenses for the six months ended June 30, 2021. 31 The following table summarizes the fair value of the intangible assets of HOA as of the date of the acquisition:
The weighted-average amortization period for the acquired intangible assets is 8.4 years. The fair value of customer relationships was estimated through the income approach using the multi-period excess earnings methodology. The fair value of trade name and trademarks was estimated through the income approach using the relief from royalty methodology. The business acquired was valued using the income approach based on estimates of expected future losses and expenses associated with the policies that were in-force as of the closing date of the transaction compared to the future premium remaining to be earned. The renewal rights was estimated through the income approach based on premium forecast and cash flows from the renewal policies modeled over the life of the renewals. The insurance licenses were valued using the market approach based on arms-length transactions in which certificate authority companies with licenses were purchased. May 20, 2021 Acquisition On May 20, 2021, Porch acquired Segin Systems, Inc. (“Rynoh”), a software and data analytics company that supports financial management and fraud prevention primarily for the title and real estate industries. The purpose of the acquisition is to expand the scope and nature of Porch’s product offerings, add additional team members with important skillsets, and realize synergies. Total consideration related to this transaction include $35.8 million, consisting of $32.3 million in cash paid at closing, and acquisition hold backs of $3.5 million. Acquisition-related costs of $1.6 million were primarily for legal and due-diligence related fees and are included in general and administrative expenses for the six months ended June 30, 2021. The following table summarizes the fair value of the intangible assets of Rynoh as of the date of the acquisition:
The weighted-average amortization period for the acquired intangible assets is 10 years. The fair value of customer relationships was estimated through the income approach using the multi-period excess earnings methodology. The fair value of trade name and trademarks, as well as acquired technology was estimated through the income approach using the relief from royalty methodology. The fair value of the non-competition agreement is derived using the with and without method over the contractual term of the agreement. 32 Revenue from these 3 acquisitions included in the Company’s consolidated statements of operations through June 30, 2021 is $27.9 million. Net income included in the Company’s consolidated statements of operations from the these acquisitions through June 30, 2021 is $4.3 million. Unaudited Pro Forma Consolidated Financial Information The following table summarizes the estimated unaudited pro forma consolidated financial information of the Company as if the V12 Data, HOA, and Rynoh acquisitions had occurred on January 1, 2020:
Other Acquisitions In the first half of 2021, the Company completed 2 other acquisitions which were not individually material to the consolidated financial statements. The purpose of the acquisitions was to expand the scope and nature of the Company’s service offerings, add additional team members with important skillsets, and realize synergies. The transaction costs associated with these acquisitions were $144 thousand and are included in general and administrative expenses on the consolidated statements of operations for the six months ended June 30, 2021. Goodwill of $3.6 million is not expected to be deductible for tax purposes, while goodwill of $3.3 million is expected to be deductible for tax purposes. 11. Commitments and Contingencies Litigation From time to time the Company is or may become subject to various legal proceedings arising in the ordinary course of business, including proceedings initiated by users, other entities, or regulatory bodies. Estimated liabilities are recorded when it is both probable that a liability has been incurred and the Cases under Telephone Consumer Protection Act Porch and an acquired entity, GoSmith.com, are party to 14 legal proceedings alleging violations of the These actions are at an early stage in the litigation process. It is not possible to determine the likelihood of an unfavorable outcome of these disputes, although it is reasonably possible that the outcome of these actions may be unfavorable. Further, it is not possible to estimate the range or amount of potential loss (if the outcome should be unfavorable). Porch intends to contest these cases vigorously. 33 Kandela, LLC v Porch.com, Inc. In May 2020, the former owners of Kandela, LLC filed a complaint against Porch in the Superior Court of the Putative Wage and Hours Class Action Proceeding A former employee of HireAHelper™ filed a complaint in San Diego County Superior Court in November 2020, asserting putative class action claims for failure to pay overtime, failure to pay compensation at the time of separation and unfair business practices in violation of California law. HireAHelper™ was served with the complaint in December 2020 and on January 28, 2021 Defendants removed the case to the United States District Court for the Southern District of California. The plaintiff seeks to represent all current and former non-exempt employees of HireAHelper™ and Legacy Porch and Porch’s other affiliated companies in the State of California during the relevant time period. Plaintiffs seek damages for unpaid wages, liquidated damages, penalties, attorneys’ fees and costs. While this action is still at an early stage in the litigation process, Porch has recorded an estimated accrual for a contingent loss based on information currently known. The parties recently attended a mediation in an effort to resolve the matter. The mediation was successful and a tentative deal was reached pending execution of the long form settlement agreement and approval by the court. Regulatory Requirements and Restrictions HAIC is subject to the laws and regulations of the State of Texas and the As of June 30, 2021 HAIC had restricted cash and investments totaling $314 thousand and pledged to the Department of Insurance in certain states as a condition of its Certificate of Authority for the purpose of meeting obligations to policyholders and creditors. See Note 1. The Texas Insurance Code limits dividends from insurance companies to their stockholders to net income accumulated in the 12. Basic and Diluted Net Loss Per Share Basic and diluted net loss per share attributable to common stockholders is presented in conformity with 34 Under the two-class method, basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share attributable to common stockholders adjusts basic earnings per share for the potentially dilutive impact of stock options, RSUs, RSAs, convertible notes, earnout shares and warrants.
Company has reported losses for all periods presented, all potentially dilutive securities are antidilutive and accordingly, basic net loss per share equals diluted net loss per share. The following table
The following table discloses securities that
See Note 8 for additional information regarding the 13. Subsequent Events In July 2021, the Company 35
PART II —OTHER INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of
Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements which speak only as of the date hereof. Unless specifically indicated otherwise, the forward-looking statements in this report do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that have not been completed as of the date of this filing. You should understand that the following important factors, among others, could affect the Company’s future results and could cause those results or other outcomes to differ materially from those
●expansion plans and opportunities, including future acquisitions or additional business combinations; ●costs related to the Merger and being a public company; ●litigation, complaints, and/or adverse publicity;
●privacy and data protection laws, privacy or data breaches, or the loss of data; and ●the impact of the COVID-19 pandemic and its effect on the business and financial conditions of the Company. These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this report are more fully described in Part II, Item 1A of this report, Item 1A of the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2020 filed with the SEC on May 19,2021 and in any of the Company’s subsequent SEC filings. The risks described in these filings are not exhaustive. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can the Company assess the impact of all such risk factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward- looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. The Company undertakes no obligations to update or revise publicly any forward-looking statements, whether as a result of 36 Business Overview Porch is a vertical software platform for the home, providing software and services to approximately 17,000 home services companies, such as home inspectors, moving companies, utility companies, warranty companies, and others. Porch helps these service providers grow their business and improve their customer experience. Porch provides software and services to home services companies and, through these relationships, gains unique and early access to homebuyers and homeowners, assists homebuyers and homeowners with critical services such as insurance and moving, and, in turn, Porch’s platform drives demand for other services from such companies as part of our
Throughout the last eight (8) years, Porch has established many partnerships across a number of home-related industries. Porch has also selectively acquired companies which can be efficiently integrated into Porch’s platform. In 2017, we significantly expanded our position in the home inspection industry by acquiring ISN™, a developer of ERP and CRM software for home inspectors. In November 2018, we acquired HireAHelper™, a provider of software and demand for moving companies.In 2019, we acquired a business that connects new homebuyers to utility companies. In 2020, we acquired a moving services technology company, iRoofing, LLC a roofing software company, and two individually immaterial acquisitions. In the first half of 2021, we acquired a home inspection integrated customer service and call handling solution company, V12 Data, an omnichannel marketing platform, HOA, an insurance managing general agency, as well as Rynoh, a financial management and fraud prevention software service for the title and real estate industries. We will continue to make additional acquisitions that are consistent with our focus on insurance and home services related verticals. We sell our software and services to companies using a variety of sales and marketing tactics. We have teams of inside sales representatives organized by vertical market who engage directly with companies. We have enterprise sales teams which target the large named accounts in each of our vertical markets. These teams are supported by a For consumers, Porch largely relies on our unique and proprietary relationships with the approximately 17,000 companies using Porch’s software to provide the company Key Performance Measures and Operating Metrics In the
2018 through 2020.
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The following table summarizes our average companies in quarter and average revenue per account per month for each of the quarterly periods indicated:
Due to COVID-19, some small companies put their business with the Company on hold which is reflected in lower number of total companies in 2020 and higher average revenue per account.
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In 2020, the Company shifted insurance monetization from In March 2020, COVID-19 impacted the service volumes during the period from March until June. The impact on service volumes, largely recovered by June 30, 2020 and Recent Developments
In
Comparability of Financial Information Porch’s future results of operations and financial position may not be comparable to historical results as a result of the Merger. Key Factors Affecting Operating Results The Company has been implementing its strategy as a vertical software platform for the home, providing software and
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Basis of Presentation The unaudited condensed consolidated financial statements and accompanying notes of Porch include the accounts of the Company and its consolidated subsidiaries and were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). All significant intercompany accounts and transactions are eliminated in consolidation. The Company operates in a single segment. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the CODM in making decisions regarding resource allocation and assessing performance. The Company has determined that its Chief Executive Officer is the CODM. To date, the Company’s CODM has made such decisions and assessed performance at the Company level. Components of Results of Operations Total Revenue The Company generates its Core Services Revenue from (1) fees received for connecting homeowners to individual contractors, small business service providers and large enterprise service providers, (2) commissions from third-party insurance carriers, and (3) insurance premiums, policy fees and other insurance-related fees generated through its own insurance carrier. The Company’s Managed Services Revenue is generated from fees received for providing select and limited services directly to homeowners. The Company’s Software and Service Subscription Revenue is generated from fees received for providing subscription access to the Company’s software platforms and subscription services across various industries. In the Core Services Revenue stream, the Company connects Service Providers with homeowners that meet pre-defined criteria and may be Managed Services Revenue includes fees earned from homeowners for providing select services directly to Software and Service Subscription Revenue primarily relates to 40 Total Costs and Expenses Operating expenses Operating expenses are categorized into four categories:
The categories of operating expenses include both, cash expenses and non-cash charges, such as stock-based compensation, depreciation and amortization. Depreciation and amortization are recorded in all operating expense categories, and consist of depreciation from property, equipment and software and intangible assets. Cost of revenue primarily consist of professional fees and materials under the Managed Services model, losses and loss adjustment expenses, and credit card processing and merchant fees. Selling and marketing expenses primarily consist of third-party data leads, affiliate and partner leads, paid search and search engine optimization (“SEO”) costs, policy acquisition and other underwriting expenses, payroll, employee benefits and stock-compensation expense and other headcount related costs associated with Product and technology development costs primarily consist of payroll, employee benefits, stock-compensation expense, other headcount related costs associated with product development, net of costs capitalized as internally developed software, cloud computing, hosting and other technology costs, software subscriptions, professional services and amortization of internally-development software. General and administrative expenses primarily consist of expenses associated with functional departments for finance, legal, human resources and executive management expenses. The primary categories of expenses include payroll, employee benefits, stock-compensation expense and other headcount related costs, rent for office space, legal and professional fees, taxes, licenses and regulatory fees, and other administrative costs. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the At least quarterly, we evaluate our estimates and
41 During the three months ended June 30, 2021, there were no changes to the critical accounting policies discussed in Results of Operations The following table sets forth our historical operating results for
NM = Not Meaningful Comparison of Revenue Three months ended June 30, 2021 compared to three months ended June 30, 2020: Total revenue increased by $34.2 million, or 200% from $17.1 million in the three months ended June 30, 2020 to $51.3 million in the three months ended June 30, 2021. The increase in revenue in 2021 is driven by acquisitions and organic growth in our
42 Six months ended June 30, 2021 compared to six months ended June 30, 2020: Total revenue increased by $45.9 million, or 143% from
Cost of Revenue Three months ended June 30, 2021 compared to three months ended June 30, 2020: Cost of revenue increased by $15.7 million, or 414% from $3.8 million in the three months ended June 30, 2020 to $19.5 million in the three months ended June 30, 2021. The increase in the cost of revenue was mostly attributable to the growth in the moving business and cost of revenue for our Six months ended June 30, 2021 compared to six months ended June 30, 2020: Cost of revenue increased by $17.5 million, or 222% from $7.9 million in the six months ended June 30, 2020 to $25.4 million in the six months ended June 30, 2021. The increase in the cost of revenue was mostly attributable to the growth in the moving business and cost of revenue for our acquired businesses. As a percentage of revenue, cost of revenue represented 33% of revenue in the three months ended June 30, 2021 compared with 25% in the same period in 2020. Selling and marketing Three months ended June 30, 2021 compared to three months ended June 30, 2020: Selling and marketing expenses increased by $14.3 million, or 163% from $8.8 million in the three months ended June 30, 2020 to $23.1 million in the three months ended June 30, 2021. The increase is due to $11.7 million related to higher selling and marketing costs associated with the growth in our moving, inspection and insurance businesses, as well as the selling and marketing costs of our acquired businesses. Additionally, there was an increase of $1.4 million in stock compensation charges. This is offset by our divested businesses selling and marketing costs of $0.7 million. As a percentage of revenue, selling and marketing expenses represented 45% of revenue in the three months ended June 30, 2021 compared with 51% in the same period in 2020. Six months ended June 30, 2021 compared to six months ended June 30, 2020: Selling and marketing expenses increased by $16.1 million, or 75% from $21.6 million in the six months ended June 30, 2020 to $37.8 million in the six months ended June 30, 2021. The increase is due to $14.2 million related to higher selling and marketing costs associated with the growth in our moving, inspection and insurance businesses, as well as the selling and marketing costs of our acquired businesses. Additionally, there was an increase of $3.7 million in stock compensation charges. This is offset by our divested businesses selling and marketing costs of $1.8 million. As a percentage of revenue, selling and marketing expenses represented 48% of revenue in the six months ended June 30, 2021 compared with 68% in the same period in 2020. Product and technology Three months ended June 30, 2021 compared to three months ended June 30, 2020: Product and technology expenses increased by $6 million, or 118% from $5.1 million in the three months ended June 30, 2020 to $11.1 million in the three months ended June 30, 2021. The increase is due to investments in our moving, insurance and inspection groups, due to the growth in these businesses, product and technology costs from our 43 acquired businesses, and $1.7 million higher stock compensation charge. As a percentage of revenue, product and technology expenses represented 22% of revenue in the three months ended June 30, 2021 compared with 30% in the same period in 2020. Six months ended June 30, 2021 compared to six months ended June 30, 2020: Product and technology expenses increased by $10.4 million, or 84% from $12.4 million in the six months ended June 30, 2020 to $22.8 million in the six months ended June 30, 2021. The increase is due to investments in moving, insurance, and inspection groups due to the growth in these businesses, product and technology costs from our acquired businesses and $3.7 million higher stock compensation charge. As a percentage of revenue, product and technology expenses represented 29% of revenue in the six months ended June 30, 2021 compared with 39% in the same period in 2020. General and administrative Three months ended June 30, 2021 compared to three months ended June 30, 2020: General and administrative expenses increased by $14.7 million, or 250% from $5.9 million in the three months ended June 30, 2020 to $20.6 million in the three months ended June 30, 2021, primarily due to increase in stock compensation charge for three months ended June 30, 2021 of $3.2 million. See the table and discussion below for the details related to stock-based compensation in the three and six months ended June 30, 2021 and 2020. In the three months ended June 30, 2021 the Company incurred costs related to operating as a public Six months ended June 30, 2021 compared to six months ended June 30, 2020: General and administrative expenses increased by $34.6 million, or 344% from $10 million in the six months ended June 30, 2020 to $44.6 million in the six months ended June 30, 2021.The increase is primarily due to increase in stock compensation of $15.4 million and costs operating as a public company and increased hiring of corporate resources. Additionally, from March 2020 through June 2020, the Company reduced pay for certain employees and partially or fully furloughed certain employees therefore reducing compensation expense in six months ended June 30, 2020. Stock-based compensation consists of expense related to (1) equity awards granted as compensation in the normal course of business operations, (2) employee earnout restricted stock (see Note 9) and (3) a secondary market transaction as described below (dollar amounts in thousands).
Interest expense, net Three months ended June 30, 2021 compared to three months ended June 30, 2020: Interest expense decreased by $2.1 million, or 63% from $3.3 million in the three months ended June 30, 2020 to $1.2 million in the three months ended June 30, 2021. The decrease was primarily due to lower outstanding debt balance and decreased interest rates paid during the three months ended June 30, 2021 compared with the three months ended 44 June 30, 2020, as a result of the January 2021 amendment to the Company’s senior secured term loans. Among other terms, this amendment reduced the interest payable from 11.05% to 8.55% (see Note 7). Six months ended June 30, 2021 compared to six months ended June 30, 2020: Interest expense decreased by $4 million, or 62% from $6.4 million in the six months ended June 30, 2020 to $2.4 million in the six months ended June 30, 2021. The decrease was primarily due to a Other expense, net Three months ended June 30, 2021 compared to three months ended June 30, 2020: Other expense, net was $ (0.2) million expense in the three months ended June 30, 2021 and $ (1.8) million expense in the three months ended June 30, 2020. The Six months ended June 30, 2021 compared to six months ended June 30, 2020: Other expense, net was Income tax expense (benefit) Three months ended June 30, 2021 compared to three months ended June 30, 2020: Income tax benefit of
Six months ended June 30, 2021 compared to six months ended June 30, 2020: Income tax benefit of
Non-GAAP Financial Measures In addition to our results determined in accordance with U.S. GAAP, we believe that Adjusted EBITDA, a non-GAAP measure which we define below, is useful in evaluating our operational performance distinct and apart from financing costs, certain non-cash expenses and non-operational expenses. We use this non-GAAP financial information to evaluate our ongoing operations and for internal planning, budgeting and forecasting purposes and for setting management bonus programs. We believe this non-GAAP financial information, when taken collectively, may be helpful to investors in assessing our operating performance and comparing our performance with competitors and other comparable companies. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP. We endeavor to compensate for the 45 Adjusted EBITDA is defined as net loss adjusted for interest expense, net; income taxes; total other expenses, net; certain non-cash long-lived asset impairment charges; depreciation and amortization; stock-based compensation expense; acquisition-related impacts, including compensation to the sellers that requires future service, amortization of intangible assets, gains (losses) recognized on changes in the value of contingent consideration arrangements, if any, gain or loss on divestitures and certain transaction costs. Adjusted EBITDA is intended as a Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA on a supplemental basis. You should review the reconciliation of net loss to Adjusted EBITDA below and not rely on any single financial measure to evaluate our business. The following table reconciles net loss to Adjusted EBITDA (loss) for the three and six months ended June 30, 2021 and the three and six months ended June 30, 2020 (dollar amounts in thousands):
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Adjusted EBITDA loss for the six months ended June 30, 2021 was $19.1 million, a $6.2 million decline from Adjusted EBITDA loss of $12.9 million for the same period in 2020. The decline in Adjusted EBITDA loss is due to the weather related loss impact of the Liquidity and Capital Resources Since inception, we have financed our operations primarily from the sales of redeemable convertible preferred stock and convertible promissory notes, and proceeds from senior secured loans. On December 23, 2020, the Company received approximately $269.5 million of aggregate cash proceeds from recapitalization, net of transactions costs. As of June 30, 2021, the Company had cash and cash equivalents of $150.2 million and $2.2 million of restricted cash. Based on the Company’s current operating and growth plan, management believes cash and cash equivalents at June 30, 2021, together with borrowing available under senior secured debt, are sufficient to finance the Company’s operations, planned capital expenditures, working capital requirements and debt service obligations for at least the next 12 months. As the Company’s operations evolve and continues its growth strategy, the Company may elect or The Company has incurred losses since its inception, and
$317.5 million, respectively. As of In the six months ended June 30, 2021, the Company spent $127.9 million in cash, net of cash acquired, plus stock of $22.9 million to acquire several companies, in transactions accounted for as a business combination. 47 The following table provides a summary of cash flow data for the three and six months ended June 30, 2021 and June 30, 2020:
Operating Cash Flows Six months ended June 30, 2021 compared to six months ended June 30, 2020: Net cash used in operating activities was $30.8 million for the six months ended June 30, 2021. Net cash used in operating activities consists of net loss of $81.4 million, adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments include stock-based compensation expense of $23.5 million, depreciation and amortization of $6.4 million, non-cash accrued and payment-in-kind interest of $0.1 million, fair value adjustments to earnout liability and private warrant liability of $22.8 million and $20.2 million, respectively. Net changes in working capital were a use of cash of $13.0 million, primarily due to increases in current liabilities. Investing Cash Flows Six months ended June 30, 2021 compared to six months ended June 30, 2020: Net cash used in investing activities was $131.3 million for the six months ended June 30, 2021. Net cash used in investing activities is primarily related to investments to develop internal use software of $1.5 million and acquisitions, net of cash acquired of $127.9 million. Net cash used in investing activities was $1.6 million for the six months ended June 30, 2020. Net cash used in investing activities is primarily related to investments to develop internal use software of $1.6 million and purchases of property and equipment of $0.1 million. Financing Cash Flows Six months ended June 30, 2021 compared to six months ended June 30, 2020: Net cash provided by financing activities was $107 million for the six months ended June 30, 2021. Net cash provided by financing activities is primarily related to exercises of warrants and stock option of $129.3 million, offset by shares repurchased to pay income tax withholdings upon vesting of RSUs of $22.1 million and debt repayments of $0.2 million. Net cash provided by financing activities was $11.1 million for the six months ended June 30, 2020. Net cash provided by financing activities is primarily related to proceeds from issuance of redeemable convertible preferred stock of $4.7 million and debt financing of $10.1 million, net of loan repayments of $3.7 million. Off-Balance Sheet Arrangements Since the date of our incorporation, we
48 Emerging Growth Company Status
Recent Accounting Pronouncements See Note 1 to our unaudited condensed consolidated financial statements as of Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to a Interest Rate Risk The market risk inherent in A one percent (1%) increase in interest rates in our variable rate indebtedness would result in approximately $0.5 million in additional annual interest expense. Inflation Risk Porch does not believe that inflation has had, or currently has, a material effect on its business. Foreign Currency Risk There was no material foreign currency risk for three and Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures
49 Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures to ensure that information required to be disclosed by the Company in
Remediation Plan Our remediation efforts for these material weaknesses have included the following:
These remediation measures may be time consuming and costly. In addition, there is no assurance that we will be successful in remediating the material weakness.We plan to continue to assess our internal controls and procedures and intend to take further action as necessary or appropriate to address any other matters we identify. Changes in Internal Control over Financial Reporting
Management initiated the process of implementing remediation steps to address the material weakness and to improve our internal control over financial reporting. Specifically, we are continuing to expand and improve our review process for complex securities, transactions, and related accounting standards, including the determination of the appropriate accounting classification of our financial instruments. We plan to further improve this process by implementing additional training of personnel to improve our understanding and documentation that supports effective control operation and will identify third-party professionals with whom to consult regarding the application of complex accounting literature as necessary. These remediation measures may be time consuming and costly. In addition, there is no assurance that we will be successful in remediating the material weakness. Limitations on Effectiveness of Controls and Procedures Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, as specified above. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. 50 PART TCPA Proceedings. Porch and/or an acquired entity, GoSmith.com, are party to 14 legal proceedings alleging violations of the automated calling and/or Do Not Call restrictions of the Telephone Consumer Protection Act of 1991 (“TCPA”). Some of these actions allege related state law claims. Most of the proceedings were commenced as mass tort actions by a single plaintiffs’ law firm in December 2019 and April/May 2020 in federal district courts throughout the United States and have been consolidated in the United States District Court for the Western District of Washington, where Porch resides. Plaintiffs seek actual, statutory, and/or treble damages, injunctive relief, and reasonable attorneys’ fees and costs. A related action brought by the same plaintiffs’ law firm was dismissed with prejudice and is on appeal before the Ninth Circuit Court of Appeals. These actions are at an early stage in the litigation process. It is not possible to determine the likelihood of an unfavorable outcome of these disputes, although it is reasonably possible that the outcome of these actions may be unfavorable. Further, it is not possible to estimate the range or amount of potential loss (if the outcome should be unfavorable). Porch intends to contest these cases vigorously.
Putative Wage and Hours Class Action Proceeding. A former employee of HireAHelper™ filed a complaint in San Diego County Superior Court in November 2020 asserting putative class action claims for failure to pay overtime, failure to pay compensation at the time of separation and unfair business practices in violation of California law. HireAHelper™ was served with the complaint in December 2020 and on January 28, 2021 Defendants removed the case to the United States District Court for the Southern District of California. The plaintiff seeks to represent all current and former non-exempt employees of HireAHelper™, Legacy Porch and Porch’s other affiliated companies in the State of California during the relevant time period. Plaintiffs seek damages for unpaid wages, liquidated damages, penalties, attorney’s fees and costs. While this action is still at an early stage in the litigation process, we have recorded an estimated accrual for a contingent loss based on information currently known. The parties recently attended a mediation in an effort to resolve the matter. The mediation was successful and a tentative deal was reached pending In addition, in the ordinary course of business, Porch and its subsidiaries are (or may become) parties to litigation involving property, personal injury, contract, intellectual property and other claims, as well as stockholder derivative actions, class action lawsuits and other matters. The amounts that may be recovered in such matters may be subject to insurance coverage. Although the results of legal proceedings and claims cannot be predicted with certainty, neither Porch nor any of its subsidiaries is currently a party to any legal proceedings the outcome of which, we believe, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our 51
Risks Relating to the Company’s Business and Industry Our brands and businesses operate in an especially competitive and evolving industry. The insurance industry, moving services industry, home service industry, and software for home services companies industry are all competitive, with many existing competitors and a consistent and growing stream of new entrants, services and products. Some of our competitors are more well-established or enjoy better competitive positions with respect to certain geographical areas, consumer and service professional demographics, and/or types of services offered. Some of our competitors have stronger brand recognition, better economies of scale, more developed software platforms or other intellectual property, and/or better access to capital. In the home services space, we compete with online home services marketplaces, search engines and social media platforms that have the ability to market products and services online in a more prominent and cost-effective manner than we can, and may better tailor results with respect to products and services to individual users. In the SaaS application space, we compete with existing providers of enterprise resource planning (“ERP”) and customer relationship management (“CRM”) software through both traditional software and SaaS models. Additionally, many of our competitors in the home and home-related services industries are undergoing consolidation and vertical integration. These consolidations may make it more difficult to compete with such competitors. Any of these advantages could enable these competitors to reach more consumers and service professionals than we do, offer products and services that are more appealing to consumers and service professionals than our products and services, and respond more quickly and/or cost effectively than we do to evolving market opportunities and trends, any of which could adversely affect our business, financial condition and results of operations. In addition, since most home services marketplace products and services are offered to consumers for free, consumers can easily switch among home services offerings (or use multiple home services offerings simultaneously) at no cost to them. And while service professionals may incur additional or duplicative near-term costs, the costs for switching to a competing platform over the long term are generally not prohibitive. Low switching costs, coupled with the propensity of consumers to try new products and services generally, will most likely result in the continued emergence of new products and services, entrants and business models in the home and home-related services industry. With the HOA acquisition, we are exposed to competition in the programs market. While we believe the number of competitors in the small-and mid-sized programs markets with the broad in-house expertise and wide array of services that HOA offers is limited, it will nonetheless face increased competition if other companies decide to compete within this space. Any increased competition in this market, particularly by one or more companies with greater resources than us, could materially and adversely impact our business, financial condition, and results of operations. Our inability to compete effectively against new competitors, services or products could result in decreases in the size and level of engagement of our consumer and service professional bases, any of which could adversely affect our business, financial condition and results of operations. We may not be able to effectively manage our growth. Our future growth, if any, may cause a significant strain on our management and our operational, financial, and other resources. Our ability to manage our growth effectively will require us to implement and improve our operational, financial, and management systems and to expand, train, manage, and motivate our employees. These demands may require the hiring of additional management personnel and the development of additional expertise by our management. Any increase in resources used without a corresponding increase in our operational, financial, and management systems could have a material adverse effect on our business, financial condition, and results of operations. 52 Our brands and businesses are sensitive to general economic events or trends, particularly those that adversely impact consumer confidence and spending behavior. Our businesses are sensitive to events and trends, such as a general economic downturn or sudden disruption in business conditions, consumer confidence, spending levels and access to credit, which could result in decreases in demand for moving, real estate transactions, home improvement services and insurance. Any such decreases could result in turnover of our consumer and service professional base and/or adversely impact the breadth of services offered through our platform and our insurance products, any or all of which could adversely affect our business, financial condition and results of operations. These events and trends could also result in decreased marketing and advertising expenditures by service professionals or cash flow problems for service professionals that could affect their ability to pay us subscription fees, their ability to purchase leads from us and the success of any revenue sharing arrangements with them. Adverse economic conditions and trends could result in service professionals decreasing and/or delaying subscription fees paid for our platform or being more likely to default on incurred fees, which would result in decreased revenue and could adversely affect our business, financial condition and results of operations. Our risk management policies and procedures may prove to be ineffective and leave us exposed to unidentified or unanticipated risk. We have identified and continue to develop enterprise-wide risk management policies and procedures to mitigate risk and loss to which we are exposed. There are inherent limitations to our risk management strategies because there may be existing or future risks that have not been fully identified. If internal risk management policies and procedures are ineffective, we may suffer unexpected losses which could be material and adversely affect our financial results and operations. Our risk management framework may not evolve at the same pace as we expand our business. As a result, there is a risk that new products or new business strategies may present risks that are not fully identified, effectively monitored, or thoroughly managed. Conditions in the real estate market generally impact the demand for a portion of the Company’s products and services. Demand for a portion of the Company’s products and services generally decreases as the number of real estate transactions in which its products and services are purchased decreases. The real estate market is seasonal, cyclical and affected by significant conditions beyond the Company’s control. The number of real estate transactions in which certain of the Company’s products and services are purchased have been, and may continue to be impacted by the following situations, among others:
Any adverse impact on a macro level to the real estate market generally could have an adverse impact on our business, 53 Risks Relating to Financial Reporting and Results of Operations Our quarterly operating results may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of research analysts or investors, which could cause our stock price to decline. Our quarterly operating results may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly operating results or guidance fall below the expectations of research analysts or investors, the price of our Common Stock could decline substantially. Fluctuations in our quarterly operating results or guidance may be due to a number of factors, including, but not limited to, those listed below:
We may be unable to access the capital markets when needed, which could adversely affect the ability to take advantage of business opportunities as they arise and to fund operations in a cost-effective manner. Our ability to grow our business depends, in part on the ability to access capital when needed to provide statutory surplus. Capital markets may become illiquid from time to time, and we cannot predict the extent and duration of future economic and market disruptions or the impact of any government interventions. We may not be able to obtain financing 54 on acceptable terms, or at all. If we require capital but cannot raise it or cannot obtain financing on acceptable terms, our business, financial condition, and results of operations may be materially adversely affected
Our businesses are seasonal and We are also subject to the cyclical nature of the insurance industry. The financial performance of the insurance industry has historically fluctuated with periods of lower premium rates and excess underwriting capacity resulting from increased competition followed by periods of higher premium rates and reduced underwriting capacity resulting from decreased competition. Although the financial performance of an insurance company depends on its own specific business characteristics, the profitability of many insurance companies tends to follow this cyclical market pattern. Because market cyclability is due in large part to the actions of competitors and general economic factors, we cannot predict the timing or duration of changes in the market cycle. Risks Relating to Our Acquisition Strategy We may experience risks related to acquisitions, including the HOA Acquisition. We have made acquisitions in the past and we continue to seek to identify potential acquisition candidates to expand our business generally in the future. If we do not identify suitable acquisition candidates or complete acquisitions with satisfactory pricing and other terms, our growth could be adversely affected. Even if we complete what we believe to be suitable acquisitions, we may experience related operational and financial risks. As a result, to the extent that we continue to grow through acquisitions, we will need to:
We may not be successful in addressing these challenges or any other problems encountered in connection with historical and future acquisitions. Adverse reactions by potential acquisition targets could frustrate our ability to execute on our acquisition strategy as could the failure of our due diligence process to uncover material risks, legal or otherwise. We may also be negatively impacted by adverse reactions of home services companies, consumers, service providers and business partners to the disclosure or consummation of any acquisition. In addition, the anticipated benefits of one or more acquisitions may not be realized. Also, future acquisitions could result in increased operating losses, dilutive issuances of equity securities and/or the assumption of contingent liabilities. Additionally, acquisitions may be compensated in part with future or contingent payments that will create future liabilities or dilution for us upon the consummation of such acquisitions. Lastly, the value of goodwill and other intangible assets acquired could be impacted by one or more continuing unfavorable events and/or trends, which could result in significant impairment charges. The occurrence of any of these events could have an adverse effects on our business, financial condition and results of operations. On April 5, 2021, the Company completed its acquisition of HOA, a leading property and casualty insurance company focused on products in the residential homeowner space. HOA is a large and complex company that added significantly to the size and scale of our operations. In addition, as discussed under “— Risks Related to Our Insurance Business,” HOA provides us with the opportunity to further expand our insurance business. The HOA 55 Acquisition is the largest acquisition in our history (as measured by purchase price). We may have failed to identify all the risks to which the HOA Acquisition may expose us or the effects it may have on the long-term value of our combined company, including any risks related to HOA or HOA’s compliance with, among other, laws and regulations, contractual obligations and leases. Although we expect the HOA Acquisition to result in a significant amount of synergies and other financial and operational benefits, we may be unable to realize these synergies or other benefits in the timeframe that we expect or at all. We continue to assess synergies that we may realize as a combined company, the realization of which will depend on a number of factors. The success of the HOA Acquisition, including anticipated synergies, benefits and cost savings, will depend, in part, on our ability to successfully combine and integrate our current operations with HOA’s business. It is possible that the integration process could result in higher than expected costs, diversion of management attention, the disruption of either company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with customers, suppliers, vendors and employees or to achieve the anticipated benefits and cost savings of the HOA Acquisition. If we experience difficulties with the integration process or other unforeseen costs, the anticipated benefits and cost savings of the HOA Acquisition may not be realized fully or at all, or may take longer to realize than expected. Management continues to refine its integration plan. The integration planning and implementation process will result in significant costs and divert management attention and resources. These integration matters could have an adverse effect on our combined company for an undetermined period. Any of the foregoing may have a material and adverse effect on our business, results of operations and financial condition. Risks Relating to Our Insurance Business We face a variety of risks through our expansion into the insurance business. In 2020, we expanded our lines of business to include home, auto, flood and umbrella insurance through the formation and licensure of Elite Insurance Group, our wholly-owned licensed insurance agency. In addition, we further expanded our insurance operations through the acquisition of HOA, a managing general agent (“MGA”) and carrier hybrid with a strong reinsurance strategy that currently operates in six states. Risks of our entry into the insurance business include, without limitation, difficulties integrating the new insurance business with our ongoing operations, potential diversion of management’s time and other resources from our previously-established lines of business, accurately underwriting risks and charging competitive, yet profitable rates to policyholders, the need for additional capital and other resources to expand into this new line of business, and inefficient integration of operational and management systems and controls. Severe weather events, extensive wildfires and other catastrophes, including the effects of climate change and global pandemics, may harm our insurance business. For example, if carriers restrict the sale of policies in certain geographical areas and/or for certain types of coverage or if they increase their premiums as a result of these events, it could result in fewer carriers whose policies we could offer to our customers and otherwise make policies harder to sell. With the acquisition of HOA, we are exposed to these losses directly. While we intend to manage our risk via reinsurance, there can be no guarantee this will adequately reduce our exposure to losses, including, but not limited to, the inability to negotiate reinsurance contracts at renewal at acceptable terms or at all, large catastrophes that exceed the our aggregate reinsurance coverage limits, the inability or unwillingness of counterparties to pay us reinsurance receivables we believe we are owed, and multiple losses in a single year that exceed our ability to reinstate reinsurance contracts. In addition, these events have in the past and could in the future negatively affect the economy in general and the housing market in particular, which in turn negatively affects the market for insurance sales. A significant increase in insurance claims by consumers who purchased their policy through Elite Insurance Group, whether as a result of these events or otherwise, could cause the affected carriers to terminate their relationship with us or decrease our commission rates. The occurrence of any of these events could have an adverse effect on our business, financial condition and results of operations. A substantial majority of Elite Insurance Group’s revenue is generated from commissions and depends on relationships with insurance providers with no long-term contractual commitments. See “— Our insurance business is commission-based and depends on our relationships with insurance providers with no long-term 56 contractual commitments. insurance providers stop working with us or pay us lower amounts for new customers, or if we are unable to establish and maintain new relationships with other insurance providers, our insurance business could be materially affected, which in turn could impact our business, results of operations and financial condition” for more information. Claims by consumers against an agency’s errors and omissions (E&O) insurance coverage are common in the insurance industry. If a carrier denies a consumer’s claim under an insurance policy or the consumer has insufficient coverage and the consumer therefore has to pay out-of-pocket for a loss, the consumer often seeks relief from agency that sold the policy. While we maintain E&O coverage, we could experience losses if claims by consumers exceed our coverage limitations. In addition, if we were to experience a significant number of claims or if our E&O coverage were to lapse, insurance providers could elect to terminate their relationships with us and we could face challenges in finding replacement coverage. Entry into the insurance business also subjects us to new laws and regulations with which we are not familiar and may lead to increased compliance costs and regulatory risk. See “— Our insurance business is subject to state governmental regulation, which could limit the growth of our insurance business and impose additional costs on us” for additional information. In addition, with the HOA Acquisition, Porch became an MGA and an insurance carrier, exposing us to the additional risks of underwriting and of handling and managing insurance claims. With the HOA acquisition, we will bear the cost of paying insured claims, which costs will be greater if Elite Insurance Group were to become an insurance carrier. As a result, the likelihood of being significantly affected by the risks inherent to the insurance industry, and the magnitude of such risks, would be greatly increased. Although we would follow the industry practice of transferring, or ceding, part of the risk we have assumed to a reinsurance company in exchange for part of the premium we receive in connection with the risk or securing excess of loss reinsurance coverage, we may not be able to successfully mitigate our risk through such reinsurance arrangements. Although reinsurance would make the reinsurer liable to us to the extent the risk is transferred to the reinsurer or we have coverage under an excess of loss reinsurance arrangement, it will not relieve us of our liability to our policyholders. If any of our reinsurers are unable or unwilling to pay amounts they owe us in a timely fashion, we could suffer a significant loss or a shortage of liquidity, which would have a material adverse effect on our business and results of operations. In addition, reinsurance may not be available for an acceptable cost or at all. Failure to successfully mitigate an acceptable portion of our risk could materially and adversely affect our ability to write insurance business and harm our business. If our actual losses from insured claims were to exceed our loss reserves, our business, financial condition and results of operations would be adversely affected. HOA distributes the majority of its products through third-party independent agents. As such, HOA is highly dependent on maintaining successful relationships with such third-party independent agencies. Negative changes in such relationships could adversely affect HOA’s insurance business, including, but not limited to, reduced sales, the loss of existing policies, the need to lower prices, or the need to pay higher commissions. In addition, such agencies act as agents of HOA. Any misconduct on the part of such agents could have an adverse impact on our business, financial conditions, reputation and results of operations. Furthermore, the HOA acquisition represents a significant expansion of Porch’s revenue from insurance sales and may have the effect of heightening many of the risks and uncertainties described above and below with respect to our insurance business. Our insurance businesses are subject to state governmental regulation, which could limit the growth of our insurance businesses and impose additional costs on us. Our insurance businesses maintain licenses with a number of individual state departments of insurance. Our insurance businesses are subject to state governmental regulation and supervision. This state governmental supervision could limit the growth of our insurance businesses, increasing the costs of regulatory compliance, limiting or restricting the products or services we provide or the methods by which we provide them, and subjecting us to the possibility of 57 regulatory actions or proceedings. If we are unable to comply with such regulations, we may be precluded or temporarily suspended from carrying on some or all of the activities of our insurance businesses or otherwise be fined or penalized in a given jurisdiction. Additionally, actual or perceived failure to comply with such state regulation may give rise to a right to terminate under arrangements with the insurance providers. Our continued ability to maintain our insurance licenses in the jurisdictions in which we are licensed or to expand to new operations or new jurisdictions depends on our compliance with the rules and regulations promulgated from time to time by the regulatory authorities in each of these jurisdictions. Furthermore, state insurance departments conduct periodic examinations, audits and investigations of the affairs of insurance companies and agencies, any of which could result in the expenditure of significant management time or financial resources. In all jurisdictions, the applicable laws and regulations are subject to amendment and interpretation by regulatory authorities. Generally, such authorities are vested with relatively broad discretion to grant, renew and revoke licenses and approvals and to implement and interpret rules and regulations. No assurances can be given that our insurance businesses can continue to be conducted in any given jurisdiction as it has been conducted in the past or that we will be able to expand our insurance business in the future. Our insurance businesses are commission-based and depends on our relationships with insurance providers with no long-term contractual commitments. If insurance providers stop working with us or pay us lower amounts for new customers, or if we are unable to establish and maintain new relationships with other insurance providers, our insurance businesses could be materially affected, which in turn could impact our business, results of operations and financial condition. A substantial majority of the revenue of Elite Insurance Group is currently derived from selling insurance policies to consumers as the insurance agency and then receiving commissions from the insurance carriers. As we grow our insurance business, including through the HOA acquisition, other potential acquisitions in the insurance space and potential expansion from an insurance agency to a managed general agency or insurance carrier, we expect to derive a greater percentage of our insurance revenue from insurance policies and reinsurance policies. Our agreements with insurance carriers are short-term agreements, and many of the insurance carriers can end their business with us at any time with no notice. We expect any future agreements with reinsurers will typically have annual terms. As a result, we cannot guarantee that insurance carriers or reinsurers will continue to work with us, or, if they do, we cannot guarantee the commissions they will pay in the first year of the policy as well as each additional year. The commissions we earn are based on premiums and commission rates set by the carriers, and any decreases in these premiums or commission rates, including as a result of adverse trends in the insurance industry, would decrease our revenue. In addition, we may not be able to attract new insurance carriers or reinsurers to our services or increase the amount of revenue we earn from our insurance business over time. The insurance business is historically cyclical in nature, and we may experience periods with excess underwriting capacity and unfavorable premium rates, which could adversely affect our business. If we are unable to maintain in good standing existing relationships with insurance carriers, or unable to add new insurance carriers or reinsurers, or if we become dependent on a limited number of carriers or reinsurers, we may be unable to meet the expectations of consumers and other counterparties in our insurance businesses. This deficiency could reduce confidence in our ability to offer competitive rates and terms, making us less popular with such consumers and counterparties. As a result, our insurance businesses could be materially impacted, which could have an adverse impact on our business, financial condition and results of operations. Our insurance businesses compete with a large number of companies in the insurance industry for underwriting premium. During periods of intense competition for premium, our insurance businesses are exposed to the actions of other companies that may seek to write policies without the appropriate regard for risk and profitability. During these times, it is very challenging to grow or maintain premium volume without sacrificing underwriting discipline and income. The effects of emerging claim and coverage issues in the insurance industry are uncertain. As industry practices, economic, legal, judicial, social, and other environmental conditions change, unexpected issues related to claims and coverage may emerge. These issues may adversely affect our insurance businesses by either 58 extending coverage beyond the underwriting intent or by increasing the number and size of claims. Examples of emerging claims and coverage issues include, but are not limited to:
In some instances, these emerging issues may not become apparent for some time after affected insurance policies have been issued. As a result, the full extent of liability may not be immediately known, nor their financial impacts adequately provided for in premium charges. In addition, potential passage of new legislation designed to expand the right to sue, to remove limitations on recovery, to extend statutes of limitations or otherwise repeal or weaken tort reforms could have an adverse impact on our insurance businesses. The effects of these and other unforeseen emerging claim and coverage issues are difficult to predict and could harm our insurance businesses and materially adversely The failure to Though our insurance businesses historically evaluated and paid claims timely and in accordance with its policies and statutory obligations, they must continue to If our insurance businesses are unable to hire, train and retain claims staff, their claims departments may be required to handle an increasing workload, which could adversely affect the quality of their claims administration, which could be materially and adversely impact our business. Our insurance businesses' loss reserves may be inadequate to cover actual losses. Estimating loss reserves is a difficult, complex, and inherently uncertain process involving many variables and subjective judgments, Significant periods of time can elapse between the occurrence of an insured loss, the reporting of a
59 This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. It also assumes that adequate historical or other data exists upon which to The performance of our insurance businesses' investment portfolios is subject to a variety of investment risks. The results of operations of our insurance businesses depend, in part, on the performance of their investment portfolios. Our insurance businesses seek to hold a high-quality portfolio managed by a professional investment advisory firm in accordance with its investment policy and The values of our insurance businesses' investment portfolios are subject to the risk that certain investments may default or become impaired due to deterioration in the financial condition of an Such factors could reduce our insurance businesses' net investment incomes and result in realized investment losses, as well as negatively impact its statutory capital. Our insurance businesses' investment portfolios are subject to Risks for all types of securities are managed through the application of the our insurance businesses' investment policies, which establish investment parameters that include maximum percentages of investment in certain types of securities and minimum levels of credit quality, which they believe are within applicable guidelines established by the National Association of Insurance Commissioners (“NAIC”). In addition, our insurance businesses seek to employ investment strategies that are not correlated with its insurance and reinsurance exposures, however, losses in their investment portfolios may occur at the same time as underwriting losses. Our insurances businesses could be forced to sell investments to meet liquidity requirements. Our insurance businesses invest premiums until they are needed to pay policyholder claims. Consequently, our insurance businesses seek to manage the duration of their investment portfolios based on the duration of their losses and loss adjustment expenses payment cycles in order to ensure sufficient liquidity and to avoid having to unexpectedly liquidate investments to fund claims. In addition unfavorable trends in litigation could potentially result in the need to sell investments to fund these liabilities. Our insurance businesses may not be able to sell their investments at favorable prices or at all. Sales of invested assets could result in significant realized losses depending on the conditions of the general market, interest rates, and credit issues with individual securities. Our business may also be Through our insurance businesses, we primarily serve customers in the homeowners’ insurance market. We also sell auto, flood and umbrella insurance and we expect sales in those markets to 60 Insurance commission revenue recognition and changes within our insurance business may create a fluctuation of our business results and expose us to additional risks. Current accounting standards allow an insurance agency like Elite Insurance Group to recognize the Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. None. 61
* Management contract or compensatory plan or arrangement. † Filed herewith Except Exhibits 32.1 and 32.2, which are furnished not filed. 62 SIGNATURES Pursuant to the requirements of Date: August 16, 2021
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