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, 20212022
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.
(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 Number) |
411 1st Avenue S., Suite 501,Seattle, WA98104
(Address of Principal Executive Offices) (Zip Code)
(855) 767-2400
(Registrant’s telephone number, including area code)
2200 1st Avenue SS.., Suite 300, Seattle, WA 98134
(Address of Principal Executive Offices)
(855) 767-2400
(Registrant’s telephone number)
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:
| | |
Title of Each Class | Trading symbol | Name of Exchange on which registered |
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.
| | | | | |
Large accelerated filer |
| Accelerated filer | ☐ | | |
| | | | | |
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 ☒
The number of outstanding shares of the Registrant’s Common Stockregistrant’s common stock as of May 14, 20216, 2022 was 96,198,917.99,136,900.
Table of Contents
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| | Unaudited Condensed Consolidated Balance Sheets as of March 31, | | 3 |
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| | Notes to Unaudited Condensed Consolidated Financial Statements | |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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2
PART I —FINANCIAL INFORMATION
Item 1. Financial Statements
PORCH GROUP, INC.
Unaudited Condensed Consolidated Balance Sheets
(all numbers in thousands, except share amounts)
| | | | | | |
|
| March 31, 2021 |
| December 31, 2020 | ||
Assets |
| |
|
| |
|
Current assets |
| |
|
| |
|
Cash and cash equivalents | | $ | 222,948 | | $ | 196,046 |
Accounts receivable, net | |
| 9,629 | |
| 4,268 |
Prepaid expenses and other current assets | |
| 7,869 | |
| 4,080 |
Restricted cash | | | 10,435 | | | 11,407 |
Total current assets | |
| 250,881 | |
| 215,801 |
Property, equipment, and software, net | |
| 5,328 | |
| 4,593 |
Goodwill | |
| 50,120 | |
| 28,289 |
Intangible assets, net | |
| 22,715 | |
| 15,961 |
Long-term insurance commissions receivable | | | 4,748 | | | 3,365 |
Other assets | |
| 444 | |
| 378 |
Total assets | | $ | 334,236 | | $ | 268,387 |
| |
|
| |
|
|
Liabilities and Stockholders’ Equity | |
|
| |
|
|
Current liabilities | |
|
| |
|
|
Accounts payable | | $ | 6,384 | | $ | 9,203 |
Accrued expenses and other current liabilities | |
| 15,268 | |
| 9,905 |
Deferred revenue | |
| 4,346 | |
| 5,208 |
Refundable customer deposit | |
| 2,026 | |
| 2,664 |
Current portion of long-term debt | |
| 7,480 | |
| 4,746 |
Total current liabilities | |
| 35,504 | |
| 31,726 |
Long-term debt | |
| 42,624 | |
| 43,237 |
Refundable customer deposit, non-current | |
| 396 | |
| 529 |
Earnout liability, at fair value | | | 43,193 | | | 50,238 |
Private warrant liability, at fair value | | | 47,444 | | | 31,534 |
Other liabilities (includes $2,869 and $3,549 at fair value, respectively) | |
| 3,068 | |
| 3,798 |
Total liabilities | |
| 172,229 | |
| 161,062 |
Commitments and contingencies (Note 10) | |
|
| |
|
|
Stockholders’ equity | |
|
| |
|
|
Common stock, $0.0001 par value: | |
| 9 | |
| 8 |
Authorized shares – 400,000,000 and 400,000,000 | |
|
| |
|
|
Issued and outstanding shares – 91,455,732 and 81,669,151 | | | | | | |
Additional paid-in capital | |
| 544,605 | |
| 424,823 |
Accumulated deficit | |
| (382,607) | |
| (317,506) |
Total stockholders’ equity | |
| 162,007 | |
| 107,325 |
Total liabilities and stockholders’ equity | | $ | 334,236 | | $ | 268,387 |
| | | | | | |
|
| March 31, 2022 |
| December 31, 2021 | ||
Assets |
| | |
| |
|
Current assets |
| |
|
| |
|
Cash and cash equivalents | | $ | 292,373 | | $ | 315,741 |
Accounts receivable, net | |
| 29,996 | |
| 28,767 |
Short-term investments | | | 8,462 | | | 9,251 |
Reinsurance balance due | | | 239,739 | | | 228,416 |
Prepaid expenses and other current assets | |
| 21,087 | |
| 14,338 |
Restricted cash | | | 10,162 | | | 8,551 |
Total current assets | |
| 601,819 | |
| 605,064 |
Property, equipment, and software, net | |
| 8,340 | |
| 6,666 |
Operating lease right-of-use assets | | | 3,922 | | | 4,504 |
Goodwill | |
| 226,576 | |
| 225,654 |
Long-term investments | | | 56,865 | | | 58,324 |
Intangible assets, net | |
| 124,306 | |
| 129,830 |
Restricted cash, non-current | |
| 500 | |
| 500 |
Long-term insurance commissions receivable | | | 9,061 | | | 7,521 |
Other assets | |
| 5,373 | |
| 684 |
Total assets | | $ | 1,036,762 | | $ | 1,038,747 |
| |
|
| |
|
|
Liabilities and Stockholders’ Equity | |
|
| |
|
|
Current liabilities | |
|
| |
|
|
Accounts payable | | $ | 8,016 | | $ | 6,965 |
Accrued expenses and other current liabilities | |
| 35,029 | |
| 37,675 |
Deferred revenue | |
| 198,857 | |
| 201,085 |
Refundable customer deposit | |
| 16,686 | |
| 15,274 |
Current portion of long-term debt | |
| 150 | |
| 150 |
Losses and loss adjustment expense reserves | | | 79,608 | | | 61,949 |
Other insurance liabilities, current | | | 43,049 | | | 40,024 |
Total current liabilities | |
| 381,395 | |
| 363,122 |
Long-term debt | |
| 415,002 | |
| 414,585 |
Operating lease liabilities, non-current | | | 2,267 | | | 2,694 |
Earnout liability, at fair value | | | 2,687 | | | 13,866 |
Private warrant liability, at fair value | | | 5,004 | | | 15,193 |
Other liabilities (includes $12,822 and $9,617 at fair value, respectively) | |
| 15,528 | |
| 12,242 |
Total liabilities | |
| 821,883 | |
| 821,702 |
Commitments and contingencies (Note 12) | |
|
| |
|
|
Stockholders’ equity | |
|
| |
|
|
Common stock, $0.0001 par value: | |
| 10 | |
| 10 |
Authorized shares – 400,000,000 and 400,000,000, respectively | |
|
| |
|
|
Issued and outstanding shares – 98,297,186 and 97,961,597, respectively | | | | | | |
Additional paid-in capital | |
| 647,551 | |
| 641,406 |
Accumulated other comprehensive loss | | | (2,774) | | | (259) |
Accumulated deficit | |
| (429,908) | |
| (424,112) |
Total stockholders’ equity | |
| 214,879 | |
| 217,045 |
Total liabilities and stockholders’ equity | | $ | 1,036,762 | | $ | 1,038,747 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
PORCH GROUP, INC.
Condensed Consolidated Statements of Operations
(all numbers in thousands, except share amounts, unaudited)
| | | | | | |
|
| Three Months Ended March 31, | ||||
|
| 2022 |
| 2021 | ||
Revenue | | $ | 62,561 | | $ | 26,742 |
Operating expenses(1): | |
|
| |
|
|
Cost of revenue | |
| 21,189 | |
| 5,930 |
Selling and marketing | |
| 25,743 | |
| 14,638 |
Product and technology | |
| 14,231 | |
| 11,789 |
General and administrative | |
| 26,699 | |
| 24,016 |
Total operating expenses | |
| 87,862 | |
| 56,373 |
Operating loss | |
| (25,301) | |
| (29,631) |
Other income (expense): | |
|
| |
|
|
Interest expense | |
| (2,293) | |
| (1,223) |
Change in fair value of earnout liability | | | 11,179 | | | (18,770) |
Change in fair value of private warrant liability | | | 10,189 | | | (15,910) |
Investment income and realized gains, net of investment expenses | | | 197 | | | — |
Other income, net | |
| 56 | |
| 83 |
Total other income (expense) | |
| 19,328 | |
| (35,820) |
Loss before income taxes | |
| (5,973) | |
| (65,451) |
Income tax benefit | |
| 177 | |
| 350 |
Net loss | | $ | (5,796) | | $ | (65,101) |
| | | | | | |
Loss per share - basic and diluted (Note 14) | | $ | (0.06) | | $ | (0.76) |
| |
|
| |
|
|
Shares used in computing basic and diluted loss per share | |
| 96,074,527 | |
| 85,331,575 |
(1) | Amounts include stock-based compensation expense, as follows: |
| | | | | | |
| | Three Months Ended March 31, | ||||
|
| 2022 |
| 2021 | ||
Cost of revenue |
| $ | — |
| $ | 1 |
Selling and marketing | |
| 632 | |
| 2,082 |
Product and technology | |
| 1,137 | |
| 2,317 |
General and administrative | |
| 4,085 | |
| 12,435 |
| | $ | 5,854 | | $ | 16,835 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
PORCH GROUP, INC.
Condensed Consolidated Statements of Comprehensive Loss
(all numbers in thousands, unaudited)
| | | | | | |
|
| Three Months Ended March 31, | ||||
|
| 2022 |
| 2021 | ||
Net loss | | $ | (5,796) | | $ | (65,101) |
Other comprehensive loss: | |
| | |
| |
Current period change in net unrealized loss, net of tax | | | (2,515) | |
| — |
Comprehensive loss | | $ | (8,311) | | $ | (65,101) |
5
PORCH GROUP, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(all numbers in thousands, except share amounts, unaudited)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | ||
| | | | | | | Additional | | | | | Other | | Total | |||
| | Common Stock |
| Paid-in |
| Accumulated |
| Comprehensive |
| Stockholders’ | |||||||
| | Shares | | Amount |
| Capital | | Deficit | | Loss |
| Equity | |||||
Balances as of December 31, 2021 |
| 97,961,597 | | $ | 10 | | $ | 641,406 | | $ | (424,112) | | $ | (259) | | $ | 217,045 |
Net loss |
| — | |
| — | |
| — | |
| (5,796) | |
| — | |
| (5,796) |
Other comprehensive income | | — | |
| — | |
| — | | | — | | | (2,515) | | | (2,515) |
Stock-based compensation |
| — | |
| — | |
| 5,854 | |
| — | |
| — | |
| 5,854 |
Contingent consideration for acquisitions |
| — | |
| — | |
| 530 | | | — | |
| — | |
| 530 |
Vesting of restricted stock awards | | 245,855 | | | — | | | — | | | — | | | — | | | — |
Exercise of stock options |
| 185,685 | |
| — | |
| 473 | | | — | |
| — | |
| 473 |
Income tax withholdings |
| (95,951) | |
| — | |
| (712) | | | — | |
| — | |
| (712) |
Balances as of March 31, 2022 | | 98,297,186 | | $ | 10 | | $ | 647,551 | | $ | (429,908) | | $ | (2,774) | | $ | 214,879 |
6
PORCH GROUP, INC.
Unaudited Condensed Consolidated Statements of OperationsStockholders’ Equity - Continued
(all numbers in thousands, except share amounts)amounts, unaudited)
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | Additional | | | | | Total | ||
| | Common Stock |
| Paid-in |
| Accumulated |
| Stockholders’ | ||||||
|
| Shares | | Amount |
| Capital | | Deficit | | Equity | ||||
Balances as of December 31, 2020 |
| 81,669,151 | | $ | 8 | | $ | 424,823 | | $ | (317,506) | | $ | 107,325 |
Net loss |
| — | |
| — | |
| — | |
| (65,101) | |
| (65,101) |
Stock-based compensation |
| — | |
| — | |
| 4,462 | |
| — | |
| 4,462 |
Stock-based compensation - earnout | | — | | | — | | | 12,373 | | | — | | | 12,373 |
Issuance of common stock for acquisitions | | 90,000 | | | — | | | 1,169 | | | — | | | 1,169 |
Reclassification of earnout liability upon vesting | | — | | | — | | | 25,815 | | | — | | | 25,815 |
Vesting of restricted stock awards |
| 2,078,102 | |
| — | |
| — | |
| — | |
| — |
Exercise of stock warrants | | 8,087,623 | | | 1 | | | 93,007 | | | — | | | 93,008 |
Exercise of stock options |
| 593,106 | |
| — | |
| 355 | |
| — | |
| 355 |
Income tax withholdings | | (1,062,250) | | | — | | | (16,997) | | | — | | | (16,997) |
Transaction costs | | — | | | — | | | (402) | | | — | | | (402) |
Balances as of March 31, 2021 | | 91,455,732 | | $ | 9 | | $ | 544,605 | | $ | (382,607) | | $ | 162,007 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
PORCH GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(all numbers in thousands, unaudited)
| | | | | |
| Three Months Ended | ||||
| March 31, | ||||
| 2021 |
| 2020 | ||
Revenue | $ | 26,742 | | $ | 15,074 |
Operating expenses(1): |
|
| |
|
|
Cost of revenue |
| 5,930 | |
| 4,099 |
Selling and marketing |
| 14,638 | |
| 12,853 |
Product and technology |
| 11,789 | |
| 7,352 |
General and administrative |
| 24,016 | |
| 4,156 |
Total operating expenses |
| 56,373 | |
| 28,460 |
Operating loss |
| (29,631) | |
| (13,386) |
Other income (expense): |
|
| |
|
|
Interest expense |
| (1,223) | |
| (3,086) |
Change in fair value of earnout liability | | (18,770) | | | — |
Change in fair value of private warrant liability | | (15,910) | | | — |
Other income (expense), net |
| 83 | |
| (1,874) |
Total other income (expense) |
| (35,820) | |
| (4,960) |
Loss before income taxes |
| (65,451) | |
| (18,346) |
Income tax (benefit) expense |
| (350) | |
| 21 |
Net loss | $ | (65,101) | | $ | (18,367) |
|
| | |
|
|
Net loss attributable per share to common stockholders: |
|
| |
|
|
Basic | $ | (0.76) | | $ | (0.53) |
Diluted | $ | (0.76) | | $ | (0.53) |
|
|
| |
|
|
Weighted-average shares used in computing net loss attributable per share to common stockholders: |
|
| |
|
|
Basic |
| 85,331,575 | |
| 34,965,300 |
Diluted |
| 85,331,575 | |
| 34,965,300 |
| | | | | | |
| | Three Months Ended March 31, | ||||
|
| 2022 |
| 2021 | ||
Cash flows from operating activities: | | |
|
| |
|
Net loss | | $ | (5,796) | | $ | (65,101) |
Adjustments to reconcile net loss to net cash used in operating activities | |
| | |
|
|
Depreciation and amortization | |
| 6,483 | |
| 2,463 |
Amortization of operating lease right-of-use assets | | | 582 | | | 345 |
Loss on sale and impairment of long-lived assets | | | 70 | | | 68 |
Loss (gain) on remeasurement of private warrant liability | |
| (10,189) | |
| 15,910 |
Loss (gain) on remeasurement of contingent consideration | |
| 3,205 | |
| (355) |
Loss (gain) on remeasurement of earnout liability | | | (11,179) | | | 18,770 |
Stock-based compensation | |
| 5,854 | |
| 16,835 |
Amortization of investment premium/accretion of discount, net | | | 566 | | | — |
Net realized losses on investments | | | 68 | | | — |
Interest expense (non-cash) | |
| 1,046 | |
| 311 |
Other | |
| 64 | |
| (225) |
Change in operating assets and liabilities, net of acquisitions and divestitures | |
| | |
|
|
Accounts receivable | |
| (1,296) | |
| (846) |
Reinsurance balance due | | | (11,323) | | | — |
Prepaid expenses and other current assets | |
| (6,749) | |
| 441 |
Accounts payable | |
| 1,051 | |
| (8,090) |
Accrued expenses and other current liabilities | |
| (3,145) | |
| 2,625 |
Losses and loss adjustment expense reserves | | | 17,659 | | | — |
Other insurance liabilities, current | | | 3,025 | | | — |
Deferred revenue | |
| (2,228) | |
| (1,362) |
Refundable customer deposits | |
| 1,412 | |
| (837) |
Contingent consideration - business combination | | | — | | | (1,663) |
Long-term insurance commissions receivable | |
| (1,540) | |
| (1,383) |
Operating lease liabilities, non-current | | | (235) | | | (354) |
Other | |
| (696) | |
| (487) |
Net cash used in operating activities | |
| (13,291) | |
| (22,935) |
Cash flows from investing activities: | |
|
| |
|
|
Purchases of property and equipment | |
| (1,167) | |
| (34) |
Capitalized internal use software development costs | |
| (1,574) | |
| (798) |
Purchases of short-term and long-term investments | |
| (8,835) | |
| — |
Maturities, sales of short-term and long-term investments | | | 8,449 | | | — |
Non-refundable deposit for acquisition | |
| (4,950) | |
| — |
Acquisitions, net of cash acquired | | | — | | | (22,882) |
Net cash used in investing activities | |
| (8,077) | |
| (23,714) |
Cash flows from financing activities: | |
|
| |
|
|
Repayments of principal and related fees | |
| (150) | |
| (150) |
Proceeds from exercises of warrants | |
| — | |
| 89,771 |
Proceeds from exercises of stock options | | | 473 | | | 355 |
Income tax withholdings paid upon vesting of restricted stock units | | | (712) | | | (16,997) |
Settlement of contingent consideration related to a business acquisition | | | — | | | (400) |
Net cash (used) provided by financing activities | |
| (389) | |
| 72,579 |
Net change in cash, cash equivalents, and restricted cash | | $ | (21,757) | | $ | 25,930 |
Cash, cash equivalents, and restricted cash, beginning of period | | $ | 324,792 | | $ | 207,453 |
Cash, cash equivalents, and restricted cash end of period | | $ | 303,035 | | $ | 233,383 |
8
PORCH GROUP, INC.
Condensed Consolidated Statements of Cash Flows - Continued
(all numbers in thousands, unaudited)
| | | | | | | |
| | Three Months Ended | | ||||
| | March 31, | | ||||
|
| 2021 |
| 2020 | | ||
Cost of revenue | | $ | 1 | | $ | — | |
Selling and marketing | |
| 2,082 | |
| 50 | |
Product and technology | |
| 2,317 | |
| 399 | |
General and administrative | |
| 12,435 | |
| 223 | |
| | $ | 16,835 | | $ | 672 | |
| | | | | | |
| | Three Months Ended March 31, | ||||
|
| 2022 |
| 2021 | ||
Supplemental disclosures |
| |
|
| |
|
Cash paid for interest | | $ | 1,587 | | $ | 903 |
Non-cash consideration for acquisitions | | $ | — | | $ | 2,906 |
Earnout liability | | $ | — | | $ | 25,815 |
Proceeds receivable from exercises of warrants | | $ | — | | $ | 3,237 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
49
PORCH GROUP, INC.
UnauditedNotes to Condensed Consolidated Statements of Comprehensive Loss
(all numbers in thousands, except share amounts)amounts and unless otherwise stated, unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Porch Group, Inc. (“Porch Group,” “Porch” or the “Company”) is a vertical software platform for the home, providing software and services to over 25,500 home services companies. The Vertical Software Segment provides software and services to home services companies, such as home inspectors, mortgage companies and loan officers, title companies, moving companies, real estate agencies, utility companies, and others, and the Insurance Segment operates both as an insurance carrier underwriting home insurance policies, and as an agent selling home and auto insurance for over 20 major and regional insurance companies. The Insurance Segment also includes Porch’s warranty service offering.
Porch helps home service providers grow their business and improve their customer experience. In addition, through these relationships Porch gains access to homebuyers and is able to offer services to make the moving process easier, helping consumers save time and make better decisions about critical services, including insurance, warranty, moving, security, TV/Internet, home repair and improvement.
Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements include the accounts of Porch Group, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, these unaudited condensed consolidated financial statements and notes should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 16, 2022. The information as of December 31, 2021 included in the unaudited condensed consolidated balance sheets was derived from the Company’s audited consolidated financial statements.
The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q (this “Quarterly Report”) were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which are of a normal recurring nature) considered necessary to present fairly the Company’s financial position, results of operations, comprehensive loss, stockholders’ equity, and cash flows for the periods and dates presented. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or any other interim period or future year.
Comprehensive Loss
Comprehensive loss consists of adjustments related to unrealized gains and losses on available-for-sale securities.
Reclassifications
Certain reclassifications to previously reported 2021 balances were made to conform to the current period presentation in the unaudited condensed consolidated statements of cash flows.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the amounts reported and disclosed in the unaudited condensed consolidated financial statements and accompanying notes. On an ongoing basis these estimates, which include, but are not limited to,
10
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
estimated variable consideration for services performed, estimated lifetime value of the commissions, current estimate for credit losses, depreciable lives for property and equipment, the valuation of and useful lives for acquired intangible assets, goodwill, the valuation allowance on deferred tax assets, assumptions used in stock-based compensation expense, unpaid losses for insurance claims and loss adjustment expenses, contingent consideration, earnout liabilities and private warrant liabilities, are evaluated by management. Actual results could differ materially from those estimates, judgments, and assumptions.
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 carrier 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 reinsurer counterparties. NaN reinsurers represented more than 10% individually, and 38% in aggregate, of the Company’s insurance subsidiary’s total reinsurance receivables as of March 31, 2022.
Substantially all of the Company’s insurance-related revenues in the Insurance segment are derived from customers in Texas (which represent approximately 57% of such revenues in the three months ended March 31, 2022), South Carolina, North Carolina, Georgia, Virginia and Arizona, which could be adversely affected by economic conditions, an increase in competition, or environmental impacts and changes.
No individual customer represented more than 10% of the Company’s total revenue for the three months ended March 31, 2022, or 2021. As of March 31, 2022 and December 31, 2021, no individual customer accounted for 10% or more of the Company’s total accounts receivable.
As of March 31, 2022, the Company held approximately $233.4 million of cash with one U.S. commercial bank.
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 March 31, 2022 includes $0.3 million 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, $7.1 million in funds held for the payment of possible warranty claims as required under regulatory guidelines in twenty five states, $0.3 million of customer deposits, $0.4 million in escrow with an insurance regulator, and $2.6 million related to acquisition indemnifications, of which $0.5 million is recorded in non-current assets. Restricted cash equivalents as of December 31, 2021, includes $0.3 million 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, $5.9 million in funds held for the payment of possible warranty claims as required under regulatory guidelines in twenty five states, $0.3 million of customer deposits, and $2.6 million related to acquisition indemnifications in escrow accounts, of which $0.5 million is recorded in non-current assets.
11
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
The reconciliation of cash and cash equivalents to amounts presented in the unaudited condensed consolidated statements of cash flows are as follows:
| | | | | | |
|
| March 31, 2022 |
| December 31, 2021 | ||
| | | | | | |
Cash and cash equivalents | | $ | 292,373 | | $ | 315,741 |
Restricted cash and restricted cash equivalents - current | |
| 10,162 | |
| 8,551 |
Restricted cash and restricted cash equivalents - non-current | | | 500 | | | 500 |
Cash, cash equivalents and restricted cash | | $ | 303,035 | | $ | 324,792 |
Accounts Receivable and Long-term Insurance Commissions Receivable
Accounts receivable consist principally of amounts due from enterprise customers and other corporate partnerships, as well as credit card receivables. The Company estimates allowances for uncollectible receivables based on the creditworthiness of its customers, historical trend analysis and general economic conditions. Consequently, an adverse change in those factors could affect the Company’s estimate of allowance for doubtful accounts. The allowance for uncollectible receivables at March 31, 2022 and December 31, 2021, was $0.5 million and $0.4 million, respectively.
Long-term insurance commissions receivable balance consists of the estimated commissions from policy renewals expected to be collected. The Company records the amount of renewal insurance commissions expected to be collected in the next twelve months as current accounts receivable.
Deferred Policy Acquisition Costs
The Company capitalizes deferred policy acquisitions costs (“DAC”) which consist primarily of commissions, premium taxes and policy underwriting and production expenses that are directly related to the successful acquisition by the Company’s insurance subsidiary of new or renewal insurance contracts. DAC are amortized to expense on a straight-line basis over the terms of the policies to which they relate, which is generally one year. The amortization of DAC is included in sales and marketing expense in the unaudited condensed consolidated statements of operations and comprehensive loss. DAC is also reduced by ceding commissions paid by reinsurance companies which represent recoveries of acquisition costs. DAC is periodically reviewed for recoverability and adjusted if necessary. Future investment income is considered in determining the recoverability of DAC. As of March 31, 2022 and December 31, 2021, DAC of $7.7 million and $4.0 million is included in prepaid expenses and other current assets.
Changes in DAC for the three months ended March 31, 2022 are as follows:
| | | |
|
| 2022 | |
Deferred policy acquisition costs at December 31, 2021 (gross) | | $ | 33,014 |
Ceded deferred policy acquisition costs | |
| (29,026) |
Deferred policy acquisition costs at December 31, 2021 (net) | | | 3,988 |
Capitalized costs | | | 16,753 |
Amortized costs | | | (13,001) |
Deferred policy acquisition costs at March 31, 2022 (net) | | $ | 7,740 |
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
12
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
applied based on the nature of the inputs used when measuring fair value. The three hierarchical levels of inputs are as follows:
Level 1 | Observable inputs, such as quoted prices (unadjusted) in active markets for identical assets or liabilities at the measurement date; |
Level 2 | Observable inputs, other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. This may include active markets for similar assets and liabilities, quoted prices in markets that are not highly active, or other inputs that are observable or can be corroborated by observable market data; and |
Level 3 | Unobservable inputs that are arrived at by means other than current observable market activity. |
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.
Other Insurance Liabilities, Current
The following table details the components of other insurance liabilities, current on the condensed consolidated balance sheets:
| | | | | | |
|
| March 31, 2022 |
| December 31, 2021 | ||
Ceded reinsurance premiums payable | | $ | 21,439 | | $ | 22,523 |
Funds held under reinsurance treaty | |
| 2,092 | |
| 2,206 |
Commissions payable, reinsurers and agents | | | 9,259 | | | 10,697 |
General and accrued expenses payable | | | 579 | | | 321 |
Advance premiums | |
| 9,680 | |
| 4,277 |
Other insurance liabilities, current | | $ | 43,049 | | $ | 40,024 |
Income Taxes
Provisions for income taxes for the three months ended March 31, 2022 and 2021 were a $0.2 million benefit and a $0.4 million benefit, respectively, and the effective tax rates for these periods were 2.96% and 0.53%, respectively. The difference between the Company’s effective tax rates for the 2022 period and the U.S. statutory rate of 21% was primarily due to a full valuation allowance related to the Company’s net deferred assets. The difference between the Company’s effective tax rates for the 2021 period and the U.S. statutory rate of 21% was primarily due to a full valuation allowance related to the Company’s net deferred tax assets.
Recently Adopted Accounting Standards
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this update require an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date. The amendments of this ASU do not affect the accounting for other assets or liabilities that may arise from revenue contracts with customers in accordance with Topic 606. The amendments of this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods in those fiscal years. The ASU clarifies that early adoption of the amendments is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition
13
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. The Company early adopted this ASU as of January 1, 2022 and will apply the guidance prospectively for business combinations that occur after the adoption date. Therefore, the adoption will have no impact to the existing consolidated balance sheets, statements of operations, and statements of cash flows.
| | | | | | |
|
| Three Months Ended | ||||
|
| March 31, | ||||
|
| 2021 |
| 2020 | ||
Net loss | | $ | (65,101) | | $ | (18,367) |
Other comprehensive income: | |
| | |
| |
Change in fair value of convertible promissory notes due to own credit | |
| — | |
| 3,856 |
Comprehensive loss | | $ | (65,101) | | $ | (14,511) |
2. Revenue
Disaggregation of Revenue
The Company generates revenue in its Vertical Software segment from (1) software and service subscription fees received for continued access to and transactions processed using owned software platforms by individual contractors, small business service providers and large enterprise service providers, (2) move-related transactions for a variety of services when end customers are connected with service providers primarily related to moving or settling into a new home, and (3) post-move transactions for the delivery of leads to service providers who primarily support the continued maintenance of the home.
The revenue generated by the Company’s Insurance segment is primarily from the sale of its own written insurance and warranty policies or third-party policies via its agency. This revenue includes insurance and warranty premiums earned over the life of the policy, reinsurance profit share, policy fees, commissions earned at the time it is put in force or ceded.
Total revenues consisted of the following:
| | | | | | |
| | Three Months Ended March 31, | ||||
| | 2022 | | 2021 | ||
Vertical Software segment | | | | | | |
Software and service subscriptions | | $ | 17,965 | | $ | 10,879 |
Move-related transactions (excluding insurance) | | | 12,193 | | | 8,960 |
Post-move transactions | | | 4,530 | | | 5,098 |
Total Vertical Software segment revenue | | | 34,688 | | | 24,937 |
| | | | | | |
Insurance segment | | | | | | |
Insurance and warranty premiums, commissions and policy fees(1) | | | 27,873 | | | 1,805 |
Total Insurance segment revenue | | | 27,873 | | | 1,805 |
| | | | | | |
Total revenue | | $ | 62,561 | | $ | 26,742 |
(1)Revenue recognized during the three months ended March 31, 2022 includes revenue from regulated property and casualty insurance entity in the form of insurance premiums, policy fees, ceding commissions, and reinsurance profit sharing of $20.0 million which is accounted for separately from the revenue from contracts with customers.
514
PORCH GROUP, INC.
UnauditedNotes to Condensed Consolidated Statements of Stockholders’ Equity (Deficit)- Continued
(all numbers in thousands, except share amounts)amounts and unless otherwise stated, unaudited)
Contracts with Customers
Contract Assets - Insurance Commissions Receivable
A summary of the activity impacting the contract assets during the three months ended March 31, 2022, is presented below:
| | | |
|
| Contract Assets | |
Balance at December 31, 2021 | | $ | 9,384 |
Estimated lifetime value of insurance policies sold by carriers | |
| 2,422 |
Cash receipts | |
| (753) |
Balance at March 31, 2022 | | $ | 11,053 |
As of March 31, 2022, $2.0 million of contract assets are expected to be collected within the next 12 months and therefore are included in current accounts receivable on the condensed consolidated balance sheets. The remaining $9.1 million of contract assets are expected to be collected in the following periods and are included in long-term insurance commissions receivable on the condensed consolidated balance sheets.
Contract Liabilities — Refundable Customer Deposits
A summary of the activity impacting the contract liabilities during the three months ended March 31, 2022 is presented below:
| | | |
| | Contract | |
|
| Liabilities | |
Balance at December 31, 2021 |
| | 15,274 |
Additions to contract liabilities | |
| 7,891 |
Contract liabilities transferred to revenue | | | (6,479) |
Balance at March 31, 2022 | | $ | 16,686 |
As of March 31, 2022, $16.7 million in contract liabilities related to refundable customer deposits received in advance of warranty services provided, are included in current refundable customer deposits on the consolidated balance sheets because the policyholder may cancel the policy at any time and receive a pro-rated refund. If the policies are not canceled, the balance is expected to be transferred to revenue over the term of the policies, which is, on average, 19 months.
Deferred Revenue
Timing may differ between the satisfaction of performance obligations and the 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 are related to a point in time obligation which has yet to be performed, these liabilities are classified as refundable customer deposits.
A summary of the activity impacting deferred revenue balances during the three months ended March 31, 2022 is presented below:
| | | | | | | | | |
| | Vertical Software | | Insurance | | Total | |||
|
| Deferred Revenue | | Deferred Revenue | | Deferred Revenue | |||
Balance at December 31, 2021 | | | 3,814 | | $ | 197,271 | | $ | 201,085 |
Revenue recognized(1) | |
| (5,279) | |
| (91,994) | |
| (97,273) |
15
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
Additional amounts deferred | |
| 5,722 | |
| 89,323 | |
| 95,045 |
Balance at March 31, 2022 | | $ | 4,257 | | $ | 194,600 | | $ | 198,857 |
(1) | In the table above, revenue recognized on earned premiums related to the insurance segment is presented as the gross amount from policy holders excluding the impact of ceded premiums. On the unaudited condensed statements of operations earned premiums are presented net of ceded premiums of $71.7 million. |
Remaining Performance Obligations
Contracts with customers include $4.3 million to performance obligations that will be satisfied at a later date. These amounts primarily include performance obligations that are recorded in the condensed consolidated balance sheets as deferred revenue.
The amount of the transaction price allocated to performance obligations to be satisfied at a later date, which is not recorded in the condensed consolidated balance sheets, is immaterial as of March 31, 2022 and December 31, 2021.
The Company has applied the practical expedients provided for in the accounting standards, and does not present unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts with variable consideration that is allocated entirely to unsatisfied performance obligations or to a wholly unsatisfied promise accounted for under the series guidance, and (iii) contracts for which the Company recognizes revenue at the amount which it has the right to invoice for services performed. Additionally, the Company excludes amounts related to performance obligations that are billed and recognized as they are delivered.
3. Investments
The following table provides the Company’s investment income, and realized gains on investments:
| | | |
| | Three Months Ended March 31, | |
| | 2022 | |
Investment income, net of investment expenses | | $ | 265 |
Realized gains on investments | | | 2 |
Realized losses on investments | | | (70) |
Investment income and realized gains, net of investment expenses | | $ | 197 |
The Company did not have significant investment income during the three months ended March 31, 2021.
16
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
The following table provides the amortized cost, fair value and unrealized gains and (losses) of the Company’s investment securities:
| | | | | | | | | | | | |
| | March 31, 2022 | ||||||||||
| | | | | Gross Unrealized | | | | ||||
|
| Amortized Cost |
| Gains |
| Losses |
| Fair Value | ||||
U.S. Treasuries | | $ | 3,653 | | $ | 1 | | $ | (135) | | $ | 3,519 |
Obligations of states, municipalities and political subdivisions | | | 9,997 | | | — | | | (584) | | | 9,413 |
Corporate bonds | |
| 30,283 | |
| 3 | |
| (1,234) | |
| 29,052 |
Residential and commercial mortgage-backed securities | | | 15,237 | | | 27 | | | (617) | | | 14,647 |
Other loan-backed and structured securities | | | 8,931 | | | 2 | | | (237) | | | 8,696 |
Total debt securities | | $ | 68,101 | | $ | 33 | | $ | (2,807) | | $ | 65,327 |
| | | | | | | | | | | | |
| | December 31, 2021 | ||||||||||
| | | | | Gross Unrealized | | | | ||||
|
| Amortized Cost |
| Gains |
| Losses |
| Fair Value | ||||
U.S. Treasuries | | $ | 5,452 | | $ | 1 | | $ | (36) | | $ | 5,417 |
Obligations of states, municipalities and political subdivisions | | | 8,913 | | | 21 | | | (84) | | | 8,850 |
Corporate bonds | |
| 31,491 | |
| 89 | |
| (155) | |
| 31,425 |
Residential and commercial mortgage-backed securities | | | 14,387 | | | 34 | | | (139) | | | 14,282 |
Other loan-backed and structured securities | | | 7,637 | | | 5 | | | (41) | | | 7,601 |
Total debt securities | | $ | 67,880 | | $ | 150 | | $ | (455) | | $ | 67,575 |
The amortized cost and fair value of securities at March 31, 2022, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | | | | |
| | March 31, 2022 | ||||
Remaining Time to Maturity |
| Amortized Cost |
| Fair Value | ||
Due in one year or less | | $ | 6,425 | | $ | 6,388 |
Due after one year through five years | | | 20,771 | | | 19,914 |
Due after five years through ten years | | | 13,700 | | | 12,820 |
Due after ten years | |
| 3,037 | |
| 2,862 |
Residential and commercial mortgage-backed securities | | | 15,237 | | | 14,647 |
Other loan-backed and structured securities | | | 8,931 | | | 8,696 |
Total | | $ | 68,101 | | $ | 65,327 |
Other-than-temporary Impairment
The Company regularly reviews its individual investment securities for other-than-temporarily impairment. The Company considers various factors in determining whether each individual security is other-than-temporarily impaired, including:
- | the financial condition and near-term prospects of the issuer, including any specific events that may affect its operations or earnings; |
- | the length of time and the extent to which the market value of the security has been below its cost or amortized cost; |
17
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
- | general market conditions and industry or sector-specific factors; |
- | nonpayment by the issuer of its contractually obligated interest and principal payments; and |
- | the Company’s intent and ability to hold the investment for a period of time sufficient to allow for the recovery of costs. |
Securities with gross unrealized loss position, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:
| | | | | | | | | | | | | | | | | | |
| | Less Than Twelve Months | | Twelve Months or Greater | | Total | ||||||||||||
| | Gross | | | | Gross | | | | Gross | | | ||||||
| | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | ||||||
At March 31, 2022 | | Loss | | Value |
| Loss | | Value |
| Loss | | Value | ||||||
U.S. Treasuries | | $ | (135) | | $ | 3,204 | | $ | — | | $ | — | | $ | (135) | | $ | 3,204 |
Obligations of states, municipalities and political subdivisions | | | (584) | | | 9,361 | | | — | | | — | | | (584) | | | 9,361 |
Corporate bonds | | | (1,234) | | | 21,104 | | | — | | | — | | | (1,234) | | | 21,104 |
Residential and commercial mortgage-backed securities | | | (617) | | | 13,816 | | | — | | | — | | | (617) | | | 13,816 |
Other loan-backed and structured securities | | | (237) | | | 8,035 | | | — | | | — | | | (237) | | | 8,035 |
Total securities | | $ | (2,807) | | $ | 55,520 | | $ | — | | $ | — | | $ | (2,807) | | $ | 55,520 |
| | | | | | | | | | | | | | | | | | |
| | Less Than Twelve Months | | Twelve Months or Greater | | Total | ||||||||||||
| | Gross | | | | Gross | | | | Gross | | | ||||||
| | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | ||||||
At December 31, 2021 | | Loss | | Value |
| Loss | | Value |
| Loss | | Value | ||||||
U.S. Treasuries | | $ | (36) | | $ | 5,007 | | $ | — | | $ | — | | $ | (36) | | $ | 5,007 |
Obligations of states, municipalities and political subdivisions | | | (84) | | | 4,292 | | | — | | | — | | | (84) | | | 4,292 |
Corporate bonds | | | (155) | | | 15,446 | | | — | | | — | | | (155) | | | 15,446 |
Residential and commercial mortgage-backed securities | | | (139) | | | 9,687 | | | — | | | — | | | (139) | | | 9,687 |
Other loan-backed and structured securities | | | (41) | | | 6,818 | | | — | | | — | | | (41) | | | 6,818 |
Total securities | | $ | (455) | | $ | 41,250 | | $ | — | | $ | — | | $ | (455) | | $ | 41,250 |
At March 31, 2022, and December 31, 2021, there were 448 and 358 securities, respectively, in an unrealized loss position. Of these securities, NaN 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 less than par value of the investments. Because the declines in fair value are attributable to changes in interest rates or market conditions and not credit quality, and because the Company has the ability and intent to hold its available-for-sale investments until a market price recovery or maturity, the Company does not consider any of its investments to be other-than-temporarily impaired at March 31, 2022.
18
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
| | | | | | | | | | | | | | | | | |
| ` | |
| | |
| Additional |
| | |
| |
| Total | |||
| | Common Stock |
| Paid-in |
| Accumulated |
| Accumulated Other |
| Stockholders’ | |||||||
|
| Shares | | Amount |
| Capital | | Deficit | | Comprehensive Income |
| Equity (Deficit) | |||||
Balances as of December 31, 2019(1) |
| 34,197,822 | | $ | 3 | | $ | 203,492 | | $ | (263,474) | | $ | — | | $ | (59,979) |
Net loss |
| — | |
| — | |
| — | |
| (18,367) | |
| — | |
| (18,367) |
Other comprehensive income | | — | |
| — | |
| — | | | — | | | 3,856 | | | 3,856 |
Stock-based compensation |
| — | |
| — | |
| 672 | |
| — | |
| — | |
| 672 |
Issuance of Series C redeemable convertible preferred stock(1) |
| 1,430,166 | |
| — | |
| 4,714 | |
| — | |
| — | |
| 4,714 |
Conversion of convertible notes to Series C redeemable convertible preferred stock(1) |
| 423,088 | |
| — | |
| 1,436 | |
| — | |
| — | |
| 1,436 |
Vesting of restricted stock awards issued for acquisitions |
| 1,005,068 | |
| — | |
| — | |
| — | |
| — | |
| — |
Issuance of common stock warrants | | — | | | — | | | 44 | | | — | | | — | | | 44 |
Exercise of stock options |
| 17,900 | |
| — | |
| 1 | |
| — | |
| — | |
| 1 |
Balances as of March 31, 2020 | | 37,074,044 | | $ | 3 | | $ | 210,359 | | $ | (281,841) | | $ | 3,856 | | $ | (67,623) |
| | | | | | | | | | | | | | | | | |
Balances as of December 31, 2020 |
| 81,669,151 | | $ | 8 | | $ | 424,823 | | $ | (317,506) | | $ | — | | $ | 107,325 |
Net loss |
| — | |
| — | |
| — | |
| (65,101) | |
| — | |
| (65,101) |
Stock-based compensation |
| — | |
| — | |
| 4,462 | |
| — | |
| — | |
| 4,462 |
Stock-based compensation - earnout | | — | |
| — | | | 12,373 | | | — | | | — | | | 12,373 |
Issuance of common stock for acquisitions |
| 90,000 | |
| — | |
| 1,169 | |
| — | |
| — | |
| 1,169 |
Reclassification of earnout liability upon vesting |
| — | |
| — | |
| 25,815 | | | — | |
| — | |
| 25,815 |
Vesting of restricted stock units | | 2,078,102 | | | — | | | — | | | — | | | — | | | — |
Exercise of stock warrants | | 8,087,623 | | | 1 | | | 93,007 | | | — | | | — | | | 93,008 |
Exercise of stock options |
| 593,106 | |
| — | |
| 355 | | | — | |
| — | |
| 355 |
Income tax withholdings |
| (1,062,250) | |
| — | |
| (16,997) | | | — | |
| — | |
| (16,997) |
Transaction costs | | — | | | — | | | (402) | | | — | | | — | | | (402) |
Balances as of March 31, 2021 |
| 91,455,732 | | $ | 9 | | $ | 544,605 | | $ | (382,607) | | $ | — | | $ | 162,007 |
(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.
Unaudited Condensed Consolidated Statements of Cash Flows
(all numbers in thousands)
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2021 |
| 2020 | ||
Cash flows from operating activities: | | |
|
| |
|
Net loss | | $ | (65,101) | | $ | (18,367) |
Adjustments to reconcile net loss to net cash used in operating activities | |
| | |
|
|
Depreciation and amortization | |
| 2,463 | |
| 1,789 |
Loss on sale and impairment of long-lived assets | | | 68 | | | 167 |
Loss (gain) on extinguishment of debt | |
| — | |
| 247 |
Loss on remeasurement of debt | |
| — | |
| 454 |
Loss on remeasurement of warrants | |
| 15,910 | |
| 1,079 |
Loss (gain) on remeasurement of contingent consideration | |
| (355) | |
| (80) |
Loss on remeasurement of earnout liability | | | 18,770 | | | — |
Stock-based compensation | |
| 16,835 | |
| 672 |
Interest expense (non-cash) | |
| 311 | |
| 1,089 |
Other | |
| (225) | |
| 167 |
Change in operating assets and liabilities, net of acquisitions and divestitures | |
|
| |
|
|
Accounts receivable | |
| (846) | |
| 559 |
Prepaid expenses and other current assets | |
| 441 | |
| 281 |
Long-term insurance commissions receivable | | | (1,383) | | | (174) |
Accounts payable | |
| (8,090) | |
| 1,414 |
Accrued expenses and other current liabilities | |
| 2,625 | |
| 1,651 |
Deferred revenue | |
| (1,362) | |
| 136 |
Refundable customer deposits | |
| (837) | |
| (880) |
Contingent consideration - business combination | | | (1,663) | | | — |
Other | |
| (496) | |
| 158 |
Net cash used in operating activities | |
| (22,935) | |
| (9,638) |
Cash flows from investing activities: | |
|
| |
|
|
Purchases of property and equipment | |
| (34) | |
| (84) |
Capitalized internal use software development costs | |
| (798) | |
| (890) |
Acquisitions, net of cash acquired | |
| (22,882) | |
| — |
Net cash used in investing activities | |
| (23,714) | |
| (974) |
Cash flows from financing activities: | |
|
| |
|
|
Proceeds from debt issuance, net of fees | |
| — | |
| 1,940 |
Repayments of principal and related fees | |
| (150) | |
| (401) |
Proceeds from issuance of redeemable convertible preferred stock, net of fees | |
| — | |
| 4,714 |
Proceeds from exercises of warrants | |
| 89,771 | |
| — |
Proceeds from exercises of stock options | | | 355 | | | 1 |
Income tax withholdings paid upon vesting of restricted stock units | | | (16,997) | | | — |
Settlement of contingent consideration related to a business combination | | | (400) | | | — |
Net cash provided by financing activities | |
| 72,579 | |
| 6,254 |
Change in cash, cash equivalents, and restricted cash | | $ | 25,930 | | $ | (4,358) |
Cash, cash equivalents, and restricted cash, beginning of period | | $ | 207,453 | | $ | 7,179 |
Cash, cash equivalents, and restricted cash end of period | | $ | 233,383 | | $ | 2,821 |
7
PORCH GROUP, INC.
Unaudited Condensed Consolidated Statements of Cash Flows - Continued
(all numbers in thousands)
| | | | | | |
|
| Three Months Ended | ||||
| | March 31, | ||||
|
| 2021 |
| 2020 | ||
Supplemental disclosures |
| |
|
| |
|
Conversion of debt to redeemable convertible preferred stock (non-cash) | | $ | — | | $ | 1,436 |
Cash paid for interest | | $ | 903 | | $ | 1,770 |
Proceeds receivable from exercises of warrants | | $ | 3,237 | | $ | — |
Reduction of earnout liability due to a vesting event | | $ | 25,815 | | $ | — |
Non-cash consideration for acquisitions | | $ | 2,906 | | $ | — |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Porch Group, Inc. (“Porch Group”, “Porch” or the “Company”) is a vertical software platform for the home, providing software and services to home services companies, such as home inspectors, insurance carriers, moving companies, utility companies, warranty companies, and others. Porch helps these service providers grow their business and improve their customer experience. In exchange for the use of the software, these companies connect their homebuyers to Porch, who in turn offer services to make the moving process easier, helping consumers save time and make better decisions about critical services, including insurance, moving, security, TV/internet, home repair and improvement, and more. While some customers pay Porch typical software-as-a-service (“SaaS”) fees, the majority of Porch’s revenue comes from business-to-business-to-consumer (“B2B2C”) transaction revenues, with service providers such as insurance carriers or TV/internet companies paying Porch for new customer sign-ups.
The Merger
On July 30, 2020, Porch.com, Inc. (“Legacy Porch”) entered into a definitive agreement (as amended, the “Merger Agreement”) with PropTech Acquisition Corporation (“PTAC”), a special purpose acquisition company, whereby the parties agreed to merge, resulting in the parent of Porch.com, Inc. becoming a publicly-listed company under the name Porch Group, Inc. (“Porch”). This merger (the “Merger”) closed on December 23, 2020, and consisted of the following transactions:
9
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
Accordingly, the Merger transactions were treated as the equivalent of Porch.com, Inc. issuing stock for the net assets of PTAC. Consistent with Securities and Exchange Commission (“SEC”) Topic 12, Reverse Acquisitions and Reverse Recapitalizations, the acquisition of a private operating company by a non-operating public shell corporation typically results in the owners and management of the private company having actual or effective voting control and operating control of the combined company. Therefore, the transaction is, in substance, a reverse recapitalization, equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation accompanied by a recapitalization (“Recapitalization”). The accounting is similar to that of a reverse acquisition, except that no goodwill or other intangible assets should be recorded. Therefore, the net assets of PTAC as of December 23, 2020, were stated at historical cost, and no goodwill or other intangible assets were recorded.
10
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
COVID-19 Update
In March 2020, the World Health Organization declared a pandemic related to the global novel coronavirus disease 2019 (“COVID-19”) outbreak. The COVID-19 pandemic and the measures adopted by government entities in response to it have adversely affected Porch’s business operations, which impacted revenue primarily in the first half of 2020. The impact of the COVID-19 pandemic and related mitigation on Porch’s ability to conduct ordinary course business activities has been and may continue to be impaired for an indefinite period of time. The extent of the continuing impact of the COVID-19 pandemic on Porch’s operational and financial performance will depend on various future developments, including the duration and spread of the outbreak and impact on the Company’s customers, suppliers, and employees, all of which is uncertain at this time. Porch expects the COVID-19 pandemic to adversely impact future revenues and results of operations, but Porch is unable to predict at this time the size and duration of such adverse impact. At the same time, Porch is observing a recovery in home sales to pre-COVID-19 levels in the second half of 2020 and in the first quarter of 2021, and with them, home inspections and related services.
Unaudited Interim Financial Statements
The accompanying unaudited condensed interim consolidated financial statements include the accounts of Porch and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC. In this Quarterly Report, Porch Group, Inc. is referred to as “Porch,” the “Company,” “we,” “us” or “our.” The information as of December 31, 2020 included in the unaudited condensed consolidated balance sheets was derived from the Company’s audited consolidated financial statements. These unaudited condensed consolidated financial statements included in this Quarterly Report were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which are considered of a normal recurring nature) considered necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods and dates presented. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
These unaudited condensed consolidated financial statements and notes should be read in conjunction with the footnotes and management’s discussion and analysis of the audited consolidated financial statements included in Item 8 of the 2020 Annual Report on Form 10-K/A filed with the SEC on May 19, 2021.
Comprehensive Income
Comprehensive income (loss) consists of adjustments related to the effect of the Company’s own credit components on the fair value of certain convertible promissory notes at fair value in accordance with the fair value option (“FVO Notes”). 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 2020.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated
11
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
financial statements and accompanying notes. These estimates and assumptions include, but are not limited to, estimated variable consideration for services performed, the allowance for doubtful accounts, depreciable lives for property and equipment, acquired intangible assets, goodwill, the valuation allowance on deferred tax assets, assumptions used in stock-based compensation, and estimates of fair value of warrants, debt, contingent consideration, earnout liability and private warrant liability. Actual results could differ materially from those estimates and assumptions, and those differences could be material to the consolidated financial statements.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Investments in equity of unconsolidated affiliates, over which the Company has significant influence, but not control, over the financial and operating policies, are accounted for primarily using the equity method. For investments accounted for under the equity method of accounting, the Company’s share of income (losses) is included in other expense, net in the unaudited condensed consolidated statements of operations. These investments are immaterial to the Company’s unaudited condensed consolidated financial statements.
Segment Reporting
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 chief operating decision maker (“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.
All the Company’s revenue is generated in the United States.
As of March 31, 2021 and December 31, 2020, the Company did not have assets located outside of the United States.
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 as of March 31, 2021 and December 31, 2020 includes $10,435 and $8,407, respectively, related to the Paycheck Protection Program Loans held in escrow with a commercial bank (see Note 6). As of December 31, 2020, the restricted cash balance also includes a $3,000 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:
| | | | | | |
|
| March 31, 2021 |
| December 31, 2020 | ||
Cash and cash equivalents | | $ | 222,948 | | $ | 196,046 |
Restricted cash - current | |
| 10,435 | |
| 11,407 |
Cash, cash equivalents and restricted cash | | $ | 233,383 | | $ | 207,453 |
12
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
Accounts Receivable and Long-term Insurance Commissions Receivable
Accounts receivable consist principally of amounts due from enterprise customers and other corporate partnerships, as well as credit card receivables. 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 estimate of allowance for doubtful accounts. The allowance for uncollectible receivables at March 31, 2021 and December 31, 2020, was $242 and $249, respectively.
Long-term insurance commissions receivable balance consists of the estimated commissions from policy renewals expected to be collected.
4. Fair Value of Financial Instruments
The Company’s assets and liabilities which require fair value measurement on a recurring basis, consist of contingent consideration, redeemable convertible preferred stock warrants and convertible notes recorded at fair value.
Fair value principles require disclosures regarding the manner in which fair value is determined for assets and liabilities and establishes a three-tiered fair value hierarchy into which these assets and liabilities must be grouped, based upon significant levels of inputs as follows:
|
|
|
|
|
|
The lowest level of significant input 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 in its entirety requires management to make judgments and consider factors specific to the asset or liability.
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 will meet the market vesting condition when the closing price of 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. The earnout shares may be contingently canceled, depending on the outcome of the Company’s application for forgiveness of the U.S. Small Business Administration loan under the Paycheck Protection Program. Additional earnout shares may also be issued earnout shareholders, on a pro rata basis, depending on forfeitures of employee earnout shares that are subject to a continued service vesting condition (see Note 8).
13
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
The earnout shares are accounted for as a derivative financial instrument that is classified as a liability and periodically measured at fair value, with changes in fair value recognized through earnings. Note 3 details the beginning and ending balances of the earnout share liability, and activity recognized during the period.
Revenue from Contracts with Customers
The Company primarily generates revenue from (1) fees received for connecting homeowners to customers in the Company’s referral network, which consist of individual contractors, small businesses, insurance carriers and large enterprises (2) fees received for providing home project and moving services directly to homeowners, and (3) fees received for providing subscription access to the Company’s software platforms and subscription services across various industries. Revenue is recognized when control of the promised services or goods is transferred to our customers and in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services or goods.
The Company determines revenue recognition through the following five-step framework:
The Company identifies performance obligations in its contracts with customers, which primarily include delivery of homeowner leads (Referral Network Revenue), performance of home project and moving services (Managed Services Revenue), and providing access to the Company’s software platforms and subscription services (Software and Service Subscription Revenue). The transaction price is determined based on the amount which the Company expects to be entitled to in exchange for providing the promised services to the customer. The transaction price in the contract is allocated to each distinct performance obligation on a relative standalone selling price basis. Revenue is recognized when performance obligations are satisfied. In certain transactions the transaction price is considered variable and an estimate of the constrained transaction price is recorded by the Company. Changes in variable consideration may result in an increase or a decrease to revenue. Changes to the estimated variable consideration were not material for the periods presented.
Contract payment terms vary from due upon receipt to net 30 days. Collectability is assessed based on a number of factors including collection history and creditworthiness of the customer. If collectability of substantially all consideration to which the Company is entitled under the contract is determined to be not probable, revenue is not recorded until collectability becomes probable at a later date.
Revenue is recorded based on the transaction price excluding amounts collected on behalf of third parties, such as sales taxes collected and remitted to governmental authorities.
14
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
Referral Network Revenue
In the Referral Network Revenue stream, the Company connects third-party service providers (“Service Providers”) with homeowners that meet pre-defined criteria and may be looking for relevant services. Service Providers include a variety of service providers throughout a homeowner’s lifecycle, including plumbers, electricians, roofers, as well as movers, TV/Internet, warranty, insurance carriers, and security monitoring providers. The Company also sells home and auto insurance policies for insurance carriers.
Revenue is recognized at a point in time upon delivery of a lead 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 based on a percentage of the revenue the Service Provider ultimately generates through the homeowner lead. For arrangements in which the amount the Company is entitled to 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.
Service Providers generally have the option to pay as they receive leads or on a subscription basis, in which a specified amount is deposited into the Company’s referral platform monthly and any relevant leads are applied against the deposited amount. Certain Service Providers also have the option to pay an additional fixed fee for added member benefits, including profile distinction and rewards. Such subscriptions automatically renew each month unless canceled by the customer in advance of the renewal period in accordance with the customer termination provisions. 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 insurance carriers. The transaction price in these arrangements is the estimated lifetime value (“LTV”) of the policies sold. The LTV represents fixed first-year commission upon sale of the policy as well as the estimated variable future renewal commissions. 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 obligation to the policyholder or insurance carrier.
The Company estimates LTV of policies sold by using a portfolio approach by policy type and the effective month of the relevant policy. LTV is estimated 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.
Managed Services Revenue
Managed services revenue includes fees earned from homeowners for providing a variety of services directly to the homeowner, including handyman, plumbing, electrical, appliance repair, 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
15
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
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 the Company 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
The Company’s subscription arrangements, which primarily relates to subscriptions to the Company’s home inspector software, do not provide the customer with the right to take possession of the software supporting the cloud-based application services. The Company also provides 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 price per inspection 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.
Income Taxes
Provisions for income taxes for the three months ended March 31, 2021 and 2020 were $350 benefit and $21 expense, respectively, and the effective tax rates for these periods were 0.53% and -0.11%, respectively. The difference between the Company’s effective tax rates for the 2021 period and the U.S. statutory rate of 21% was primarily due to a full valuation allowance related to the Company’s net deferred assets and the impact of acquisitions on the Company’s valuation allowance. The difference between the Company’s effective tax rates for the 2020 period and the U.S. statutory rate of 21% was primarily due to a full valuation allowance related to the Company’s net deferred tax assets.
Other income (expense), net
The following table details the componentsfair value measurements of other income (expense), netassets and liabilities that are measured at fair value on the unaudited condensed consolidated statements of operations:a recurring basis:
| | | | | | | | | | | | |
| | Fair Value Measurement at March 31, 2022 | ||||||||||
| | | | | | | | | | | Total | |
| | Level 1 | | Level 2 |
| Level 3 |
| Fair Value | ||||
Assets | | | | | | | | | | | | |
Money market mutual funds | | $ | 5,041 | | $ | — | | $ | — | | $ | 5,041 |
Debt securities: | | | | | | | | | | | | |
U.S. Treasuries | | | 3,519 | | | — | | | — | | | 3,519 |
Obligations of states and municipalities | | | — | | | 9,413 | | | — | | | 9,413 |
Corporate bonds | | | — | | | 29,052 | | | — | | | 29,052 |
Residential and commercial mortgage-backed securities | | | — | | | 14,647 | | | — | | | 14,647 |
Other loan-backed and structured securities | | | — | | | 8,696 | | | — | | | 8,696 |
| | $ | 8,560 | | $ | 61,808 | | $ | — | | $ | 70,368 |
Liabilities | | | | | | | | | | | | |
Contingent consideration - business combinations | | $ | — | | $ | — | | $ | 12,822 |
| $ | 12,822 |
Contingent consideration - earnout | |
| — | |
| — | |
| 2,687 |
| | 2,687 |
Private warrant liability | | | — | |
| — | | | 5,004 | | | 5,004 |
| | $ | — | | $ | — | | $ | 20,513 | | $ | 20,513 |
| | | | | | |
|
| 2021 |
| 2020 | ||
Loss on remeasurement of debt (Note 3) | |
| — | |
| (454) |
Loss on remeasurement of legacy preferred stock warrant liability | | | — | |
| (1,079) |
Loss on extinguishment of debt, net | |
| — | |
| (247) |
Other, net | |
| 83 | |
| (94) |
| | $ | 83 | | $ | (1,874) |
| | | | | | | | | | | | |
| | Fair Value Measurement at December 31, 2021 | ||||||||||
| | | | | | | | | | | Total | |
| | Level 1 |
| Level 2 |
| Level 3 |
| Fair Value | ||||
Assets | | | | | | | | | | | | |
Money market mutual funds | | | 17,318 | | $ | — | | $ | — | | $ | 17,318 |
Debt securities: | | | | | | | | | | | | |
U.S. Treasuries | | | 5,417 | | | — | | | — | | | 5,417 |
Obligations of states and municipalities | | | — | | | 8,850 | | | — | | | 8,850 |
Corporate bonds | | | — | | | 31,425 | | | — | | | 31,425 |
Residential and commercial mortgage-backed securities | | | — | | | 14,282 | | | — | | | 14,282 |
Other loan-backed and structured securities | | | — | | | 7,601 | | | — | | | 7,601 |
| | $ | 22,735 | | $ | 62,158 | | $ | — | | $ | 84,893 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Contingent consideration - business combinations | | $ | — | | $ | — | | $ | 9,617 | | $ | 9,617 |
Contingent consideration - earnout | |
| — | |
| — | |
| 13,866 | |
| 13,866 |
Private warrant liability | | | — | |
| — | | | 15,193 | | | 15,193 |
| | $ | — | | $ | — | | $ | 38,676 | | $ | 38,676 |
Emerging Growth Company StatusFinancial Assets
The Company isMoney market mutual funds are valued at the closing price reported by the fund sponsor from an emerging growth company,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 defineda Level 1 measurement in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.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 elected to use this extended transition periodreviewed these prices for complying with new or revised accounting standards that have different effective dates for publicreasonableness and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the
16
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
JOBS Act. As a result, these consolidated financial statements mayhas not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. The Company expects to use the extended transition period foradjusted any new or revised accounting standards during the period in which it remains an emerging growth company.
Recent Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. The ASU is effective for public companies, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020 and adoption must be as of the beginning of the Company’s annual fiscal year. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Additionally, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326 in April 2019 and ASU 2019-05, Financial Instruments — Credit Losses (Topic 326) — Targeted Transition Relief in May 2019. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excludedprices received from the scope that have the contractual right to receive cash. In November 2019, the FASB issued ASU No. 2019-10, which 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 Companyindependent provider. Level 2 securities represent assets whose fair value 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 keydetermined using observable market 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 the adoption of Topic 842 in 2021 would increase the Company’s total assets reflecting right of use asset of approximately $2.5 million and total liabilities reflecting the lease obligation payable of approximately $2.5 million.
17
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
2. Revenue
Disaggregation of Revenue
Total revenues consisted of the following:
| | | | | | | |
| | Three months ended | | ||||
| | March 31, | | ||||
|
| 2021 |
| 2020 | | ||
Referral network revenue | | $ | 11,024 | | $ | 9,128 | |
Managed services revenue | |
| 4,644 | |
| 4,135 | |
Software and service subscription revenue | |
| 11,074 | |
| 1,811 | |
Total revenue | | $ | 26,742 | | $ | 15,074 | |
Management also evaluates revenue based upon when the Company’s customers avail themselves of the Company’s software, solutions or services. The first category, moving services relates to services that are typically provided to customers in connection with a home purchases and/or homeowner/renter moves. This includes revenue from insurance, moving, security systems and TV/internet services. The second category, post-move services, relates to services that are typically provided to customers post-move, such as home maintenance projects, repairs, remodeling and other services from professional contractors or service providers. Moving services represented 82 percent and 51 percent of total revenue in the three months ending March 31, 2021 and 2020, respectively. Post-move services represented 18 percent and 49 percent of total revenue the three months ending March 31, 2021 and 2020, respectively.
Revenue from Divested Businesses
Total revenue reported includes revenue from divested businesses of $0 and $2,540 in three months ending March 31, 2021 and 2020, respectively.
Disclosures Related to Contracts with Customers
Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to contracts with customers. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. To the extent a contract exists, as defined by ASC 606, these liabilities are classified as deferred revenue. To the extent that a contract does not exist, as defined by ASC 606, these liabilities are classified as refundable customer deposits.
Contract Assets - Long-term Insurance Commissions Receivable
A summary of the activity impacting the contract assets during the year ended December 31, 2020 is presented below:
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18
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
As of March 31, 2021, $151 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 $4,748 of contract assets 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 to provide.
A summary of the activity impacting the contract liabilities during the three months ended March 31, 2021 is presented below:
| | | |
| | Contract | |
|
| Liabilities | |
Balance at December 31, 2020 |
| $ | 3,193 |
Additions to contract liabilities | |
| — |
Additions to contract liabilities – significant financing component interest | |
| 66 |
Contract liabilities transferred to revenue | |
| (837) |
Balance at March 31, 2021 | | $ | 2,422 |
As of March 31, 2021, $2,026 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 $396 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
A summary of the activity impacting deferred revenue balances during the three months ended March 31, 2021 is presented below:
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Remaining Performance Obligations
Contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. These amounts primarily include performance obligations that are recorded in the consolidated balance sheets asprevious day trade prices,
19
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020- Continued
(all numbers in thousands, except share amounts and unless otherwise stated)stated, unaudited)
deferred revenue. The amountquotes from less active markets or quoted prices of transaction price allocated to performance obligations to be satisfied at a later date, which is not recorded in the unaudited condensed consolidated balance sheets, is immaterial as of March 31, 2021securities with similar characteristics. There were no transfers between Level 1 and December 31, 2020.
As permitted under the practical expedient available under ASC 606, the Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts with variable consideration that is allocated entirely to unsatisfied performance obligations or to a wholly unsatisfied promise accounted for under the series guidance, and (iii) contracts for which the Company recognizes revenue at the amount which we have the right to invoice for services performed.
The Company applied the practical expedient under ASC 606 to exclude amounts related to performance obligations that are billed and recognized as they are delivered.
3. Fair Value
The following table details the fair value measurements of liabilities that are measured at fair value on a recurring basis:
| | | | | | | | | | | | |
| | Fair Value Measurement at March 31, 2021 | ||||||||||
| | | | | | | | | | | Total | |
| | Level 1 | | Level 2 |
| Level 3 |
| Fair Value | ||||
Contingent consideration - business combinations | | $ | — | | $ | — | | $ | 2,869 |
| $ | 2,869 |
Contingent consideration - earnout | |
| — | |
| — | |
| 43,193 |
| | 43,193 |
Private warrant liability | | | — | |
| — | | | 47,444 | | | 47,444 |
| | $ | — | | $ | — | | $ | 93,506 | | $ | 93,506 |
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Level 2.
Contingent Consideration – Business Combinations
The Company estimated the fair value of the business combination contingent consideration triggered by EBITDA or revenue milestones, related to certain 2021 acquisitions using the Monte Carlo simulation method. The fair value of $0.1 million and $0.3 million as of March 31, 2022 and December 31, 2021, respectively, is based on the simulated revenue and net income (loss) of the Company over the maturity date of the contingent consideration. As of March 31, 2021, the key inputs used in the determination of the combined fair value of $1,596 included volatility of 38.1% to 68.5%, discount rate of 25.7% to 31.5% and weighted-average cost of capital of 25.7% to 32.5%.
The Company estimated the fair value of the 2020 business combination contingent consideration that is triggered by stock price milestones, related to a certain 2021 acquisition, using the Monte Carlo simulation method. The fair value is based on the simulated stock price of the Company over the maturity date of the contingent consideration. As of DecemberMarch 31, 2020,2022, the key inputs used in the determination ofto determine the fair value of $1,749 included current$12.7 million, were the stock price of $14.27,$6.95, strike price of $20.00,$36.00, discount rate of 9%8.2% and volatility of 60%75%. As of MarchDecember 31, 2021, the key inputs used in the determination of the fair value of $1,273$9.3 million included current stockthe volume weighted average price of $17.70,$16.37, strike price of $20.00,$36.00, discount rate of 6.7%7% and volatility of 80%60%.
20
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
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. 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%. In January 2021, the 2018 business combination consideration was settled in full for a cash payment of $2,063.
Contingent Consideration - Earnout
The Company estimated the fair value of the earnout contingent consideration using the Monte Carlo simulation method. The fair value of $2.7 million 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 March 31, 2022, the key inputs used to determine the fair value included exercise price of $22.00, volatility of 70%, forfeiture rate of 15% and stock price of $6.95. As of December 31, 2021, the key inputs used in the determination of the fair value included exercise price of $20 and $22,$22.00, volatility of 75%65%, and forfeiture rate of 16%15% and stock price of $17.70. 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%, and forfeiture rate of 16% and stock price of $14.27.$15.59.
Private Warrants
The Company estimated the fair value of the private warrants of $5.0 million using the Black-Scholes-Merton option pricing model. As of March 31, 2021,2022, the key inputs used in the determination ofto determine the fair value included exercise price of $11.50, expected volatility of 35%71%, remaining contractual term of 4.733.73 years, and stock price of $17.70.$6.95. As of December 31, 2020,2021, the key inputs used in the determination ofto determine the fair value included exercise price of $11.50, expected volatility of 35%60%, remaining contractual term of 4.983.98 years, and stock price of $14.27.$15.59.
Level 3 Rollforward
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:
| | | | | | | | |
| | | Contingent | | | |||
| Contingent | | Consideration - | | Private | |||
| Consideration - | | Business | | Warrant | |||
| Earnout |
| Combinations |
| Liability | |||
Fair value as of January 1, 2021 | $ | 50,238 | | $ | 3,549 | | $ | 31,534 |
Additions |
| — | |
| 1,737 | |
| — |
Settlements |
| (25,815) | |
| (2,062) | |
| — |
Change in fair value, loss (gain) included in net loss(1) |
| 18,770 | |
| (355) | |
| 15,910 |
Fair value as of March 31, 2021 | $ | 43,193 | | $ | 2,869 | | $ | 47,444 |
2120
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020- Continued
(all numbers in thousands, except share amounts and unless otherwise stated)stated, unaudited)
| | | | | | | | | |
| | Redeemable | | | | | Contingent | ||
| | Convertible | | | | | Consideration - | ||
| | Preferred Stock | | | | | Business | ||
|
| Warrants |
| FVO Notes | | Combinations | |||
Fair value as of January 1, 2020 | | $ | 6,684 | | $ | 11,659 | | $ | 100 |
Additions | |
| — | |
| — | |
| — |
Settlements | |
| — | |
| — | |
| — |
Change in fair value, loss (gain) included in net loss(1) | |
| 1,214 | |
| 454 | |
| (80) |
Change in fair value, (gain) included in other comprehensive income | |
| — | |
| (3,856) | |
| — |
Fair value as of March 31, 2020 | | $ | 7,898 | | $ | 8,257 | | $ | 20 |
Fair Value Disclosure
The fair value of debt approximates the unpaid principal balance and is considered a Level 2 measurement. See Note 6.
4. Property, Equipment, and Software
Property, equipment, and software net, consists of the following:
| | | | | | |
|
| March 31, | | December 31, | ||
| | 2021 |
| 2020 | ||
Software and computer equipment | | $ | 1,544 | | $ | 1,381 |
Furniture, office equipment, and other | |
| 1,538 | |
| 567 |
Internally developed software | |
| 11,369 | |
| 10,741 |
Leasehold improvements | |
| 1,112 | |
| 1,112 |
| |
| 15,563 | |
| 13,801 |
Less: Accumulated depreciation and amortization | |
| (10,235) | |
| (9,208) |
Property, equipment, and software, net | | $ | 5,328 | | $ | 4,593 |
Depreciation and amortization expense related to property, equipment, and software was $1,123 and $982 for the three months ended March 31, 2021 and 2020, respectively.
22
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
The changes for Level 3 items measured at fair value on a recurring basis using significant unobservable inputs are as follows:
| | | | | | | | |
| | | Contingent | | | |||
| Contingent | | Consideration - | | Private | |||
| Consideration - | | Business | | Warrant | |||
| Earnout |
| Combinations |
| Liability | |||
Fair value as of January 1, 2022 | $ | 13,866 | | $ | 9,617 | | $ | 15,193 |
Additions |
| — | |
| — | |
| — |
Settlements |
| — | |
| — | |
| — |
Change in fair value, loss (gain) included in net loss(1) |
| (11,179) | |
| 3,205 | |
| (10,189) |
Fair value as of March 31, 2022 | $ | 2,687 | | $ | 12,822 | | $ | 5,004 |
| | | | | | | | | |
| | | | Contingent | | | |||
| | Contingent | | Consideration - | | Private | |||
| | Consideration - | | Business | | Warrant | |||
|
| Earnout |
| Combinations |
| Liability | |||
Fair value as of January 1, 2021 | | $ | 50,238 | | $ | 3,549 | | $ | 31,534 |
Additions | |
| — | |
| 1,737 | |
| — |
Settlements | | | (25,815) | | | (2,062) | |
| — |
Change in fair value, loss (gain) included in net loss(1) | | | 18,770 | | | (355) | |
| 15,910 |
Fair value as of March 31, 2021 | | $ | 43,193 | | $ | 2,869 | | $ | 47,444 |
(1) | Changes in fair value of contingent consideration related to business combinations are included in general and administrative expenses in the unaudited condensed consolidated statements of operations. Changes in fair value of the earnout contingent consideration and private warrant liabilityare disclosed separately in the unaudited condensed consolidated statements of operations. |
Fair Value Disclosure
As of March 31, 2022 and December 31, 2021, the fair value of the convertible senior notes is $286.9 million and $400.4 million, respectively. The decrease of $113.5 million is primarily due to the decline in the stock price at March 31, 2022 as compared to December 31, 2021. The fair value of other debt approximates the unpaid principal balance and is considered a Level 3 measurement. See Note 7.
5. Property, Equipment, and Software
Property, equipment, and software net, consists of the following:
| | | | | | |
|
| March 31, | | December 31, | ||
| | 2022 |
| 2021 | ||
Software and computer equipment | | $ | 8,257 | | $ | 7,287 |
Furniture, office equipment, and other | |
| 2,126 | |
| 2,006 |
Internally developed software | |
| 14,221 | |
| 13,102 |
Leasehold improvements | |
| 2,208 | |
| 2,191 |
| |
| 26,812 | |
| 24,586 |
Less: Accumulated depreciation and amortization | |
| (18,472) | |
| (17,920) |
Property, equipment, and software, net | | $ | 8,340 | | $ | 6,666 |
Depreciation and amortization expense related to property, equipment, and software was $1.0 million and $1.1 million for the three months ended March 31, 2022 and 2021, respectively.
21
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
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 March 31, 2021:2022:
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Intangible assets consist of the following, as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | |
| | Weighted |
| | |
| | |
| | | | Weighted |
| | | |
| | | | |
| | Average | | Intangible | | | | | Intangible | | Average | | Intangible | | | | | Intangible | ||||
| | Useful Life | | Assets, | | Accumulated | | Assets, | | Useful Life | | Assets, | | Accumulated | | Assets, | ||||||
|
| (in years) |
| gross |
| Amortization |
| Net |
| (in years) |
| gross |
| Amortization |
| Net | ||||||
Customer relationships |
| 7.0 | | $ | 8,440 | | $ | (2,173) | | $ | 6,267 |
| 9.0 | | $ | 56,810 | | $ | (8,658) | | $ | 48,152 |
Acquired technology |
| 6.0 | |
| 12,170 | | | (5,481) | |
| 6,689 |
| 5.0 | |
| 48,135 | | | (12,619) | |
| 35,516 |
Trademarks and tradenames |
| 9.0 | |
| 3,688 | | | (893) | |
| 2,795 |
| 12.0 | |
| 25,389 | | | (3,194) | |
| 22,195 |
Non-compete agreements | | 2.0 | |
| 225 | | | (15) | | | 210 | | 2.0 | | | 450 | | | (320) | | | 130 |
Value of business acquired | | 1.0 | | | 400 | | ��� | (394) | | | 6 | |||||||||||
Renewal rights | | 6.0 | | | 9,734 | | | (1,137) | | | 8,597 | |||||||||||
Trademarks and tradenames | | Indefinite | | | 4,750 | | | — | | | 4,750 | |||||||||||
Insurance licenses | | Indefinite | | | 4,960 | | | — | | | 4,960 | |||||||||||
Total intangible assets |
| | | $ | 24,523 | | $ | (8,562) | | $ | 15,961 |
| | | $ | 150,628 | | $ | (26,322) | | $ | 124,306 |
The aggregate amortization expense related to intangibles was $1,340$5.5 million and $807$1.3 million for the three months ended March 31, 20212022 and 2020,2021, respectively.
Goodwill
The following tables summarize the changes in the carrying amount of goodwill for the three months ended March 31, 2021:2022:
| | | |
|
| Goodwill | |
Balance as of December 31, 2020 | | $ | 28,289 |
Acquisitions | |
| 21,831 |
Balance as of March 31, 2021 | | $ | 50,120 |
| | | |
|
| Goodwill | |
Balance as of December 31, 2021 | | | 225,654 |
Purchase price adjustments | |
| 922 |
Balance as of March 31, 2022 | | $ | 226,576 |
7. Debt
At March 31, 2022, debt comprised of the following:
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| | |
| Debt |
| | | |
| | | |
| Unaccreted |
| Issuance |
| Carrying | |||
| | Principal | | Discount |
| Costs | | Value | ||||
Convertible senior notes, due 2026 | | $ | 425,000 | | $ | — | | $ | (10,228) | | $ | 414,772 |
Other notes | |
| 450 | |
| (70) | |
| — | |
| 380 |
| | $ | 425,450 | | $ | (70) | | $ | (10,228) | | $ | 415,152 |
Convertible Senior Notes
Interest expense recognized related to the 0.75% Convertible Senior Notes due 2026 (the “2026 Notes”) was approximately $1.4 million for the three months ended March 31, 2022, and comprised of contractual interest expense and amortization of debt issuance costs.
2322
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020- Continued
(all numbers in thousands, except share amounts and unless otherwise stated)stated, unaudited)
6. Debt
At March 31, 2021, debt comprised of the following:
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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 million, reduces the interest rate payable on borrowed amounts, reduces certain financial covenants related to minimum revenue and amended the maturity date to December 15, 2024, and eliminates a minimum cash balance requirement of $3,000. 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 March 31, 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 $15,356 in the quarter ended December 31, 2020, and 70% of projected revenue in all future quarters.
As of March 31, 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 $8,139 (the “Porch PPP Loan”). The term of the Porch PPP Loan is two years with a maturity date of April 18, 2022 and bears 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 are payable monthly, less the amount of any potential forgiveness (discussed below), and the Company may prepay 20% or less at any time prior to maturity with no
24
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
prepayment penalties, more than 20% will require notice to the lender. The Porch PPP Loan contains customary event of default provisions. As of March 31, 2021, the Company is in compliance with all covenants of the Porch PPP Loan.
All or a portion of the Porch PPP Loan may be forgiven by the SBA and the lender upon application by the Company, if the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities (“Qualifying Expenses”). Not more than 25 percent of the Porch PPP Loan may be used for non-payroll costs. The Company believes that it used the proceeds of the Porch PPP Loan for Qualifying Expenses in accordance with the terms of the Porch PPP Loan. The Company submitted an application for forgiveness of the loan in December 2020. However, no assurance is provided that the Company will be able to obtain forgiveness of the Porch PPP Loan in whole or in part. If the loan is forgiven in part or in whole, the Company will reduce the liability by the amount forgiven and record a gain on extinguishment in the consolidated statements of operations. The carrying value of the Porch PPP Loan is $8,317 as of March 31, 2021.
In connection with an acquisition of DataMentors Holdings, LLC d/b/a V12 Data (“V12 Data”) on January 12, 2021 (see Note 9), the Company assumed a loan agreement with Western Alliance Bank pursuant to the Paycheck Protection Program for the amount of $2,026 (the “V12 Data PPP Loan”). The loan has a maturity date of April 19, 2022 and a fixed interest rate of 1%. All other terms are the same as those of the Porch PPP Loan. An application for forgiveness of the loan was submitted in November 2020. However, no assurance is provided that the Company will be able to obtain forgiveness of the loan in whole or in part. As of March 31, 2021, the Company is in compliance with all covenants of the V12 Data PPP Loan.
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 and a stated interest rate of 0.38% per annum. The promissory note shall be paid in 5 equal annual installments of $150 each, plus accrued interest commencing on January 21, 2021. As of March 31, 2021, the promissory note had a carrying amount $483.
7.8. Equity and Warrants
Shares Authorized
As of March 31, 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.
25
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
Common Shares Outstanding and Common Stock Equivalents
The following table summarizes ourthe Company’s fully diluted capital structure at March 31, 2021:structure:
| | | | |
| | March 31, | | December 31, |
| | 2022 | | 2021 |
Issued and outstanding common shares |
| 96,247,186 |
| 95,911,597 |
Earnout common shares |
| 2,050,000 |
| 2,050,000 |
Total common shares issued and outstanding | | 98,297,186 | | 97,961,597 |
Common shares reserved for future issuance: | | | | |
Private warrants | | 1,795,700 | | 1,795,700 |
Common stock options outstanding (Note 9) |
| 4,569,743 |
| 4,822,992 |
Restricted stock units and awards (Note 9) |
| 4,225,986 |
| 2,717,154 |
2020 Equity Plan pool reserved for future issuance |
| 6,390,137 |
| 8,126,263 |
Convertible senior notes, due 2026(1) | | 16,998,130 | | 16,998,130 |
Total shares of common stock outstanding and reserved for future issuance |
| 132,276,882 |
| 132,421,836 |
(1) | |
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The table above excludes common stock contingently issuable in connection with prior acquisitions. Such common stock is issuable to the extent specified operational milestones are achieved or market conditions are met in the future.
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 warrantsThere was no activity related to purchase an aggregate 14,325,000 shares of common stock, which were outstanding as of December 31, 2020. Each warrant entitles the registered holder to purchase 1 share of common stock at a price of $11.50 per share, subject to adjustment, commencing 30 days after the completion of the Merger, and expiring on December 23, 2025 which is five-years after the Merger.
The Company may call the public warrants for redemption (excluding the private warrants), in whole, at a price of $0.01 per warrant:
●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,
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The private warrants are identical to the public warrants, except that the private warrants are exercisable on a cashless basis and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees, as defined in the warrant agreements. If the placement warrants are held by someone other than the initial purchasers or their permitted transferees, the private warrants will be redeemable by the Company and exercisable by such holders on the same basis as the public warrants. As of December 31, 2020, 5,700,000 private warrants were held by the initial purchases or their permitted transferees.
The public and private warrants are classified separately on our unaudited condensed consolidated balance sheets due to differences in each instrument’s contractual terms. The public warrants are classified in equity classified financialduring the three months ended March 31, 2022.
| | | | | | |
| | | Number of | | | |
| | | Common | | ||
| | | Shares Issued | Cash Received | ||
Balances as of January 1, 2022 | 1,795,700 | | $ | — | ||
Exercised | — | | — | |||
Canceled | | | — | | | — |
Balances as of March 31, 2022 | 1,795,700 | | $ | — |
26
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
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 3.
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 and a receivable balance of $3.2 million.
8.9. Stock-Based Compensation
Under the Company’s 2020 EquityStock 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”), restricted stock units (“RSU”), performance awards, and RSUs,other stock awards, collectively referred to as “Awards”.
Stock-based compensation consists of expense related to (1) equity awards in the normal course and (2) a secondary market transaction as described below:
| | | | | | | |
| | Three months ended | | ||||
| | March 31, | | ||||
|
| 2021 |
| 2020 | | ||
Secondary market transaction | | $ | 1,933 | | $ | — | |
Employee earnout restricted stock | | | 12,373 | | | — | |
Employee awards | |
| 2,529 | |
| 672 | |
Total operating expenses | | $ | 16,835 | | $ | 672 | |
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 $4,023 ($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 $33,232 in general and administrative expense for the difference between the purchase price and fair value.
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 $2,553 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 $1,616 was recorded in 2020 related to these awards, of which $689 was related to former employees and immediately recognized, as there is no continued service vesting requirement, and $927 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 $1,933 related to the award was recognized in March 2021.
2723
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020- Continued
(all numbers in thousands, except share amounts and unless otherwise stated)stated, unaudited)
2020 Equity Incentive Plan
The aggregate number of shares of common stock reserved for future issuance under the 2020 Plan is 11,005,115. The number of shares of common stock available under the 2020 Plan will increase annually on the first day of each calendar year, beginning with the calendar year ending December 31, 2021, and continuing until (and including) the calendar year ending December 31, 2030, with such annual increase equal to the lesser of (i) 5% of the number of shares of common stock issued and outstanding on December 31st of the immediately preceding fiscal year and (ii) an amount determined by the Board.
Stock-Based Compensation
Awards granted under the 2020 Plan to employees typically vest 25% of the shares one year after the options’ vesting commencement date and the remainder ratably on a monthly basis over the following three years. Other vesting terms are permitted and are determined by the Board. Options have a term of no more than ten years from the date of grant and vested options are generally canceled three months after termination of employment.
During the three months ended March 31, 2021, the Company approved 132,709 RSU’s to various levels of key employees and members of the Board.
Payroll Reduction Program
In March 2020, in response to the adverse impact of COVID-19 on the Company’s operations and financial performance, the Company carried out a variety of measures to reduce cash operating expenses, including the 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 $3,979 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 $6,506 of compensation expense was recorded in the fourth quarter of 2020.
Compensation cost of $1,105 was recorded during the three months ended March 31, 2021, and $500 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 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. The employee earnout shares are forfeited upon termination of an employee’s employment. Upon forfeiture, the forfeited shares will be redistributed to all earnout shareholders. Upon redistribution of earnout shares, the awards will be recorded as new awards. The fair value of the award on the grant date is a weighted average of $12.08 per share and will
28
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
be recognized as stock compensation expense on a graded vesting basis over the derived service period of 1 year or shorter if the awards vest.
During the three months ended March 31, 2021, 19,838 shares were forfeited due to employee terminations. This resulted in the grant of 3,918 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 $6,153 in stock compensation expense related to the employee earnout shares in the quarter ended March 31, 2021, and $5,476 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 award being fully vested, then the award will be terminated and canceled, provided that if Mr. Ehrlichman’s employment is terminated by the Company without cause or Mr. Ehrlichman resigns due to good reason (in each case, as defined in the award agreement), the award will remain outstanding and will vest to the extent the stock price triggers are achieved during the 36-month period. The fair value of the award on the grant date is an average of $12.08 per share and will be recognized as stock compensation expense on a graded vesting basis over the derived service period of 1 year or shorter if the awards vest.
During the three months ended March 31, 2021, 333,333 CEO restricted earnout shares were fully vested, as the market conditions for vesting was fully satisfied as a result of the Company’s stock price and trading activity. The Company recorded $6,228 in stock compensation expense related to the restricted stock award in the quarter ended March 31, 2021, and $5,526 is expected to be recorded over the remaining estimated service period in 2021.
9. Business Combinations
During the three months ended March 31, 2021, the Company completed 2 business combination transactions. The purpose of each of the acquisitions were to expand the scope and nature of the Company’s product and service offerings, obtain new customer acquisition channels, add additional team members with important skillsets, and realize synergies. The aggregate transaction costs associated with these transactions were $401, and are included in general and administrative expenses on the consolidated statements of operations. The results of operations for each acquisition are included in the Company’s consolidated financial statements from the date of acquisition onwards.
The acquisitions are included in the Company’s consolidated financial statements as of the date of the acquisition. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions and may be subject to change as additional information is received. The primary areas that remain preliminary relate to the fair values of intangible assets acquired, certain tangible assets and liabilities acquired, legal and other contingencies as of the acquisition date, income and non-income-based taxes and residual goodwill. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
29
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
Stock-based compensation consists of expense related to equity awards in the normal course, earnout restricted stock and a secondary market transaction as described below:
| | | | | | |
|
| Three months ended | ||||
| | March 31, | ||||
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| 2022 |
| 2021 | ||
Secondary market transaction | | $ | — | | $ | 1,933 |
Employee earnout restricted stock | | | — | | | 12,373 |
Employee awards | |
| 5,854 | |
| 2,529 |
Total operating expenses | | $ | 5,854 | | $ | 16,835 |
Detail related to stock option, RSU and RSA activity for the three months ended March 31, 2022, is as follows:
| | | | |
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| | Number of | Number of |
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| Number of | Restricted | Restricted |
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| Options | Stock Units | Stock Awards |
Balances as of January 1, 2021 |
| 4,822,992 | 2,712,762 | 4,392 |
Granted |
| — | 1,885,725 | — |
Vested |
| — | (241,463) | (4,392) |
Exercised | | (185,685) | — | — |
Forfeited, canceled or expired |
| (67,564) | (131,038) | — |
Balances as of March 31, 2022 |
| 4,569,743 | 4,225,986 | — |
10. Reinsurance
The following table summarizes the total considerationeffects of reinsurance on premiums written and the estimated fair value of the assets acquired and liabilities assumedearned for business combinations made by the Company during the three months ended March 31, 2021:2022 were as follows:
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Direct premiums | | $ | 87,123 | | $ | 84,318 |
Ceded premiums | |
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Net premiums | | $ | 26,487 | | $ | 12,591 |
January 12, 2021 Acquisition
On January 12, 2021, the Company acquired V12 Data, an omnichannel marketing platform. The purposeeffects of the acquisition was to expand the scopereinsurance on incurred losses and nature of the Company’s service offerings, add additional team members with important skillsets, and realize synergies. The Company paid $20,169 cash with an additional $1,410 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 the discretion of the Company. The consideration was paid to the sellers in exchange for net assets of $21,579. Goodwill is expected to be deductible for tax purposes. The transaction costs associated with this acquisition were $274 and are included in general and administrative expenses on the consolidated statements of operationsLAE for the quarterthree months ended March 31, 2021.
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,2022 were 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. The fair value of the 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. The weighted-average amortization period for the acquired intangible assets is 7.6 years.follows:
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| | 2022 | |
Direct losses and LAE | | $ | 68,221 |
Ceded losses and LAE | | | (58,973) |
Net losses and LAE | | $ | 9,248 |
3024
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020- Continued
(all numbers in thousands, except share amounts and unless otherwise stated)stated, unaudited)
RevenueThe detail of reinsurance balances due is as follows:
| | | | | | |
| | March 31, 2022 | | December 31, 2021 | ||
Unearned premium | | $ | 142,619 | | $ | 153,710 |
Losses and LAE Reserve | | | 71,196 | | | 56,752 |
Reinsurance recoverable | | | 25,746 | | | 17,780 |
Other | | | 178 | | | 174 |
Reinsurance balance due | | $ | 239,739 | | $ | 228,416 |
11. Unpaid Losses and net loss from the V12 Data acquisition included in the Company’s consolidated statements of operations since January 12, 2021, the date of the acquisition, through March 31, 2021 are $5,580 and $575, respectively.
Unaudited Pro Forma Consolidated Financial InformationLoss Adjustment Reserve
The following table summarizesprovides the estimated unaudited pro forma consolidated financial informationrollforward of the Company as ifbeginning and ending reserve balances for losses and LAE, gross of reinsurance for the V12 Data acquisition had occurred on January 1, 2020:three months ended March 31, 2022:
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| March 31, |
| March 31, |
| 2022 | |||
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| 2021 |
| 2020 | |||||
Revenue | | $ | 27,504 | | $ | 20,974 | |||
Net loss | | $ | (65,570) | | $ | (21,264) | |||
Reserve for losses and LAE, at December 31, 2021 | | $ | 61,949 | ||||||
Reinsurance recoverables on losses and LAE | |
| (56,752) | ||||||
Losses and LAE reserve, net of reinsurance recoverables at December 31, 2021 | | | 5,197 | ||||||
Add provisions for losses and LAE occurring in: | | | | ||||||
Current year | | | 9,868 | ||||||
Prior years | | | (620) | ||||||
Net incurred losses and LAE during the current year | | | 9,248 | ||||||
Deduct payments for losses and LAE occurring in: | | | | ||||||
Current year | | | (4,431) | ||||||
Prior years | | | (1,602) | ||||||
Net claim and LAE payments during the current year | | | (6,033) | ||||||
Reserve for losses and LAE, net of reinsurance recoverables, at end of year | | | 8,412 | ||||||
Reinsurance recoverables on losses and LAE | | | 71,196 | ||||||
Losses and LAE reserve at March 31, 2022 | | $ | 79,608 |
The estimated unaudited pro forma
As a result of additional information includes adjustmentson claims occurring in prior years becoming available to amortization for intangible assets acquired.
Other Acquisitions
In the first quartermanagement, changes in estimates of 2021, the Company completed another acquisition which is not material to the consolidated financial statements. The purposeprovisions of the acquisition was to expand the scopelosses and natureloss adjustment expenses were made, resulting in a decrease of the Company’s service offerings, add additional team members with important skillsets, and realize synergies. Goodwill is not expected to be deductible for tax purposes. The transaction costs associated with this acquisition were $126 and are included in general and administrative expenses on the consolidated statements of operations$0.6 million for the yearthree months ended March 31, 2021.2022.
10.12. Commitments and Contingencies
Acquisition Commitments
On September 2, 2021, the Company entered into a Stock Purchase Agreement with Covéa Coopérations S.A., to acquire CSE - a California-based personal lines insurer focused on property and auto. Subject to the terms and conditions set forth in the Agreement, at the closing of the transactions contemplated by the Agreement, Buyer will pay $48.6 million in cash for all of the shares of GMF Financial Services Corporation, which owns all of the issued and outstanding stock of Civil Service Employees Insurance Company, CSE Safeguard Insurance Company, CSE Insurance Services, Inc. and CSE Group Services Company, subject to certain adjustments, as further described in the Agreement. The closing is subject to customary conditions, including, among others, the absence of a material adverse effect on GMFF and the receipt of specified governmental consents and approvals.
25
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
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 amount of the loss can be reasonably estimated. In many instances, the Company is unable to determine whether a loss is probable or to reasonably estimate the amount of such a loss and, therefore, the potential future losses arising from a matter may differ from the amount of estimated liabilities the Company has recorded in the financial statements covering these matters. The Company reviews its estimates periodically and makes adjustments to reflect negotiations, estimated settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter.
Cases under Telephone Consumer Protection Act
Porch andand/or an acquired entity, GoSmith.com, are party to 14twelve legal proceedings alleging violations of the automated calling and/or Do Not Call restrictions of the Telephone Consumer Protection Act of 1991 (“TCPA”).1991. Some of these actions allege related state law claims. Most of theThe proceedings were commenced as mass tort actionsaction by a single plaintiffs’ law firm in December 2019 and April/May 2020 in federal district courts throughout the United StatesStates. One of the actions was dismissed with prejudice and is on appeal before the Ninth Circuit Court of Appeals. The remainder have been consolidated in the United States District Court for the Western District of Washington, where Porch resides. A related action brought byThat case is stayed pending the same plaintiffs’ law firm was dismissed with prejudiceoutcome of the appeal. Plaintiffs seek actual, statutory, and/or treble damages, injunctive relief, and is on appeal before the Ninth Circuit Court of Appeals.
31
PORCH GROUP, INC.reasonable attorneys’ fees and costs.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
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.
Kandela, LLC v Porch.com, Inc.
In May 2020, the former owners of Kandela, LLC filed a complaintcomplaints against Porch in the Superior Court of the State of California, alleging a breach of contract related to the terms and achievement of an earnout agreement related to the acquisition of the Kandela business and related fraudulent inducement claims. Claimants seek to recover compensatory damages based on an asset purchase agreement entered into with Porch and related employment agreements. Claimants also seek punitive damages, attorney’s fees and costs. This actionmatter is at an early stagestill in the litigationarbitration process and Porch is unable to determine the likelihood of an unfavorable outcome, although it is reasonably possible that the outcome may be unfavorable; however,unfavorable. Certain claimants have settled their claims, and this settlement discussions have progressed with certain plaintiffs.is within the range of the estimated accrual. Arbitration of the remaining claims occurred in March 2022, but a final decision has yet to be issued by the Arbitrator. Porch is unable to provide an estimate of the range or amount of potential loss across allthe remaining claims (if the outcome should be unfavorable); however, Porch has recorded an estimated accrual related to thosethe claims underlying the aforementioned settlement discussions.settlement. Porch intends to contest this casethe remaining claims 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™ and Legacy Porch and Porch’s other affiliated companies in the State of California during the relevant time period. While this action is still at an early stage in the litigation process, we havePlaintiffs seek damages for unpaid wages, liquidated damages, penalties, attorneys’ fees and costs for which, Porch has recorded an estimated accrual for a contingent loss based on information currently known. The parties have agreed to explore resolution by wayrecently attended mediation
26
PORCH GROUP, INC.
11.Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
in an effort to resolve the matter. The mediation was successful, and a deal was reached. The parties have executed the long form settlement agreement and obtained preliminary approval from the court on April 25, 2022. Notices will go out to the putative class, and after the notice period, the parties will seek final approval of the settlement from the court on August 11, 2022. If final approval is granted, and the settlement will be funded, and the case will be complete.
Other
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 business, financial condition or results of operations.
13. Segment Information
Beginning in 2021, the Company has 2 reportable segments that are also our operating segments: Vertical Software and Insurance. Our reportable segments have been identified based on how our CODM manages our business, makes operating decisions and evaluates operating and financial performance. The chief executive officer acts as the CODM and reviews financial and operational information for our 2 reportable segments. Operating segments are components of an enterprise for which separate discrete financial information is available and operational results are regularly evaluated by the CODM for the purposes of making decisions regarding resource allocation and assessing performance.
Our Vertical Software segment primarily consists of a vertical software platform for the home, providing software and services to home services companies, such as home inspectors, moving companies, utility companies, title companies and others, and includes software fee revenues from companies, and non-insurance revenue. The Vertical Software segment also includes per-lead and per-quote-based revenue from insurance companies.
Our Insurance segment offers various forms of homeowner insurance policies through its own insurance carrier and certain homeowner and auto insurance policies through its licensed insurance agency. The Insurance segment also includes home warranty service revenue.
The following table provides the Company’s revenue by segment:
| | | | | | |
|
| Three Months Ended March 31, | ||||
|
| 2022 |
| 2021 | ||
Segment revenues: | | | | | | |
Vertical Software | | $ | 34,688 | | $ | 24,937 |
Insurance | | | 27,873 | | | 1,805 |
Total segment revenue | | $ | 62,561 | | $ | 26,742 |
Our segment operating and financial performance measure is segment Adjusted EBITDA (loss). Segment Adjusted EBITDA (loss) is defined as revenue less the following expenses associated with our segments: cost of revenue, sales and marketing, product and technology, and general and administrative expenses. Segment Adjusted EBITDA (loss) also excludes non-cash items or items that management does not consider are reflective our ongoing core operations.
27
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
Currently, we do not allocate any shared expenses to the reportable segments. These expenses are included in Corporate and Other. Corporate and Other includes shared expenses such as sales and marketing, certain product and technology, accounting, human resources, legal and general and administrative, and other income, expenses, gains and losses that are not allocated in assessing segment performance due to their function. Such transactions are excluded from the reportable segments results but included in reported consolidated results.
The reconciliation of segment Adjusted EBITDA (loss) to consolidated loss from operations below includes the effects of corporate and other items that the CODM does not consider in assessing segment performance.
The following tables provide financial information for the 2 reportable segments and reconciliations to consolidated financial information for the periods presented:
| | | | | | |
|
| Three Months Ended March 31, | ||||
|
| 2022 |
| 2021 | ||
Segment adjusted EBITDA (loss): | | | | | | |
Vertical Software | | $ | 2,984 | | $ | 3,151 |
Insurance | |
| 3,286 | |
| 508 |
Corporate and Other | |
| (13,342) | |
| (13,261) |
Total segment adjusted EBITDA (loss) | |
| (7,072) | |
| (9,602) |
Reconciling items: | | | | | | |
Depreciation and amortization | | | (6,483) | | | (2,463) |
Non-cash stock-based compensation expense | | | (5,854) | | | (16,835) |
Acquisition and related expense | | | (895) | | | (728) |
Non-cash long-lived asset impairment charge | | | (69) | | | (68) |
Revaluation of contingent consideration | | | (3,205) | | | 355 |
Investment income and realized gains | | | (197) | | | — |
Non-cash bonus expense | | | (1,526) | | | (290) |
Operating loss | | $ | (25,301) | | $ | (29,631) |
The CODM does not review assets on a segment basis.
All of the Company’s revenue is generated in the United States. As of March 31, 2022 and December 31, 2021, the Company did not have assets located outside of the United States.
14. Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. It has been retrospectively adjusted for all periods prior to the reverse capitalization. The retroactive adjustment is based on the same number of weighted-average shares outstanding in each historical period.
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. As the 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.
3228
PORCH GROUP, INC.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020- Continued
(all numbers in thousands, except share amounts and unless otherwise stated)stated, unaudited)
The following table sets forth the computation of the Company’s basic and diluted net loss attributable per share to common stockholders for the three months ended March 31, 20212022 and 2020:2021:
| | | | | | | | ||||||
| | Three Months Ended | | | | | | | | ||||
| | March 31, | | | Three Months Ended March 31, | ||||||||
|
| 2021 |
| 2020 |
|
| 2022 |
| 2021 | ||||
Numerator: | | |
|
| |
| |
| |
|
| |
|
Net loss | | $ | (65,101) | | $ | (18,367) | | ||||||
Net loss used to compute net loss per share - basic and diluted | | $ | (5,796) | | $ | (65,101) | |||||||
| | | | | | | | | | | | | |
Denominator: | |
|
| |
|
| | |
|
| |
|
|
Shares used in computing net loss attributable per share to common stockholders, basic and diluted | |
| 85,331,575 | |
| 34,965,300 | | ||||||
Net loss attributable per share to common stockholders: | |
|
| |
|
| | ||||||
Basic and diluted | | $ | (0.76) | | $ | (0.53) | | ||||||
Weighted average shares outstanding used to compute loss per share - basic and diluted | |
| 96,074,527 | |
| 85,331,575 | |||||||
| | | | | | | |||||||
Loss per share - basic and diluted | | $ | (0.06) | | $ | (0.76) |
The following table discloses securities that could potentially dilute basic net loss per share in the future that were not included in the computation of diluted net loss per share because to do so would have been antidilutive for all periods presented:
| | | | | | |||||
| | | | | |
|
| 2022 |
| 2021 |
|
| 2021 |
| 2020 |
| | | | | |
Stock options | | 6,199,325 |
| 6,918,406 |
|
|
| 4,569,743 |
| 6,199,325 |
Restricted stock units and awards | | 1,282,327 | | 96,550 | | | | 4,225,986 | | 1,282,327 |
Legacy Porch warrants | | — | | 3,134,068 | | |||||
Public and private warrants | | 6,237,377 |
| — |
|
|
| 1,795,700 |
| 6,237,377 |
Earnout shares | | 4,099,999 |
| — |
| | | 2,050,000 | | 4,099,999 |
Convertible debt | | — | | 1,034,760 | | | | 16,998,130 | | — |
See Note 7 for additional information regarding(1) In connection with the termsSeptember 16, 2021 issuance of the warrants. See Note 82026 Notes, the Company used a portion of the proceeds to pay for additional information regarding stock options and restrictedthe capped call transactions, which are expected to generally reduce the potential dilution to the Company’s common stock. The capped call transactions impact the number of shares that may be issued by effectively increasing the conversion price for the Company from $25 per share to approximately $37.74 per share, which would result in 11,261,261 potentially dilutive shares instead of the shares reported in this table as of March 31, 2022.
12.15. Subsequent Events
33
PORCH GROUP, INC.cash, of which $5 million was paid in March 2022, and $4 million of Porch common stock and additional contingent consideration tied to the performance of a recently launched business line.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Three Months Ended March 31, 2021 and 2020
(all numbers in thousands, except share amounts and unless otherwise stated)
3429
PART II —OTHER INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This reportQuarterly Report and the documents incorporated herein by reference contain forward- looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and assumptions of management. Although the Company believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, the Company cannot assure you that it will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning the Company’s possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. These statements may be preceded by, followed by or include the words “believes,” “estimates,” “expects,” “projects,” “forecasts,” “may,” “will,” “should,” “seeks,” “plans,” “scheduled,” “anticipates” or “intends” or similar expressions.
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 Quarterly 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 expressed or implied in the Company’s forward-looking statements:
● |
|
●
| costs related to being a public company; |
●litigation, complaints, and/or adverse publicity;
● | the impact of changes in consumer spending patterns, consumer preferences, local, regional and national economic conditions, crime, weather, demographic trends and employee availability; |
● | further expansion into the insurance industry, and the related federal and state regulatory requirements; |
●privacy and data protection laws, privacy or data breaches, or the loss of data; and
● the duration and scope of the COVID pandemic, and its continued effect on the business and financial conditions of the Company.●the impact of the COVID-19
These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this reportQuarterly Report are more fully described in Part II, Item 1A of this report,Quarterly Report, Item 1A of the Company’s Annual Report on Form 10-K/A10-K for the year ended December 31, 20202021 filed with the SEC on May 19,2021March 16,2022 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 new information, future events or otherwise, except as required by law.
3530
Business Overview
Porch is a vertical software platform for the home, providing software and services to approximately 14,000over 25,500 home services companies, such as home inspectors, mortgage companies and loan officers, title companies, moving companies, real estate agencies, utility companies, warranty companies,roofers and others. Porch helpsothers, helping these service providers grow their business and improve their customer experience.
Porch The Company 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’sthe Company’s platform drives demand for other services from such companies as part of ourthe value proposition. Porch has three types of customers: (1) home services companies, such as home inspectors, mortgage companies, and loan officers and title companies, for whom Porch provides software and services and who pay recurring SaaS fees and increasingly provide introductions to homebuyers and homeowners; (2) consumers, such as homebuyers and homeowners, whom Porch assists with the comparison and provision of various critical home services, such as insurance, moving, security, TV/internet,Internet, and home repair and improvement; and (3) service providers, such as insurance carriers, moving companies, security companies, title companies, mortgage companies and TV/internetInternet providers, who pay Porch for new customer sign-ups.
Throughout the last seven (7) 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 quarter of 2021, we acquired a home inspection integrated customer service and call handling solution company and V12 Data, an omnichannel marketing platform. We will continue to make additional acquisitions that are consistent with our focus on insurance and home services related verticals.
We sell ourThe Company sells software and services to companies using a variety of sales and marketing tactics. We havetactics, including teams of inside sales representatives organized by vertical market who engage directly with companies. We havecompanies, and enterprise sales teams whichthat target the large named accounts in each of ourthe vertical markets. These teams are supported by a variety ofvarious typical software marketing tactics, including both digital, in-person (such as trade shows and other events) and content marketing.
For consumers, Porch largely relies on our unique and proprietary relationships with the approximately 14,000over 25,500 companies using Porch’sthe Company’s software to provide the company with end customer access and introductions. PorchThe Company then utilizes technology, lifecycle marketing and teams in lower cost locations to operate as a Moving Concierge to assist these consumers with services. PorchThe Company has invested in limited direct-to-consumer (“D2C”) marketing capabilities, but expects to become more advanced over time with capabilities such as digital and social retargeting.
Key Performance Measures and Operating Metrics
In the management of ourthese businesses, we identify, measurethe Company identifies, measures and evaluate a variety ofevaluates various operating metrics. The key performance measures and operating metrics we useused in managing ourthe businesses are set forth below. These key performance measures and operating metrics are not prepared in accordance with GAAP,generally accepted accounting principles in the United States (“GAAP”), and may not be comparable to or calculated in the same way as other similarly titled measures and metrics used by other companies. The key performance measures presented have been adjusted for divested Porch businesses in 2018 through 2020.
● | Average |
36
the number of |
● | Average Revenue per Account per Month in Quarter— Management views |
31
in Quarter |
The following table summarizes our average companiesAverage Companies in quarterQuarter and average revenueAverage Revenue per accountAccount per monthMonth in Quarter for each of the quarterly periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| 2018 |
| 2018 |
| 2018 |
| 2019 |
| 2019 |
| 2019 |
| 2019 |
| 2020 |
| 2020 |
| 2020 |
| 2020 |
| 2021 |
| 2022 |
| 2022 |
| 2022 |
| 2022 |
| ||||||||||||||||
| | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q1 | | Q2 | | Q3 | | Q4 | | ||||||||||||||||
Average Companies in Quarter |
| | 8,520 |
| | 9,142 |
| | 9,627 |
| | 10,199 |
| | 10,470 |
| | 10,699 |
| | 10,972 |
| | 10,903 |
| | 10,523 |
| | 10,792 |
| | 11,157 |
| | 13,995 |
| | 25,512 |
| | — |
| | — |
| | — |
|
Average Revenue per Account per Month in Quarter | | $ | 369 | | $ | 344 | | $ | 325 | | $ | 305 | | $ | 468 | | $ | 552 | | $ | 450 | | $ | 484 | | $ | 556 | | $ | 664 | | $ | 556 | | $ | 637 | | $ | 817 | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||
| | 2021 |
| 2021 |
| 2021 |
| 2021 | | ||||||||||||||||||||||||||||||||||||||||
| | Q1 | | Q2 | | Q3 | | Q4 | | ||||||||||||||||||||||||||||||||||||||||
Average Companies in Quarter | | | 13,995 |
| | 17,120 |
| | 20,472 |
| | 24,603 | | ||||||||||||||||||||||||||||||||||||
Average Revenue per Account per Month in Quarter (adjusted)(1) | | $ | 637 | | $ | 933 | (1) | $ | 985 | (1) | $ | 776 | (1) | ||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||
| | 2020 |
| 2020 |
| 2020 |
| 2020 | | ||||||||||||||||||||||||||||||||||||||||
| | Q1 | | Q2 | | Q3 | | Q4 | | ||||||||||||||||||||||||||||||||||||||||
Average Companies in Quarter | | | 10,903 |
| | 10,523 |
| | 10,792 |
| | 11,157 | | ||||||||||||||||||||||||||||||||||||
Average Revenue per Account per Month in Quarter | | $ | 484 | | $ | 556 | | $ | 664 | | $ | 556 | |
(1) | During the quarter ended December 31, 2021, the Company corrected an immaterial error that impacted revenue and cost of revenue for the three months ended June 30, 2021 and September 30, 2021. Average Revenue per Account per Month in Quarter metrics were recalculated for the affected quarters to show the impact of the adjustments. |
The following tables shows the impact of this error on Average Revenue per Account per Month in Quarter:
| | | | | | | | | | | | |
| | 2021 | | 2021 | | 2021 | | 2021 | ||||
| | Q1 | | Q2 | | Q3 | | Q4 | ||||
Total Revenue (as previously reported) | | | 26,742 | | $ | 51,340 | | $ | 62,769 | | $ | 51,582 |
Quarterly Impact of Revenue Adjustment Recorded in Q4 | | | — | | | (3,400) | | | (2,300) | | | 5,700 |
Total Revenue (as adjusted) | | $ | 26,742 | | $ | 47,940 | | $ | 60,469 | | $ | 57,282 |
Average Revenue per Account per Month in Quarter (as adjusted) | | $ | 637 | | $ | 933 | | $ | 985 | | $ | 776 |
Average Revenue per Account per Month in Quarter (as previously reported) | | $ | 637 | | $ | 1,000 | | $ | 1,022 | | $ | 699 |
In 2021, the Company completed acquisitions of V12 Data in Q1, Homeowners of America (“HOA”) and Rynoh in Q2, American Home Protect (“AHP”) in Q3 and Floify in Q4, that impacted the average number of companies in the quarter.
Due to COVID-19, some small companies put their business with the Company on hold, which is reflected in a lower number of total companies in 2020 and higher average revenue per account.
● |
● | Average Revenue per Monetized Service in Quarter — Management believes that shifting the mix of services delivered to homebuyers and |
32
per monetized service performed in a quarterly period. When calculating Average Revenue per Monetized Service in quarter, average revenue is defined as total quarterly service transaction revenues generated from monetized services. |
The following table summarizes our monetized services and average revenue per monetized service for each of the quarterly periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 |
| 2018 |
| 2018 |
| 2019 |
| 2019 |
| 2019 |
| 2019 |
| 2020 |
| 2020 |
| 2020 |
| 2020 |
| 2021 |
| 2022 |
| 2022 |
| 2022 |
| 2022 |
| ||||||||||||||||
| Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q1 | | Q2 | | Q3 | | Q4 | | ||||||||||||||||
Monetized Services in Quarter | | 193,114 |
| | 188,502 |
| | 184,645 |
| | 185,378 |
| | 205,887 |
| | 211,190 |
| | 172,862 |
| | 152,165 |
| | 181,520 |
| | 198,165 |
| | 169,949 |
| | 182,779 |
| | 254,249 |
| | — |
| | — |
| | — |
|
Revenue per Monetized Service in Quarter | $ | 41 | | $ | 42 | | $ | 44 | | $ | 43 | | $ | 63 | | $ | 76 | | $ | 78 | | $ | 93 | | $ | 86 | | $ | 97 | | $ | 98 | | $ | 92 | |||||||||||||
Average Revenue per Monetized Service in Quarter | | $ | 176 | | $ | — | | $ | — | | $ | — | | |||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||||
| | 2021 |
| 2021 |
| 2021 |
| 2021 | | |||||||||||||||||||||||||||||||||||||||
| | Q1 | | Q2 | | Q3 | | Q4 | | |||||||||||||||||||||||||||||||||||||||
Monetized Services in Quarter | | | 182,779 |
| | 302,462 |
| | 329,359 |
| | 260,352 | | |||||||||||||||||||||||||||||||||||
Average Revenue per Monetized Service in Quarter (adjusted)(1) | | $ | 92 | | $ | 118 | (1) | $ | 137 | (1) | $ | 154 | (1) | |||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||||
| | 2020 |
| 2020 |
| 2020 |
| 2020 | | |||||||||||||||||||||||||||||||||||||||
| | Q1 | | Q2 | | Q3 | | Q4 | | |||||||||||||||||||||||||||||||||||||||
Monetized Services in Quarter | | | 152,165 |
| | 181,520 |
| | 198,165 |
| | 169,949 | | |||||||||||||||||||||||||||||||||||
Average Revenue per Monetized Service in Quarter | | $ | 93 | | $ | 86 | | $ | 97 | | $ | 98 | |
(1) | During the quarter ended December 31, 2021, the Company corrected an immaterial error that impacted revenue and cost of revenue for the three months ended June 30, 2021 and September 30, 2021. Average Revenue per Monetized Service in Quarter metrics were recalculated for the affected quarters to show the impact of the adjustments. |
The following tables shows the impact of this error on Average Revenue per Monetized Service in Quarter:
| | | | | | | | | | | | |
| | 2021 |
| 2021 |
| 2021 |
| 2021 | ||||
| | Q1 | | Q2 | | Q3 | | Q4 | ||||
Service Revenue (as previously reported) | | $ | 16,812 | | $ | 39,102 | | $ | 47,398 | | $ | 34,351 |
Quarterly Impact of Revenue Adjustment Recorded in Q4 | | | — | | | (3,400) | | | (2,300) | | | 5,700 |
Service Revenue (as adjusted) | | $ | 16,812 | | $ | 35,702 | | $ | 45,098 | | $ | 40,051 |
Average Revenue per Monetized Service in Quarter (adjusted) | | $ | 92 | | $ | 118 | | $ | 137 | | $ | 154 |
Average Revenue per Monetized Service in Quarter (as previously reported) | | $ | 92 | | $ | 129 | | $ | 144 | | $ | 132 |
In 2021, the Company completed acquisitions of V12 in Q1, HOA and Rynoh in Q2, AHP in Q3 and Floify in Q4, which impacted the number of monetized services in the quarter.
In 2020, the Company shifted insurance monetization from getting paid per quote to earning multiyear insurance commissions, resulting in fewer monetized transactions with higher average revenue.
37
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 after adjusting for insurance monetization remains above prior year volumes.
Recent Developments
COVID-19 ImpactAdoption of New Accounting Standards
In March 2020,We early adopted Accounting Standards Update No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers on January 1, 2022 and will apply the World Health Organization declared a pandemic relatedguidance prospectively for business combinations that occur after the adoption date. The adoption has no impact to the global novel coronavirus disease 2019 (“COVID-19”) outbreak. The COVID-19 pandemic and the measures adopted by government entities in response to it have adversely affected Porch’s business operations, which has impacted revenue primarily in the first half of 2020. The impact of the COVID-19 pandemic and related mitigation measures, Porch’s ability to conduct ordinary course business activities has been and may continue to be impaired for an indefinite period of time. The extent of the continuing impact of the COVID-19 pandemic on Porch’s operational and financial performance will depend on various future developments, including the duration and spread of the outbreak and impact on the Company’s customers, suppliers, and employees, all of which is uncertain at this time. Porch expects the COVID-19 pandemic to adversely impact future revenue and results of operations, but Porch is unable to predict at this time the size and duration of such adverse impact. At the same time, Porch is observing a recovery in home sales to pre-COVID-19 levels in the second half of 2020, and with them, home inspections and related services.
Comparability of Financial Information
Porch’s future resultsexisting unaudited condensed consolidated balance sheets, statements of operations, and financial position may not be comparable to historical results as a resultstatements of the Merger.cash flows.
Key Factors Affecting Operating Results
The Company has been implementing its strategy as a vertical software platform for the home, providing software and services to approximately 14,000over 25,500 home services companies, such as home inspectors, moving companies, utility companies,
33
warranty companies, and others.etc. The following are key factors affecting our operating results in 2020 and the three months ended March 31, 2021:2022:
● |
● | Continued investment in growing and expanding the Company’s position in the home inspection industry including through our core ERP and CRM software offered by ISN. |
● | Continued investment in growing and expanding the Company’s position in providing moving services to consumers as a result of the 2018 acquisition of HireAHelper™, a provider of software and demand for moving companies. |
● | Intentionally building operating leverage in the business by focusing on growing operating expenses at a slower rate than the growth in revenue. |
● |
● |
● |
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● |
● | Growth across the |
Basis of Presentation
The unaudited condensed consolidated financial statements and accompanying notes of Porchthe Company 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.two operating segments: Vertical Software and Insurance. 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 primarily generates revenue from (1) fees received for connecting homeowners to customers in the Company’s referral network, which consist of individual contractors, small businesses, insurance carriers,software and large enterprises (“Referral Network Revenue”); (2) fees received for providing home improvement, maintenance and moving services directly to homeowners (“Managed Services Revenue”); and (3)service subscription revenue generated from fees received for providing subscription access to the Company’s software platforms primarily inspection software platform and marketing softwaresubscription services across various industries; (2) insurance revenue in the form of commissions from third-party insurance carriers where Porch acts as an independent agent and services (“Softwarecommissions from reinsurers, insurance and Service Subscription Revenue”). Revenue is recognized when controlwarranty premiums, policy fees and other insurance-
34
related fees generated through its own insurance carrier; (3) move-related service revenue through feesreceived for connecting homeowners to our customers and in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services or goods.
In the Referral Network Revenue stream, the Company connects Service Providers with homeowners that meet pre-defined criteria and may be looking for relevant services. Service Providers include a variety of service providers throughoutduring time of a homeowner’s lifecycle,move including plumbers, electricians and roofers, as well as movers, TV/Internet, warranty, insurance carriers, and security monitoring providers. The Company also sells homeproviders and auto insurance policies for insurance carriers.
Managed Services Revenue includes fees earned from homeownerscertain move related services for providing a variety ofselect services directly to the homeowner,homeowner; (4) post-move related revenue in the form of fees earned from introducing homeowners to home service professionals including handyman, plumbing, electrical, appliance repairhandymen, plumbers, electricians, roofers etc., and moving services. The Company generally invoices for managed servicescertain 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 select services directly to the respective service. Revenue is recognized as services are performed based on an output measure or 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.homeowner.
Software and Service Subscription Revenueservice subscription revenue primarily relates to subscriptions to the Company’s home inspector software offerings across its verticals as well as marketing software and services, and other vertical software.services. The Company’s subscription arrangements for this revenue stream do not provide the customer with the right to take possession of the software supporting the cloud-based application services. The Company’s standard subscription contracts are monthly contracts in which pricing is based on a specified price per inspection completed through the software. Marketing software and services are primarily contractual monthly recurring billings. Fees earned for providing access to the subscription software 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 during the monthly contract term.
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Move-related transactions revenue arises when the Company connects service providers with homeowners that meet pre-defined criteria and may be looking for relevant services. Service providers include movers, TV/Internet, warranty, and security monitoring providers. The Company earns revenue when consumers purchase services from third-party providers. For moving products where the Company manages the process of selecting the service provider and setting the price, the Company generally invoices for projects on a fixed fee or time and materials basis.
Post-move-related transaction revenue includes fees earned from introducing consumers to home service providers as well as directly to the homeowner when the Company manages the service. Revenue generated from service providers is recognized at a point in time upon the connection of a homeowner to the service provider. The Company generally invoices for managed services projects on a fixed fee or time and materials basis.
Total Costs and Expenses
Operating expenses
Operating expenses are categorized into four categories:
● | Cost of revenue; |
● | Selling and marketing; |
● | Product and technology; and |
● | General and administrative. |
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.
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Cost of revenue primarily consistconsists of professional feesinsurance claims losses and materials underloss adjustment expenses, warranty claims, third-party providers for executing moving labor and handyman services when the Managed Services model andCompany is managing the job, data costs related to marketing campaigns, certain call center costs, credit card processing and merchant fees including merchant fees.and operational cost of SaaS businesses.
Selling and marketing expenses primarily consist of third-party data leads, affiliate and partner leads, paid search and search engine optimization (“SEO”) costs, payroll, employee benefits and stock-compensationstock-based compensation expense, and other headcount related costs associated with sales efforts directed toward companies and consumers.consumers, and deferred policy acquisition costs (“DAC”) of new and renewal insurance contracts. Also included are any direct costs to acquire customers, such as search engine optimization (“SEO”), marketing (“SEM”) costs and affiliate and partner leads.
The Company capitalizes DAC, which consists primarily of commissions, premium taxes, policy underwriting, and production expenses directly related to the successful acquisition by the Company’s insurance subsidiary of new or renewal insurance contracts. DAC are amortized to expense on a straight-line basis over the terms of the policies to which they relate, which is generally one year. DAC is also reduced by ceding commissions paid by reinsurance companies which represent recoveries of acquisition costs. DAC is periodically reviewed for recoverability and adjusted if necessary.
Product and technology development costs primarily consist of payroll, employee benefits, stock-compensationstock-based compensation expense, other headcount relatedheadcount-related costs associated with product development, net of costs capitalized as internally developed software,software. Also included are cloud computing, hosting and other technology costs, software subscriptions, professional services and amortization of internally-developmentinternally developed software.
General and administrative expenses primarily consist of expenses associated with functional departments for finance, legal, human resources and executive management expenses.management. The primary categories of expenses include payroll, employee benefits, stock-compensationstock-based compensation expense and other headcount related costs, rent for office space, legal and professional fees, taxes, licenses and regulatory fees, merger and acquisition transaction costs, and other administrative costs.
Critical Accounting Policies and Estimates
The preparation of Porch’s consolidated financial statements in conformity with GAAP requires Porch’s management to make estimates, judgments, and assumptions that affect the amounts reported and disclosed in the Porch unaudited condensed consolidated financial statements and accompanying notes. TheseOn an ongoing basis these estimates, and assumptionswhich include, but are not limited to:to, estimated variable consideration for services transferred,performed, estimated lifetime value of the insurance agency commissions, current estimate for credit losses, depreciable lives for property and equipment, the valuation of and useful lives for acquired intangible assets, goodwill, the valuation allowance on deferred tax assets, assumptions used in stock-based compensation expense, unpaid losses for insurance claims and estimates of fair value of debt, warrants,loss adjustment expenses, contingent consideration, earnout liabilityliabilities and private warrant liability.liabilities, all of which are evaluated by management. Actual results could differ materially from those estimates, judgments, and assumptions, and those differences could be material to the Porch’s consolidated financial statements.assumptions.
At least quarterly, we evaluate ourthe Company evaluates estimates and assumptions and makemakes changes accordingly. For information on our significant accounting policies, see Note 1 to the accompanying Porch unaudited condensed consolidated financial statements.
During the three months ended March 31, 2021,2022, there were no changes to the critical accounting policies discussed in our Annual Report on Form 10-K/A10-K for the fiscal year ended December 31, 2020,2021, as filed on May 19, 2021.March 16, 2022. For a complete discussion of our critical accounting policies, refer to Item 87 in the 20202021 Annual Report on Form 10-K/A.10-K.
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Results of Operations
Comparison of Three Months Ended March 31, 2021 to Three Months Ended March 31, 2020
Net loss increased by $46.7 million from $18.4 million for the three months ended March 31, 2020 to $65.1 million for the three months ended March 31, 2021. This change is due to changes in fair value of earnout2022 and private warrant liabilities of $18.8 million and $15.9 million, respectively. Additionally, stock compensation expense included in the net loss for the three months ended March 31, 2021 increased by $16.2 million as compared to the same period in 2020. This was primarily due to $11.6 million of the employee and CEO earnout restricted stock which met the requirements to vest during the three months ended March 31, 2021.
The following table sets forth our historical operating results for the periods indicated:
| | | | | | | | | | | | | ||||||||||||
| | Three months ended | | | | | |
| | | | | | | | | | | | | ||||
|
| March 31, |
| $ |
| % |
| | Three Months Ended March 31, | |
| $ | | % | | |||||||||
| | 2021 |
| 2020 |
| Change |
| Change | | | 2022 |
| 2021 | | Change |
| Change | | ||||||
|
| (dollar amounts in thousands, except share and per share data) | | | (dollar amounts in thousands) | | | | | | | |||||||||||||
Revenue | | $ | 26,742 | | $ | 15,074 | | $ | 11,668 |
| 77 | % | | $ | 62,561 | | $ | 26,742 | | $ | 35,819 | | 134 | % |
Operating expenses: | |
| | |
|
| |
|
|
|
| | |
| | |
|
| | |
| |
| |
Cost of revenue | |
| 5,930 | |
| 4,099 | |
| 1,831 |
| 45 | % | |
| 21,189 | |
| 5,930 | | | 15,259 | | 257 | % |
Selling and marketing | |
| 14,638 | |
| 12,853 | |
| 1,785 |
| 14 | % | |
| 25,743 | |
| 14,638 | | | 11,105 | | 76 | % |
Product and technology | |
| 11,789 | |
| 7,352 | |
| 4,437 |
| 60 | % | |
| 14,231 | |
| 11,789 | | | 2,442 | | 21 | % |
General and administrative | |
| 24,016 | |
| 4,156 | |
| 19,860 |
| 478 | % | |
| 26,699 | |
| 24,016 | | | 2,683 | | 11 | % |
Total operating expenses | |
| 56,373 | |
| 28,460 | |
| 27,913 |
| 98 | % | |
| 87,862 | |
| 56,373 | | | 31,489 | | 56 | % |
Operating loss | |
| (29,631) | |
| (13,386) | |
| (16,245) |
| 121 | % | |
| (25,301) | |
| (29,631) | | | 4,330 | | (15) | % |
Other expense: | |
|
| |
|
| |
|
|
|
| | ||||||||||||
Other income (expense): | |
|
| |
|
| | |
| |
| | ||||||||||||
Interest expense | |
| (1,223) | |
| (3,086) | |
| 1,863 |
| (60) | % | |
| (2,293) | |
| (1,223) | | | (1,070) | | 87 | % |
Change in fair value of earnout liability | | | (18,770) | | | — | | | (18,770) | | NM | | | | 11,179 | | | (18,770) | | | 29,949 | | NM | |
Change in fair value of private warrant liability | | | (15,910) | | | — | | | (15,910) | | NM | | | | 10,189 | | | (15,910) | | | 26,099 | | NM | |
Other expense, net | |
| 83 | |
| (1,874) | |
| 1,957 |
| (104) | % | ||||||||||||
Total other expense, net | |
| (35,820) | |
| (4,960) | |
| (30,860) |
| 622 | % | ||||||||||||
Investment income and realized gains, net of investment expenses | | | 197 | | | — | | | 197 | | NM | | ||||||||||||
Other income, net | |
| 56 | |
| 83 | | | (27) | | (33) | % | ||||||||||||
Total other income (expense) | |
| 19,328 | |
| (35,820) | | | 55,148 | | (154) | % | ||||||||||||
Loss before income taxes | |
| (65,451) | |
| (18,346) | |
| (47,105) |
| 257 | % | |
| (5,973) | |
| (65,451) | | | 59,478 | | (91) | % |
Income tax expense | |
| (350) | |
| 21 | |
| (371) |
| NM | | ||||||||||||
Income tax benefit | |
| 177 | |
| 350 | | | (173) | | (49) | % | ||||||||||||
Net loss | | $ | (65,101) | | $ | (18,367) | | $ | (46,734) |
| 254 | % | | $ | (5,796) | | $ | (65,101) | | $ | 59,305 | | (91) | % |
| | | | | | | | | | | | | ||||||||||||
Net loss attributable per share to common stockholders: | |
|
| |
|
| |
|
|
|
| | ||||||||||||
Basic | | $ | (0.76) | | $ | (0.53) | | $ | (0.24) |
| (45) | % | ||||||||||||
Diluted | | $ | (0.76) | | $ | (0.53) | | $ | (0.24) |
| (45) | % | ||||||||||||
Weighted-average shares used in computing net loss attributable per share to common stockholders: | |
|
| |
|
| |
|
|
|
| | ||||||||||||
Basic | |
| 85,331,575 | |
| 34,965,300 | |
| 50,366,275 |
| 144 | % | ||||||||||||
Diluted | |
| 85,331,575 | |
| 34,965,300 | |
| 50,366,275 |
| 144 | % |
NM = Not Meaningful
Revenue
Total revenue increased by $11.7$35.8 million, or 77%134%, from $15.1 million in the three months ended March 31, 2020 to $26.7 million in the three months ended March 31, 2021. The2021 to $62.6 million in the three months ended March 31, 2022. During 2021, the Company acquired a number of businesses with an aggregate purchase price of $346.3 million as disclosed in the Company’s Annual Report on Form 10-K. These acquisitions included V12 Data (acquired in January 2021), HOA (acquired in April 2021), Rynoh (acquired in May 2021), AHP (acquired in September 2021) and Floify (acquired in October 2021). Other than V12 Data, these businesses were not owned by the Company during the three months ended March 31, 2021, therefore no revenue was recognized from these businesses during that period. Thus, the increase in revenue in 20212022 is primarily driven by the 2021 acquisitions, by accelerated growth after acquisition and by organic growth in our moving services, inspection and insurance businesses, which contributedgrowth.
During the quarter ended December 31, 2021, the Company corrected an aggregate of $13.3 million of the revenue, offset by the revenueimmaterial error related to divestituresrevenue from claims fees and contra claims expense, which was corrected in the fourth quarter of $2.5 million. As Porch has grown2021. This error impacted revenue and cost of revenue for the number of companies that use our softwarethree months ended June 30, 2021 and services, weSeptember 30, 2021. The correction did not impact operating loss or net loss in these periods, and did not have been able to grow our B2B2C (“Business to Business to Consumer”) and move related services revenues.any impact on the three months ended March 31, 2021.
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The following table summarizes the impact of the correction by quarter (in thousands):
| | | | | | | | | | | | | | | |
| | Quarter ended | | | | ||||||||||
|
| March 31, 2021 |
| June 30, 2021 |
| September 30, 2021 |
| December 31, 2021 |
| Total | |||||
Revenue increase (decrease) | | $ | — | | $ | (3,400) | | $ | (2,300) | | $ | 5,700 | | $ | — |
Cost of revenue increase (decrease) | |
| — | |
| 3,400 | |
| 2,300 | |
| (5,700) | |
| — |
Net loss impact | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Cost of Revenue
Cost of revenue increased by $1.8$15.3 million, or 45%257%, from $4.1 million in the three months ended March 31, 2020 to $5.9 million in the three months ended March 31, 2021.2021 to $21.2 million in the three months ended March 31, 2022. The increase in the cost of revenue was mostlyprimarily attributable to the 2021 acquisitions of V12 Data (acquired in January 2021), HOA (acquired in April 2021), Rynoh (acquired in May 2021), AHP (acquired in September 2021), and Floify (acquired in October 2021). Other than V12 Data, these businesses were not owned by the Company in the three months ended March 31, 2021, therefore no cost of revenue was recognized from these businesses during that period. Thus, the increase in cost of revenue in 2022 is primarily driven by the 2021 acquisitions, by accelerated growth in moving services.after acquisition and by organic growth. As a percentage of revenue, cost of revenue represented 22%34% of revenue in the three months ended March 31, 20212022 compared with 27%22% in the same period in 2020.2021. Cost of revenue as a percentage of revenue is higher due to the mix shift in business with insurance as the claims and loss and loss adjustment expense is recorded in cost of revenue.
Selling and marketing
Selling and marketing expenses increased by $1.8$11.1 million, or 14%76%, from $12.9 million in the three months ended March 31, 2020 to $14.6 million in the three months ended March 31, 2021.2021 to $25.7 million in the three months ended March 31, 2022. The increase is due to $3.1$8.3 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 ourthe acquired businesses. This is offset by our divested businesses comprised of the underwriting and policy acquisition costs for HOA and additional selling and marketing costsexpenses for V12, AHP, Floify and Rynoh. The increase was also due to a $1.5 million increase in amortization expense related to acquired intangibles. This was partially offset by a decrease of $1.1 million.$1.5 million in stock-based compensation expenses. As a percentage of revenue, selling and marketing expenses represented 41% of revenue in the three months ended March 31, 2022 compared with 55% in the same period in 2021.The improvement in selling and marketing expenses as a percentage of revenue is due to the growing economies of scale across the Company’s vertical software and insurance segments.
Product and technology
Product and technology expenses increased by $4.4$2.4 million, or 60%21%, from $7.4 million in the three months ended March 31, 2020 to $11.8 million in the three months ended March 31, 2021.2021 to $14.2 million in the three months ended March 31, 2022. The increase is mainly due to growtha $2.0 million increase in our moving, insuranceamortization expense related to acquired intangibles and inspection groups,a $1.8 million increase in product and $1.9technology costs of the acquired businesses, most notably HOA. This was offset by $1.2 million higher stocklower stock-based compensation charge.expense. As a percentage of revenue, product and technology expenses represented 44%23% of revenue in the three months ended March 31, 20212022 compared with 49%44% in the same period in 2020.2021. The improvement in product and technology expenses as a percentage of revenue is due to the growing economies of scale in the overall business.
General and administrative
General and administrative expenses increased by $19.9$2.7 million, or 478%11%, from $4.2 million in the three months ended March 31, 2020 to $24$24.0 million in the three months ended March 31, 2021 primarily due to increase$26.7 million in stock compensation charge forthe three months ended March 31, 20212022, primarily due to costs related to increased hiring of $12.2 million.corporate resources, audit and accounting fees, as well as consulting fees related to the ongoing SOX requirements. In the three months ended March 31, 2021 the Company incurred costs operating as a public company costs and increased hiring of corporate resources, as well as, approximately $2.2 million of additional legal costs as compared to the same period in 2020, primarily attributable to general legal matters described in Note 10 to the unaudited condensed consolidated financial statements.
Stock-based compensation consists of expense related to (1) equity awards in the normal course of business operations, (2) employee earnout restricted stock (see Note 8) and (3) a secondary market transaction as described below (dollar amounts in thousands).
| | | | | | | |
| | Three months ended |
| ||||
| | March 31, | | ||||
|
| 2021 |
| 2020 | | ||
Secondary market transaction | | $ | 1,933 | | $ | — | |
Employee earnout restricted stock | | | 12,373 | | | — | |
Employee awards | |
| 2,529 | |
| 672 | |
Total stock-based compensation expenses | | $ | 16,835 | | $ | 672 | |
In May 2019, the Company’s CEO purchased a total of 16,091,277 legacy Porch.com shares of redeemable convertible preferred stock from a significant Porch stockholder at the time for an aggregate purchase price of approximately $4.0 million ($0.25 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 approximately $33.2 million in2022, general and administrative expense forexpenses included $11.7 million related to the difference betweenHOA, AHP, Floify and Rynoh, which were acquired in 2021, and $3.8 million attributable to increased corporate resources, investments in corporate systems and SOX implementation. In addition, during the purchase price and fair value. This secondary stock transactionthree months ended March 31, 2022, there was a transaction negotiated by such significant Porch stockholder andloss on revaluation of contingent consideration of $3.2 million, while during the CEO, whereby the CEO transferred funds for the purchase to the selling shareholder and did not involve a grant of new shares by the Company to the CEO. Due to the unique circumstances, this stock-based compensation charge in 2019 attributable to the CEO purchasing stock from a shareholder is not expected to reoccur in future years.three
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In July 2019,months ended March 31, 2021, there was a gain of $0.4 million. This was offset by stock-based compensation expense for 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 atthree months ended March 31, 2022, which was $8.4 million lower than in the same price at which the shares were initially acquiredperiod in the May 2019 transaction. The Company has 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. In March 2021, 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.
Interest expense, net
Interest expense decreasedincreased by $1.9$1.1 million, or 60%87%, from $3.1 million in the three months ended March 31, 2020 to $1.2 million in the three months ended March 31, 2021. The decrease2021 to $2.3 million in the three months ended March 31, 2022. This was primarily due to decreasedissuance of $425 million of Convertible Senior Notes in September 2021, that in part was used to pay off the $42.1 million of Senior Secured Term Loans that were outstanding at March 31, 2021. The total level of interest-bearing debt balance was $425.6 million at January 1, 2022 and $50.8 million at January 1, 2021 and this higher outstanding debt balance was the primary reason for the increased interest rates paid duringexpense.
Change in fair value of earnout liability
Changes in fair value of earnout liability were $11.2 million (gain) and $18.8 million (loss) in the three months ended March 31, 2022 and 2021, respectively. The decrease in fair value was primarily due to the decline in the stock price at March 31, 2022 as compared to March 31, 2021. During the three months ended March 31, 2021, compared with$25.8 million of the three months ended March 31, 2020,earnout liability was reclassified to additional paid in capital 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 6). The total levela vesting event in March 2021.
Change in fair value of interest-bearing debt was $50.8private warrant liability
Changes in fair value of private warrant liability were $10.2 million at January 1, 2021(gain) and $54.1$15.9 million at January 1, 2020.
Other expense, net
Other expense, net was $0.1 million income(loss) in the three months ended March 31, 2022 and 2021, respectively. The decrease in fair value was primarily due to the decline in the stock price at March 31, 2022 as compared to March 31, 2021.
Investment income and $1.9realized gains, net of investment expenses
Investment income and realized gains, net of investment expenses was $0.2 million expense in the three months ended March 31, 2020.2022. In April 2021, the Company acquired HOA that maintains a short-term and long-term investment portfolio that generated investment income for nine months in 2021. The decrease in expense of $2.0 million was primarily dueCompany did not have any material investments prior to $1.1 million loss on remeasurement of legacy preferred stock warrant liability, $0.5 million loss on remeasurement of debt, and $0.2 million loss on extinguishment of debt in the three months ended March 31, 2020.April 2021.
Income tax expense (benefit)benefit
Income tax benefit of $0.2 million and $0.4 million was recognized for the three months ended March 31, 2022 and 2021, due to the impact of acquisitions on the Company’s valuation allowance. Income tax expense was not material for the three months ended March 31, 2020.respectively. The Company’s effective tax raterates in both periods differs substantially from the U.S. federal statutory tax rate of 21% primarily due to a full valuation allowance related to the Company’s net deferred tax assets.
Segment Results of Operations
We operate our business as two reportable segments that are also our operating segments: Vertical Software and Insurance. For additional information about our segments, see Note 13 in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.
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Segment Revenue
| | | | | | | | | |
| | Three Months Ended March 31, 2022 | |||||||
| | Vertical Software Segment | | Insurance Segment | | | Total | ||
Revenue: | | | | | | | | | |
Software and service subscriptions | | $ | 17,965 | | $ | — | | $ | 17,965 |
Move-related transactions (excluding insurance) | | | 12,193 | | | — | | | 12,193 |
Post-move transactions | | | 4,530 | | | — | | | 4,530 |
Insurance | | | — | | | 27,873 | | | 27,873 |
Total revenue | | $ | 34,688 | | $ | 27,873 | | $ | 62,561 |
| | | | | | | | | |
| | Three Months Ended March 31, 2021 | |||||||
| | Vertical Software Segment | | Insurance Segment | | | Total | ||
Revenue: | | | | | | | | | |
Software and service subscriptions | | $ | 10,880 | | $ | — | | $ | 10,880 |
Move-related transactions (excluding insurance) | | | 8,961 | | | — | | | 8,961 |
Post-move transactions | | | 5,096 | | | — | | | 5,096 |
Insurance | | | — | | | 1,805 | | | 1,805 |
Total revenue | | $ | 24,937 | | $ | 1,805 | | $ | 26,742 |
For the three months ended March 31, 2022, Vertical Software segment revenues were $34.7 million or 55.5% of total revenue. Software and service subscriptions revenue increased from $10.9 million to $18.0 million as the Company acquired a V12 Data in January 2021, Rynoh in May 2021 and Floify in October 2021. Other than V12 Data, these businesses were not owned by the Company during the quarter ended March 31, 2021, and therefore no revenue was recognized from these businesses in the same period. Thus, the increase in revenue in 2022 is primarily driven by the 2021 acquisitions, by accelerated growth after acquisition and by organic growth.
Insurance segment revenues were $27.9 million or 44.6% of total revenue during the same period.The increase from $1.8 million in the three months ended March 31, 2021 to $27.9 million in the three months ended March 31, 2022 is mainly due to the acquisitions of HOA (acquired in April 2021) and AHP (acquired in September 2021), and the accelerated growth of these businesses after acquisition, as well as the organic growth of the Company’s existing insurance operation.
Segment Adjusted EBITDA (Loss)
Segment Adjusted EBITDA (loss) is defined as revenue less operating expenses associated with our segments. Segment Adjusted EBITDA (loss) also excludes non-cash items, certain transactions that are not indicative of ongoing segment operating and financial performance and are not reflective of the Company’s core operations. See Note 13 in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report for additional information.
| | | | | | |
| | Three Months Ended March 31, | ||||
| | | 2022 | | | 2021 |
Segment adjusted EBITDA (loss): | | | | | | |
Vertical Software | | $ | 2,984 | | $ | 3,151 |
Insurance | | | 3,286 | | | 508 |
Corporate and Other(1) | | | (13,342) | | | (13,261) |
Total segment adjusted EBITDA (loss)(2) | | $ | (7,072) | | $ | (9,602) |
(1) Includes costs that are not directly attributable to our reportable segments, as well as certain shared costs.
(2) See reconciliation of adjusted EBITDA (loss) to net loss below.
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Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. GAAP, we believe thatThis Quarterly Report includes non-GAAP financial measures, such as 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 that 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 limitation of the non-GAAP measure presented by also providing the most directly comparable GAAP measure, which is net loss, and a description of the reconciling items and adjustments to derive the non-GAAP measure.
(loss), Adjusted EBITDA is defined(loss) as a percent of revenue, and average revenue per monetized service.
The Company defines Adjusted EBITDA (loss) as net lossincome (loss) adjusted for interest expense;expense, net, income taxes; totaltaxes, other expenses, net;net, depreciation and amortization, certain non-cash long-lived asset impairment charges;charges, stock-based compensation expense;expense and 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 divestituresdivestures and certain transaction costs.
Adjusted EBITDA is intended(loss) as a percent of revenue is defined as Adjusted EBITDA (loss) divided by GAAP total revenue. Average revenue per monetized services in quarter is the average revenue generated per monetized service performed in a quarterly period. When calculating average revenue per monetized service in a quarter, average revenue is defined as total quarterly service transaction revenues generated from monetized services.
Company management uses these non-GAAP financial measures as supplemental measuremeasures of ourthe Company’s operating and financial performance, that is neither required by, nor presented in accordance with, GAAP. We believefor internal budgeting and forecasting purposes, to evaluate financial and strategic planning matters, and to establish certain performance goals for incentive programs. The Company believes that the use of Adjusted EBITDAthese non-GAAP financial measures provides an additional tool for investors with useful information to use in evaluating ongoingevaluate the Company’s operating resultsand financial performance and trends and in comparing the Company’sPorch’s financial measuresresults with thosecompetitors, other similar companies and companies across different industries, many of comparable companies, which may present similar non-GAAP financial measures to investors. However,
43
Table the Company’s definitions and methodology in calculating these non-GAAP measures may not be comparable to those used by other companies. In addition, the Company may modify the presentation of Contentsthese non-GAAP financial measures in the future, and any such modification may be material.
youYou should not consider these non-GAAP financial measures in isolation, as a substitute to or superior to financial performance measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude specified income and expenses, some of which may be awaresignificant or material, that when evaluating Adjusted EBITDA, weare required by GAAP to be recorded in the Company’s consolidated financial statements. The Company may also incur future income or expenses similar to those excluded when calculatingfrom these measures. In addition, ournon-GAAP financial measures, and the presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computationIn addition, these non-GAAP financial measures reflect the exercise of Adjusted EBITDA may not be comparable to other similarly titledmanagement judgment about which income and expense are included or excluded in determining these non-GAAP financial measures.
See the reconciliation tables below for more details regarding these non-GAAP financial measures, computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion.
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 reviewincluding the reconciliation of netnon-GAAP financial measures to the most directly comparable GAAP financial measures.
41
Revenue Less Cost of Revenue
The following table reconciles revenue less cost of revenue to operating loss for the three months ended March 31, 2022 and 2021, respectively (dollar amounts in thousands):
| | | | | | | |
|
| Three Months Ended March 31, | | ||||
|
| 2022 |
| 2021 | | ||
Revenue | | $ | 62,561 | | $ | 26,742 | |
Less: Cost of revenue | |
| (21,189) | |
| (5,930) | |
Revenue less cost of revenue | |
| 41,372 | |
| 20,812 | |
Less: Selling and marketing costs | | | 25,743 | | | 14,638 | |
Less: Product and technology costs | | | 14,231 | | | 11,789 | |
Less: General and administrative costs | | | 26,699 | | | 24,016 | |
Total operating expenses | | $ | 87,862 | | $ | 56,373 | |
Operating loss | | $ | (25,301) | | $ | (29,631) | |
Revenue less cost of revenue increased by $20.6 million, or 98.8% from $20.8 million in the three months ended March 31, 2021 to $41.4 million in the three months ended March 31, 2022. During 2021, the Company acquired a number of businesses with an aggregate purchase price of $346.3 million as disclosed in the Company’s Annual Report on Form 10-K. These acquisitions included V12 Data (acquired in January 2021), HOA (acquired in April 2021), Rynoh (acquired in May 2021), AHP (acquired in September 2021) and Floify (acquired in October 2021). Other than V12 Data, these businesses were not owned by the Company in the three months ended March 31, 2021, therefore no revenue less cost of revenue was recognized from these businesses during that period. Thus, the increase revenue less cost of revenue in 2022 is primarily driven by the 2021 acquisitions, by accelerated growth after acquisition and by organic growth.
Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.(loss)
The following table reconciles net loss to Adjusted EBITDA (loss) for the three months ended March 31, 20212022 and the three months ended March 31, 2020,2021, respectively (dollar amounts in thousands):
| | | | | | | |
|
| March 31, |
| March 31, | |||
|
| 2021 |
| 2020 | |||
Net loss | | $ | (65,101) | | $ | (18,367) | |
Interest expense | |
| 1,223 | |
| 3,086 | |
Income tax (benefit) expense | |
| (350) | |
| 21 | |
Depreciation and amortization | |
| 2,463 | |
| 1,789 | |
Other expense, net(1) | |
| (83) | |
| 1,874 | |
Non-cash long-lived asset impairment charge | |
| 68 | |
| 167 | |
Non-cash stock-based compensation | |
| 16,723 | |
| 369 | |
Non-cash bonus expense | | | 290 | | | — | |
Revaluation of contingent consideration | |
| (355) | |
| (80) | |
Revaluation of earnout liability | | | 18,770 | | | — | |
Revaluation of private warrant liability | | | 15,910 | | | — | |
Acquisition and related (income) expense(2) | |
| 840 | |
| 371 | |
Adjusted EBITDA (loss) | | $ | (9,602) | | $ | (10,770) | |
Adjusted EBITDA (loss) as a percentage of revenue | | | (36) | % | | (71) | % |
| | | | | | |
|
| 2021 |
| 2020 | ||
Loss on remeasurement of debt | | | — | | | 454 |
Loss on remeasurement of legacy preferred stock warrant liability | |
| — | |
| 1,079 |
Loss on extinguishment of debt, net | |
| — | |
| 247 |
Other, net | |
| (83) | |
| 94 |
| | $ | (83) | | $ | 1,874 |
| | | | | | |
| | 2021 | | 2020 | ||
Acquisition compensation – cash |
| $ | — |
| $ | 14 |
Acquisition compensation – stock | |
| 112 | |
| 302 |
Bank fees | |
| 4 | |
| — |
Bonus expense | |
| — | |
| 22 |
Professional fees – accounting | |
| 59 | |
| — |
Professional fees – legal | |
| 665 | |
| 33 |
| | $ | 840 | | $ | 371 |
| | | | | | | |
|
| Three Months Ended March 31, | | ||||
|
| 2022 |
| 2021 | | ||
Net loss | | $ | (5,796) | | $ | (65,101) | |
Interest expense | |
| 2,293 | |
| 1,223 | |
Income tax benefit | |
| (177) | |
| (350) | |
Depreciation and amortization | |
| 6,483 | |
| 2,463 | |
Other expense (income), net | |
| (56) | |
| (83) | |
Non-cash long-lived asset impairment charge | |
| 69 | |
| 68 | |
Non-cash stock-based compensation expense | |
| 5,854 | |
| 16,835 | |
Revaluation of contingent consideration | |
| 3,205 | |
| (355) | |
Revaluation of earnout liability | | | (11,179) | | | 18,770 | |
Revaluation of private warrant liability | | | (10,189) | | | 15,910 | |
Acquisition and related expense | |
| 895 | |
| 728 | |
Non-cash bonus expense | | | 1,526 | | | 290 | |
Adjusted EBITDA (loss) | | $ | (7,072) | | $ | (9,602) | |
Adjusted EBITDA (loss) as a percentage of revenue | | | (11) | % | | (36) | % |
Net loss increased by $46.7 million from $18.4 millionAdjusted EBITDA (loss) for the three months ended March 31, 2020 to $65.12022 was $7.1 million, a $2.5 million improvement from Adjusted EBITDA (loss) of $9.6 million for the three months ended March 31,same period in 2021. This change is due to changesDuring 2021, the Company acquired a number of businesses with an aggregate purchase price of $346.3 million as disclosed in fair value of earnout and private warrantthe Company’s Annual Report on Form 10-K. These acquisitions included V12 Data (acquired in January 2021), HOA (acquired in April 2021), Rynoh
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liabilities of $18.8 million(acquired in May 2021), AHP (acquired in September 2021) and $15.9 million, respectively. Additionally, stock compensation expense includedFloify (acquired in October 2021). Other than V12 Data, these businesses were not owned by the net loss forCompany in the three months ended March 31, 2021, increased by $16.2 million as compared to the same period in 2020.
therefore no revenue and Adjusted EBITDA loss for(loss) was recognized from these businesses during that period. Thus, the three months ended March 31, 2021 was $9.6 million, a $1.2 million improvement from Adjusted EBITDA loss of $10.8 million for the same period in 2020. The improvement in Adjusted EBITDA loss(loss) in 2022 is due toprimarily driven by the growth in the moving, insurance and inspection groups, as well as no negative impact of the divested businesses in 2020,2021 acquisitions, offset by the increaseinvestments in generalsales and administrative costsmarketing and product and technology related public company costs, increased hiring for corporate resourcesto consumer experience, app build out, data platforms and litigation matters.investments in establishing and maintaining SOX and other internal controls across IT and accounting organizations.
Liquidity and Capital Resources
Since inception, as a private company, we have financed our operations primarily from the sales of redeemable convertible preferred stock and convertible promissory notes, and proceeds from the senior secured term loans. On December 23, 2020, the Company received approximately $269.5 million of aggregate cash proceeds from recapitalization, net of transactions costs. transaction costs, as it began trading publicly.
During 2021, the Company completed a private offering of $425 million aggregate principal amounts of convertible debt maturing in 2026, and raised $126.7 million and $4.3 million from exercise of public warrants and stock options, respectively.
As of March 31, 2021,2022, the Company had cash and cash equivalents of $222.9$292.4 million and $10.4$10.7 million of restricted cash, representing loan proceeds relatedrespectively. Restricted cash consists of funds held for the payment of possible warranty claims as required in 25 states; funds held in certificates of deposits and money market mutual funds pledged to, the Paycheck Protection Program Loans.or held in escrow with, certain state insurance regulators in connection with our insurance operations; customer deposits; and acquisition indemnifications.
The Company has incurred net losses since its inception, and has an accumulated deficit at March 31, 20212022 and December 31, 20202021 totaling $382.6$429.9 million and $317.5$424.1 million, respectively.
As of March 31, 2021,2022 and December 31, 20192021, the Company had $53.1$425.5 million and $50.8$425.6 million aggregate principal amount outstanding on term loansin convertible notes and promissory notes, respectively. During 2020,
Based on the Company’s current operating and growth plan, management believes cash and cash equivalents at March 31, 2022, 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 continue its growth strategy, including through acquisitions, the Company refinancedmay elect or need to obtain alternative sources of capital, and it may finance additional liquidity needs in the existing $40.0 million term loans and receivedfuture through one or more equity or debt financings. The Company may not be able to obtain equity or additional loan proceeds of $7.0 million from new senior secured term loans and $8.3 million fromdebt financing in the U.S. government pursuantfuture when needed or, if available, the terms may not be satisfactory to the Paycheck Protection Program underCompany or could be dilutive to its stockholders.
Porch Group, Inc. is a holding company that transacts a majority of its business through operating subsidiaries, including insurance subsidiaries. Consequently, the CARES Act. In connection with an acquisitionCompany’s ability to pay dividends and expenses is largely dependent on January 12, 2021, the Company assumed another loan pursuantdividends or other distributions from its subsidiaries. The Company’s insurance company subsidiaries are highly regulated and are restricted by statute as to the Paycheck Protection Program for the amount of $2.0 million. Additionally, individends they may pay without the three months endedprior approval of their respective regulatory authorities. As of March 31, 2021, the company raised approximately $89.82022, cash and cash equivalents of $35.5 million from the exercisesand investments held by these companies was $65.3 million.
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In the three months ended March 31, 2021, the Company spent $22.9 million to acquire several companies, in transactions accounted for as a business combination.
The following table provides a summary of cash flow data for the three months ended March 31, 20212022 and March 31, 2020:2021:
| | | | | | | | | | | | | ||||||||||||
| | Three months ended | | | | | |
| | | | | | | | | | | | | ||||
|
| March 31, |
| $ |
| % |
|
| Three Months Ended March 31, |
| $ |
| % |
| ||||||||||
| | 2021 |
| 2020 |
| Change |
| Change | | | 2022 |
| 2021 |
| Change |
| Change | | ||||||
|
| (dollar amounts in thousands) | |
| (dollar amounts in thousands) | | | | | | | |||||||||||||
Net cash used in operating activities | | $ | (22,935) | | $ | (9,638) | | $ | (13,297) |
| 138 | % | | $ | (13,291) | | $ | (22,935) | | $ | 9,644 |
| 42 | % |
Net cash used in investing activities | |
| (23,714) | |
| (974) | |
| (22,740) |
| 2,335 | % | |
| (8,077) | |
| (23,714) | |
| 15,637 |
| 66 | % |
Net cash provided by financing activities | |
| 72,579 | |
| 6,254 | |
| 66,325 |
| 1,061 | % | ||||||||||||
Net cash (used) provided by financing activities | |
| (389) | |
| 72,579 | |
| (72,968) |
| NM | | ||||||||||||
Change in cash, cash equivalents and restricted cash | | $ | 25,930 | | $ | (4,358) | | $ | 30,288 |
| NM | | | $ | (21,757) | | $ | 25,930 | | $ | (47,687) |
| NM | |
ThreeOperating Cash Flows
Net cash used in operating activities was $13.3 million for the three months ended March 31, 20212022. Net cash used in operating activities consists of net loss of $5.8 million, adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments include stock-based compensation expense of $5.9 million, depreciation and amortization of $6.5 million, and fair value adjustments to earnout liability and private warrant liability of $11.2 million (gain) and $10.2 million (gain), respectively. Net changes in working capital were a use of cash of $4.1 million, primarily due to increases in current liabilities and reinsurance balance due, offset by losses and loss adjustment expense reserves.
Net cash used in operating activities was $22.9 million for the three months ended March 31, 2021. Net cash used in operating activities consists of net loss of $65.1 million, adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments include stock-based compensation expense of $16.8 million, depreciation and amortization of $2.5 million, non-cash accrued and payment-in-kind interest of $0.3 million, fair value adjustments to earnout liability and private warrant liability of $18.8 million (loss) and $15.9 million (loss), respectively. Net changes in working capital were a use of cash of $11.6 million, primarily due to increases in current liabilities.
45Investing Cash Flows
TableNet cash used in investing activities was $8.1 million for the three months ended March 31, 2022. Net cash used in investing activities is primarily related to purchases of Contentsinvestments of $8.8 million, investments in developing internal-use software of $1.6 million, purchases of property and equipment of $1.2 million, and a $5.0 million non-refundable deposit for an acquisition. This was offset by the cash inflows related to maturities and sales of investments of $8.4 million.
Net cash used in investing activities was $23.7 million for the three months ended March 31, 2021. Net cash used in investing activities is primarily related to investments to develop internal useinternal-use software of $0.8 million and acquisitions, net of cash acquired of $22.9 million, including V12 Data.
Financing Cash Flows
Net cash used in financing activities was $0.4 million for the three months ended March 31, 2022. Net cash used in financing activities is primarily related to shares repurchased to pay income tax withholdings upon vesting of RSUs of $0.7 million and debt repayments of $0.2 million, partially offset by proceeds from exercises of stock options of $0.5 million.
Net cash provided by financing activities was $72.6 million for the three months ended March 31, 2021. Net cash provided by financing activities is primarily related to exercises of warrants and stock optionoptions of $89.8$89.9 million, offset by shares repurchased to pay income tax withholdings upon vesting of RSUs of $14.6 million and debt repayments of $0.2 million.
Three months ended March 31, 202044
Net cash used in operating activities was $9.6 million for the three months ended March 31, 2020. Net cash used in operating activities consistsTable of net loss of $18.4 million, adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments include stock-based compensation expense of $0.7 million, depreciation and amortization of $1.8 million, fair value adjustments to debt, warrants and contingent consideration, with combined net losses of $1.7 million, non-cash accrued and payment-in-kind interest of $1.1 million, and loss on sale and impairment of long-lived assets of $0.2 million. Net changes in working capital provided cash of $3.1 million, primarily due to increases in current liabilities.Contents
Net cash used in investing activities was $1.0 million for the three months ended March 31, 2020. Net cash used in investing activities is primarily related to investments to develop internal use software of $0.9 million and purchases of property and equipment of $0.1 million.
Net cash provided by financing activities was $6.3 million for the three months ended March 31, 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 $1.9 million, net of loan repayments of $0.4 million.
Off-Balance Sheet Arrangements
Since the date of our incorporation, we havethe Company has not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. The Company expects to use the extended transition period for any other new or revised accounting standards during the period in which it remains an emerging growth company.
Recent Accounting Pronouncements
See Note 1 to our unaudited condensed consolidated financial statements as of and for the three months ended March 31, 20212022 for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one, of their potential impact on our financial condition and our results of operations.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We areThe Company is exposed to a variety of market and other risks, including the effects of changes in interest rates, and inflation, as well as risks to the availability of funding sources, hazard events, and specific asset risks.
Interest Rate Risk
The market risk inherent in our financial instruments and our financial position represents the potential loss arising from adverse changes in interest rates. As of March 31, 2021,2022, and December 31, 2020, we have2021, the Company has interest-bearing debt of $53.1$425.5 million and $50.8 million.$425.6 million, respectively. Our senior secured term loans0.75% Convertible Senior Notes due 2026 (the “2026 Notes”) have a principal balance of $425 million as of March 31, 2021 are variable rate loans that accrue interest at2022, have a variablefixed coupon rate of 75 basis points, and effective interest basedrate of 1.3%. As such, interest expense on the greater of 0.55% or LIBOR rate (as defined) plus an applicable margin of 8.0%. As2026 Notes will not change if market interest rates increase. Other debt as of March 31, 2021, the calculated interest rate2022 totaled $0.5 million and is 8.55%.variable-rate.
A one percent (1%) increase in interest rates in our variable rate indebtedness would result in approximately $0.5 milliona nominal change in additional annual interest expense.
As of March 31, 2022, the Company’s insurance subsidiary has a $65.3 million portfolio of fixed income securities and an unrealized loss of $2.8 million, as described in Note 3. In a rising interest rate environment, the portfolio would result in unrealized losses.
At March 31, 2022, accounts receivable and reinsurance balances due were $30.0 million and $239.7 million, respectively, were not interest-bearing assets and are generally collected in less than 180 days. As such, the Company does not consider these assets to have material interest rate risk.
Inflation Risk
Porch does not believeDue to significant increases in the consumer price index in the past twelve months, supply chain disruptions, war in Ukraine and other geo-political events, the Company believes that inflation has had, or currently has,may have a material effectimpact on its business.business in the future.
Foreign Currency Risk
There was no material foreign currency risk for three months ended March 31, 2021 and the years ended December 31, 2020. Porch’s2022. The Company’s activities to date have been limited and were conducted in the United States.
45
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2021,2022, which is the end of the period covered by this Quarterly Report. Based on this evaluation, our Chief 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 reports we file or submit under the Exchange Act is (i) recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the United States Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures were not effective as of March 31, 20212022 due to the material weaknesses in internal control over financial reporting described in Part II, Item 9A of the Annual Report.Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 16, 2022.
Remediation Plan
Our remediation efforts for these material weaknesses have included the following:
● |
● |
47
● |
● |
● |
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
ThereExcept for actions taken under the Remediation Plan described above in this Part I, Item 4, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management initiatedDuring 2022, the process of implementing remediation stepsCompany continued to address the material weakness andtake actions on initiatives to improve ourthe internal control over financial reporting.environment, which started in 2021. Specifically, we are continuingformed an internal working group to expanddetail and improve our review processimplement specific remediation plans for complex securities, transactions,these control deficiencies, engaged with outside consultants to provide advice and related accounting standards, including the determination of the appropriate accounting classification of our financial instruments. We plan to further improve this process by implementingassistance, and hired additional training of personnel to improve our understandingperform and documentation that supports effectivemonitor internal control operation and will identify third-party professionals with whom to consult regarding the applicationactivity.
46
Limitations on Effectiveness of Controls and Procedures
OurAs specified above, the Company disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, as specified above. Ourobjectives. Company 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.
4847
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
TCPA Proceedings. Porch and/or an acquired entity, GoSmith.com, are partySee Note 12 (“Commitments and Contingencies”) to 14 legal proceedings alleging violationsPart I, Item 1 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 actionsthis Quarterly Report, which is incorporated 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. 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.
Kandela Proceeding. In May 2020, the former owners of Kandela, LLC filed a complaint against Porch in the Superior Court of the State of California, alleging a breach of contract related to the terms and achievement of an earnout agreement related to the acquisition of the Kandela business and related fraudulent inducement claims. This action is at an early stage in the litigation process and Porch is unable to determine the likelihood of an unfavorable outcome, although it is reasonably possible that the outcome may be unfavorable; however, settlement discussions have progressed with certain plaintiffs. Porch is unable to provide an estimate of the range or amount of potential loss across all claims (if the outcome should be unfavorable); however, Porch has recorded an estimated accrual related to those claims underlying the aforementioned settlement discussions. Porch intends to contestreference into this case vigorously.
Putative Wage and Hours Class Action Proceeding. A former employee of HireAHelper™ filed a complaint in San Diego County Superior Court 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 in the State of California during the relevant time period. While this action is still at an early stage in the litigation process, we have recorded an estimated accrualPart II, Item 1, for a contingent loss based on information currently known. The parties have agreed to explore resolution by waydescription of a private non-binding mediation in the summer or fall of 2021, however if such mediations are unsuccessful losses may exceed the amount accrued.certain litigation and legal proceedings.
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,the Company, would individually or in the aggregate have a material adverse effect on ourthe business, financial condition or results of operations.
Item 1A. Risk Factors
TheAs of May 10, 2022, the Company’s risk factors as of May 19, 2021, have not materially changed from those described in Part 1, Item 1A of ourthe Annual Report on Form 10-K/A10-K for the fiscal year ended December 31, 20202021 filed with the SEC on May 19, 2021.March 16, 2022.
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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.
Item 5. Other Information
None.
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Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
Exhibit No. | Description | ||
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| Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
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| XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||
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| XBRL Taxonomy Extension Schema Document | ||
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| XBRL Taxonomy Extension Calculation Linkbase Document | ||
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| XBRL Taxonomy Extension Definition Linkbase Document | ||
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| XBRL Taxonomy Extension Label Linkbase Document | ||
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| XBRL Taxonomy Extension Presentation Linkbase Document |
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104* | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | ||
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* Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant agrees to furnish a copy of any omitted schedule and/or exhibit to the SEC upon request.
** Management contract or compensatory plan or arrangement.
† Filed herewith.
** ThesecertificationsarefurnishedtotheSECpursuanttoSection906oftheSarbanes-OxleyActof2002andaredeemednotfiledforpurposesof Section18oftheSecuritiesExchangeActof1934,asamended,norshalltheybedeemedincorporatedbyreferenceinanyfilingunderthe SecuritiesActof1933,exceptasshallbeexpresslysetforthbyspecificreferenceinsuchfiling.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
Date: May 19, 202110, 2022
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| PORCH GROUP, INC. | |
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| By: | /s/ Martin L. Heimbigner |
| Name: | Martin L. Heimbigner |
| Title: | Chief Financial Officer |
| | (Principal Financial Officer) |
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