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EVERQUOTE, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing in Part II, Item 8 of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the ''Risk Factors'' section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis. Overview
consumers and insurance providers time and money.
We operate a leading online marketplace for insurance shopping, connecting consumers with insurance providers. Our mission is to empower insurance shoppers to better protect life's most important assets-their family, property, and future. Our vision is to become the largest online source of insurance policies by using data and technology to make insurance simpler, more affordable and personalized, ultimately reducing cost and risk. Our results-driven marketplace, powered by our proprietary data and technology platform, is reshaping the insurance shopping experience for consumers and improving the way insurance providers attract and connect with consumers shopping for insurance. Finding the right insurance product is often challenging for consumers, who face limited online options, complex, variable and opaque pricing, and myriad coverage configurations. We present consumers with a single starting point for a comprehensive and cost-effective insurance shopping experience. Our marketplace reduces the time consumers spend searching across multiple sites by delivering broader and more relevant results than consumers may find on their own. Our direct to consumer, or DTC, agents bind policies for consumers, further streamlining the consumer shopping experience. Our service is free for consumers, and we derive our revenue from sales of consumer referrals to insurance providers and directly from commissions on sales of policies. Insurance providers, which we view as including carriers, our own DTC agents, and third-party agents, operate in a highly competitive and regulated industry and typically specialize in pre-determined subsets of consumers. As a result, not every consumer is a good match for every provider, and some providers can struggle to reach the segments that are most desirable for their business models. Traditional offline and online advertising channels reach broad audiences but lack the fine-grained consumer acquisition capabilities needed for optimally matching consumers to specific insurance products. We connect providers to a large volume of high-intent, pre-validated consumer referrals that match the insurers' specific requirements. The transparency of our marketplace, as well as the campaign management tools we offer, make it easy for insurance carriers and third-party agents to evaluate the performance of their marketing spend on our platform and manage their own return on investment. Since 2011, our core mission has been to make finding insurance easy and more personal, saving consumers and insurance providers time and money. We are working to build the largest and most trusted online insurance marketplace in the world. In pursuing this goal, we have consistently innovated through our disruptive data driven approach. Highlights of our history of innovation include: • In 2011, we launched theEverQuote marketplace for auto insurance.
• In 2013, we launched EverQuote Pro, our provider portal, for carriers.
• In 2015, we launched EverQuote Pro for agents.
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Table of Contents • In 2016, we added home and life insurance in our marketplace.
• In 2018, we exceeded 46 million cumulative quote requests since launch
of our marketplace. • In 2019, we added health and renters insurance in our marketplace.
• In 2020, we launched our DTC insurance offerings in our life vertical
and in our health vertical via the acquisition ofCrosspointe Insurance & Financial Services, LLC , or Crosspointe, which we later renamed Eversurance.
• In
home verticals via the acquisition of Policy Fuel LLC and its
affiliates, or PolicyFuel.
In the years ended December 31, 2021 , 2020 and 2019, our total revenue was
$418.5 million , $346.9 million and $248.8 million , respectively, representing
year-over-year growth of 20.6% and 39.4%, respectively. We had net losses of
$19.4 million , $11.2 million and $7.1 million for the years ended December 31,
2021 , 2020 and 2019, respectively, and had $14.6 million , $18.4 million and
$8.3 million in adjusted EBITDA for these same periods, respectively. See the
section titled
"-Non-GAAP Financial
Measure" for information regarding our use of adjusted EBITDA and its
reconciliation to net income (loss) determined in accordance with generally
accepted accounting principles in the United States , or GAAP.
COVID-19
The
COVID-19
pandemic has had a significant adverse impact on global commercial activity and has created significant volatility in financial markets. Many governmental authorities have implemented travel bans and restrictions, quarantines, shelter-in-place orders, business limitations and shutdowns and other measures to attempt to contain the spread of the virus. Government recommendations and requirements are continuing to change and there remains significant uncertainty as to the breadth and duration of business disruptions related to COVID-19, as well as its impact on the global economy and consumer confidence. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to these uncertainties, our compliance with measures to contain the spread of the virus has impacted our day-to-day operations and could disrupt our business and operations, as well as that of our customers and consumer traffic to our marketplace for an indefinite period of time. For example, we believe that immediately after shelter-in-place orders went into effect consumers performed fewer searches for insurance online. To support the health and well-being of our employees, customers, partners and communities, a majority of our employees continue to work remotely, however our offices are open for use. While such disruptions have not had a material adverse impact on our financial results throughDecember 31, 2021 , such disruptions may impact consumer insurance shopping behavior. We continue to monitor and are managing our operations for the ongoing impact of COVID-19.
Factors Affecting Our Performance
We believe that our performance and future growth depend on a number of factors
that present significant opportunities for us but also pose risks and
challenges, including those discussed below and in the section titled "Risk
Factors."
Auto insurance industry risk
We derive a significant portion of our revenue from auto insurance providers and our financial results depend on the performance of the auto insurance industry. For example, in 2016, theU.S. commercial auto insurance industry experienced its worst underwriting performance in 15 years, with higher loss ratios that were driven by both adverse claim severity and frequency trends. As a result, our auto insurance carrier customers reduced marketing spend and cost per sale targets the following year, ultimately impacting our revenue growth in the auto insurance vertical in 2017. More recently, and specifically starting in the third quarter of 2021, the auto 49
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insurance industry has experienced similar challenges, which is impacting our
revenue growth in the auto insurance vertical. We believe this trend will
continue into 2022.
Expanding consumer traffic
Our success depends in part on the growth of our consumer traffic, as measured by quote requests. We have historically increased consumer traffic to our marketplace by expanding existing advertising channels and adding new channels such as by engaging with consumers through our verified partner network. We plan to continue to increase consumer traffic by leveraging the features and growing data assets of our platform. While we plan to increase consumer traffic over the long term, we also have the ability to decrease advertising, which would likely result in a decrease in quote requests from consumers targeted by such advertising, if we believe the revenue associated with such consumer traffic does not result in incremental profit to our business. We have also increased the number of quote requests acquired from our verified partner network. While we plan to continue to increase the number of quote requests we acquire from our verified partner network, our ability to acquire quote requests in significant volume, at prices that are attractive, and that represent high-intent shoppers that insurance providers will purchase referrals for will impact our profitability.
Increasing the number of insurance providers and their respective spend in our
marketplace
Our success also depends on our ability to retain and grow our insurance provider network. We have expanded both the number of insurance providers and the spend per provider on our platform. While not a factor in our historical increases in revenue per quote request, we believe we have an opportunity to increase the number of referrals per quote request while increasing the bind rate per quote request, which would allow us to increase our revenue at low incremental cost.
Revenue per quote request
We seek to increase our revenue per quote request by attaining higher insurance provider bids and by increasing the number of referrals per quote request. Insurance provider bids are influenced by competition in our marketplace auctions, the performance of our consumer referrals for insurance providers relative to other consumer acquisition channels, as well as by market conditions, insurance provider budgets and insurance providers' new customer acquisition targets. Increases in revenue per quote request allow us to increase advertising and consumer traffic to our marketplace while maintaining or increasing variable marketing margin. We believe revenue per quote request will decrease in the near term as a result of reduced marketing spend from our auto insurance carrier customers.
Cost per quote request
We seek to efficiently acquire consumers by increasing the effectiveness of our consumer advertising and insurance marketplace. Cost per quote request is influenced by the cost and mix of advertising and the conversion rate of marketplace visitors who request an insurance quote. While we seek to minimize cost per quote request, we may incur increased cost per quote request in order to achieve profitability at relative volumes of quote requests and revenue per quote request. We believe cost per quote request will decrease in the near term as a result of reduced marketing spend by the auto insurance industry.
Key Business Metrics
We regularly review a number of metrics, including GAAP operating results and
the key metrics listed below, to evaluate our business, measure our performance,
identify trends affecting our business, formulate financial projections, and
make operating and strategic decisions. Some of these metrics are
non-financial
metrics or are financial metrics that are not defined by GAAP.
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Adjusted EBITDA
We define Adjusted EBITDA as net income (loss), adjusted to exclude: stock-based compensation expense, depreciation and amortization expense, acquisition-related costs, legal settlement expense, one-time severance charges, interest income and the provision for (benefit from) income taxes. Adjusted EBITDA is a non-GAAP financial measure that we present in this Annual Report on Form 10-K to supplement the financial information we present on a GAAP basis. We monitor and present Adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, to establish budgets and to develop operational goals for managing our business. Adjusted EBITDA should not be considered in isolation from, or as an alternative to, measures prepared in accordance with GAAP. Adjusted EBITDA should be considered together with other operating and financial performance measures presented in accordance with GAAP. Also, Adjusted EBITDA may not necessarily be comparable to similarly titled measures presented by other companies. For further explanation of the uses and limitations of this measure and a reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income (loss), please see "-Non GAAP Financial Measure".
Variable Marketing Margin
We define variable marketing margin, or VMM, as revenue, as reported in our consolidated statements of operations and comprehensive loss, less advertising costs (a component of sales and marketing expense, as reported in our statements of operations and comprehensive loss). We use VMM to measure the efficiency of individual advertising and consumer acquisition sources and to make trade-off decisions to manage our return on advertising. We do not use VMM as a measure of profitability. Quote Requests
Quote requests are consumer-initiated requests for an insurance quote that
result from a website form, telephones calls with a consumer, or other
interactions we have with consumers through third-party websites that result in
a revenue generating transaction.
Key Components of Our Results of Operations
Revenue
We generate our revenue primarily by selling consumer referrals to insurance
provider customers, consisting of carriers and agents, as well as to indirect
distributors. To simplify the quoting process for the consumer and improve
performance for the provider, we are able to provide consumer-submitted quote
request data along with each referral. We recognize revenue from consumer
referrals at the time of delivery. We support three secure consumer referral
formats:
• Clicks: An
online-to-online
referral, with a handoff of the consumer to the provider's website.
• Data: An
online-to-offline
referral, with quote request data transmitted to the provider for
follow-up.
• Calls: An
online-to-offline
referral for outbound calls and an
offline-to-offline
referral for inbound calls, with the consumer and provider connected by
phone.
We also generate less than 10% of our revenue from commission fees for the sale
of policies, primarily in our health and automotive verticals. We recognize
revenue based on our constrained estimate of commission payments we expect to
receive over the lifetime of the policies sold, which we refer to as constrained
lifetime values, or constrained LTVs, of commission payments. Commission revenue
is recognized upon satisfaction of our performance obligation, which we consider
to be submission of the policy application.
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For the periods presented, our total revenue consisted of revenue generated from
our automotive and other insurance verticals, which includes home and renters,
life and health insurance verticals, as follows:
Year Ended December 31,
2021 2020 2019
(in thousands)
Automotive $ 330,928 $ 283,236 $ 212,300
Other 87,587 63,699 36,511
Total Revenue $ 418,515 $ 346,935 $ 248,811
We expect a modest overall increase in revenue in 2022 as we anticipate
increases in commission revenue to be mostly offset by decreases in referral
revenue in our automotive vertical as a result of challenges in the automotive
insurance industry described above. We expect revenue to fluctuate from quarter
to quarter and, in particular, for our commission revenue to be impacted by the
open enrollment period and annual enrollment period in our health vertical.
Cost and Operating Expenses
Our cost and operating expenses consist of cost of revenue, sales and marketing,
research and development, and general and administrative expenses.
We allocate certain overhead expenses, such as rent, utilities, office supplies and depreciation and amortization of general office assets, to cost of revenue and operating expense categories based on headcount. As a result, an overhead expense allocation is reflected in cost of revenue and each operating expense category. Personnel-related costs included in cost of revenue and each operating expense category include wages, fringe benefit costs and stock-based compensation expense.
Cost of Revenue
Cost of revenue is comprised primarily of the costs of operating our marketplace
and delivering consumer referrals to our customers. These costs consist
primarily of technology service costs including hosting, software, data
services, and third-party call center costs. In addition, cost of revenue
includes depreciation and amortization of our platform technology assets and
personnel-related costs.
Sales and Marketing
Sales and marketing expenses consist primarily of advertising and marketing
expenditures as well as personnel-related costs for employees engaged in sales,
marketing, data analytics and consumer acquisition functions and amortization of
sales and marketing-related intangible assets. Advertising expenditures consist
of variable costs that are related to attracting consumers to our marketplace,
generating consumer quote requests, including the cost of quote requests we
acquire from our verified partner network, and promoting our marketplace to
carriers and agents. Advertising costs are expensed as incurred. Marketing costs
consist primarily of content and creative development, public relations,
memberships, and event costs. In order to continue to grow our business and
brand awareness, we expect that we will continue to commit substantial resources
to our sales and marketing efforts. We expect our sales and marketing expense
will increase in the near term, both as a percentage of revenue and in absolute
dollars, especially as we continue to expand our DTC agency. In the longer term,
we expect sales and marketing expense to decrease as a percentage of revenue due
to efficiencies of scale and improvements in our marketplace technology.
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Research and Development
Research and development expenses consist primarily of personnel-related costs for software development and product management. We have focused our research and development efforts on improving ease of use and functionality of our existing marketplace platform and developing new offerings and internal tools. We primarily expense research and development costs. Direct development costs related to software enhancements that add functionality are capitalized and amortized as a component of cost of revenue. We expect that research and development expenses will increase as we continue to enhance and expand our platform technology.
General and Administrative
General and administrative expenses consist of personnel-related costs and related expenses for executive, finance, legal, human resources, technical support and administrative personnel as well as the costs associated with professional fees for external legal, accounting and other consulting services, insurance premiums and payment processing and billing costs. We expect general and administrative expenses to increase as we continue to incur the costs of compliance associated with being a publicly traded company, including legal, audit, insurance and consulting fees.
Acquisition-related
Acquisition-related costs include expenses associated with third-party
professional services we utilize for the evaluation and execution of
acquisitions as well as changes in the fair value of our contingent
consideration liabilities recorded as the result of our Eversurance and
PolicyFuel acquisitions.
Other Income (Expense)
Other income (expense) consists of interest income and other income (expense). Interest income consists of interest earned on invested cash balances. Other income (expense) consists of miscellaneous income (expense) unrelated to our core operations. Income Taxes We have not recorded income tax benefits for the net losses we have incurred in the years endedDecember 31, 2021 and 2020 or for our research and development tax credits generated, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. As ofDecember 31, 2021 , we had federal net operating loss carryforwards of$104.1 million , which may be available to offset future taxable income, of which$9.0 million of the total net operating loss carryforwards expire at various dates beginning in 2029, while the remaining$95.1 million do not expire but are limited in their usage to an annual deduction equal to 80% of annual taxable income. As ofDecember 31, 2021 , we had state net operating loss carryforwards of$87.5 million , which may be available to offset future taxable income and expire at various dates beginning in 2027. As ofDecember 31, 2021 , we also had federal and state research and development tax credit carryforwards of$5.1 million and$3.1 million , respectively, which may be available to reduce future tax liabilities and expire at various dates beginning in 2030 and 2029, respectively. During the year endedDecember 31, 2021 , we released$2.5 million of our valuation allowance related to the net deferred tax liability recorded as a result of the PolicyFuel acquisition. We maintain a valuation allowance on our overall net deferred tax asset as it is deemed more likely than not the net deferred tax asset will not be realized. Non-GAAP Financial Measure
To supplement our consolidated financial statements presented in accordance with
GAAP and to provide investors with additional information regarding our
financial results, we present in this Annual Report on
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Table of Contents Form 10-K adjusted EBITDA as a non-GAAP financial measure. Adjusted EBITDA is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similarly titled measures presented by other companies. Adjusted EBITDA . We define adjusted EBITDA as our net income (loss), excluding the impact of stock-based compensation expense; depreciation and amortization expense; acquisition-related costs; legal settlement expense; one-time severance charges; interest income; and our provision for (benefit from) income taxes. The most directly comparable GAAP measure to adjusted EBITDA is net income (loss). We monitor and present in this Annual Report on Form 10-K adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, to establish budgets and to develop operational goals for managing our business. In particular, we believe that excluding the impact of these expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core operating performance. We use adjusted EBITDA to evaluate our operating performance and trends and make planning decisions. We believe adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in the calculation of adjusted EBITDA. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects. Adjusted EBITDA is not prepared in accordance with GAAP and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the most directly comparable financial measure calculated and presented in accordance with GAAP. Some of these limitations are:
• adjusted EBITDA excludes stock-based compensation expense as it has
recently been, and will continue to be for the foreseeable future, a
significant
recurring non-cash expense
for our business;
• adjusted EBITDA excludes depreciation and amortization expense and,
although this is
a non-cash expense,
the assets being depreciated and amortized may have to be replaced in the
future;
• adjusted EBITDA excludes acquisition-related costs that affect cash
available to us and the change in fair value of
non-cash
contingent consideration;
• adjusted EBITDA excludes legal settlement expense that affected cash
available to us;
• adjusted EBITDA excludes severance charges incurred and paid in the
fourth quarter of 2021 related to our reduction in
non-marketing operating
expenses that affected cash available to us;
• adjusted EBITDA does not reflect the cash received from interest income
on our investments, which affects the cash available to us;
• adjusted EBITDA does not reflect income tax expense (benefit) that
affects cash available to us; and
• the expenses and other items that we exclude in our calculation of
adjusted EBITDA may differ from the expenses and other items, if any,
that other companies may exclude from adjusted EBITDA when they report
their operating results.
In addition, other companies may use other measures to evaluate their
performance, all of which could reduce the usefulness of adjusted EBITDA as a
tool for comparison.
The following table reconciles adjusted EBITDA to net income (loss), the most
directly comparable financial measures calculated and presented in accordance
with GAAP.
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Reconciliation of Net Loss to Adjusted EBITDA:
Year Ended December 31,
2021 2020 2019
(in thousands)
Net loss $ (19,434 ) $ (11,202 ) $ (7,117 )
Stock-based compensation 30,020 24,179 12,721
Depreciation and amortization 5,072 3,350 2,186
Acquisition-related costs 1,065 2,258 -
Legal settlement - - 1,227
Severance under a plan 440 - -
Interest income (37 ) (189 ) (669 )
Benefit from income taxes (2,510 ) - -
Adjusted EBITDA $ 14,616 $ 18,396 $ 8,348
Results of Operations
The following tables set forth our results of operations for the periods shown:
Year Ended December 31,
2021 2020 2019
(in thousands)
Statement of Operations Data:
Revenue(1) $ 418,515 $ 346,935
Cost and operating expenses(2): Cost of revenue 23,949 21,373 15,903 Sales and marketing 354,990 284,880 202,689 Research and development 35,732 29,662 20,214 General and administrative 24,703 20,444 16,827 Acquisition-related costs 1,065 2,258 - Legal settlement - - 1,227 Total cost and operating expenses 440,439 358,617 256,860 Loss from operations (21,924 ) (11,682 ) (8,049 ) Other income (expense): Interest income 37 189 669 Other income (expense), net (57 ) 291 263 Total other income (expense), net (20 ) 480 932 Loss before income taxes (21,944 ) (11,202 ) (7,117 ) Benefit from income taxes 2,510 - - Net loss$ (19,434 ) $ (11,202 ) $ (7,117 ) Other Financial and Operational Data: Quote requests 30,270 27,013 20,011 Variable marketing margin$ 129,553 $ 108,642 $ 73,316 Adjusted EBITDA(3)$ 14,616 $ 18,396 $ 8,348 55
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(1) Comprised of revenue from the following distribution channels:
Year Ended December 31,
2021 2020 2019
Direct channels 90 % 92 % 94 %
Indirect channels 10 % 8 % 6 %
100 % 100 % 100 %
(2) Includes stock-based compensation expense as follows:
Year Ended December 31,
2021 2020 2019
(in thousands)
Cost of revenue $ 363 $ 361 $ 193
Sales and marketing 12,405 10,246 3,805
Research and development 9,551 7,751 3,967
General and administrative 7,701 5,821 4,756
$ 30,020 $ 24,179 $ 12,721
(3) See
"-Non-GAAP
Financial Measure" for information regarding our use of adjusted EBITDA as a
non-GAAP
financial measure and a reconciliation of adjusted EBITDA to its comparable
GAAP financial measure.
Comparison of the Years Ended
Revenue:
Year Ended December 31, Change
2021 2020 Amount %
(dollars in thousands)
Revenue $ 418,515 $ 346,935 $ 71,580 20.6 %
Revenue increased by $71.6 million from $346.9 million for the year ended
December 31, 2020 to $418.5 million for the year ended December 31, 2021 . The
increase in revenue was due to increases of $47.7 million and $23.9 million in
revenue from our automotive and other insurance marketplace verticals,
respectively. The increase in revenue from our automotive vertical was primarily
due to an increase in the volume of quote requests resulting from increased
advertising to attract consumers and to an increase in commission revenue of
$4.7 million . The increase in revenue from our other marketplace verticals was
primarily due to an increase of $14.9 million in commission revenue, primarily
in our health vertical, and an increase in revenue per quote request as a result
of increased demand for consumer referrals by our insurance providers.
Cost of Revenue
Year Ended December 31, Change
2021 2020 Amount %
(dollars in thousands)
Cost of revenue $ 23,949 $ 21,373 $ 2,576 12.1 %
Percentage of revenue 5.7 % 6.2 %
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Cost of revenue increased by$2.6 million from$21.4 million for the year endedDecember 31, 2020 to$23.9 million for the year endedDecember 31, 2021 . Cost of revenue increased due primarily to increased third-party call center costs of$2.5 million , which were primarily related to increased volume of call referrals. Amortization of capitalized software costs increased by$0.4 million . Sales and Marketing Year Ended December 31, Change 2021 2020 Amount % (dollars in thousands)
Sales and marketing expense
24.6 % Percentage of revenue 84.8 % 82.1 % Sales and marketing expenses increased by$70.1 million from$284.9 million for the year endedDecember 31, 2020 to$355.0 million for the year endedDecember 31, 2021 . The increase in sales and marketing expense was primarily due to an increase in advertising expenditures of$50.7 million and an increase in personnel-related costs of$16.2 million . The increase in personnel-related costs was primarily due to an increase in headcount, a significant portion of which was in DTC agency. Personnel-related costs for the year endedDecember 31, 2021 included severance costs of$0.4 million . Personnel-related costs for the years endedDecember 31, 2021 and 2020 included stock-based compensation expense of$12.4 million and$10.2 million , respectively. Research and Development Year Ended December 31, Change 2021 2020 Amount % (dollars in thousands)
Research and development expense
$ 6,070 20.5 % Percentage of revenue 8.5 % 8.5 % Research and development expenses increased by$6.1 million from$29.7 million for the year endedDecember 31, 2020 to$35.7 million for the year endedDecember 31, 2021 . The increase in research and development expense was primarily due to an increase in personnel-related costs of$4.7 million as a result of our continued hiring of research and development employees and a shift towards hiring more senior personnel, to further develop and enhance our marketplace websites and technology. Personnel-related costs for the years endedDecember 31, 2021 and 2020 included stock-based compensation expense of$9.6 million and$7.8 million , respectively. Technical service costs also increased by$1.3 million for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 .
General and Administrative
Year Ended December 31, Change
2021 2020 Amount %
(dollars in thousands)
General and administrative expense
$ 4,259 20.8 % Percentage of revenue 5.9 % 5.9 % General and administrative expenses increased by$4.3 million from$20.4 million for the year endedDecember 31, 2020 to$24.7 million for the year endedDecember 31, 2021 . The increase in general and administrative expenses was primarily due to an increase in personnel-related costs of$2.9 million and increases in accounting fees and insurance costs of$0.5 million each. Personnel-related costs for the years endedDecember 31, 2021 and 2020 included stock-based compensation expense of$7.7 million and$5.8 million , respectively. 57
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Acquisition-related Costs
Acquisition-related costs for the years endedDecember 31, 2021 and 2020 were$1.1 million and$2.3 million , respectively, and included costs for third-party professional services we utilized for the evaluation and execution of our completed acquisitions of$0.9 million and$0.5 million , respectively. Acquisition-related costs also included the change in the fair value of our contingent consideration liabilities recorded as the result of our acquisitions, which were comprised of expenses of$0.2 million and$1.8 million for the years endedDecember 31, 2021 and 2020, respectively.
Other Income (Expense)
Other income (expense), net was not significant for the year endedDecember 31, 2021 . Other income (expense), net included sublease income of$0.3 million for the year endedDecember 31, 2020 . The sublease ended in 2020.
Benefit from Income Taxes
We recorded an income tax benefit of$2.5 million for the year endedDecember 31, 2021 due to the release of a portion of our valuation allowance as a result of the PolicyFuel acquisition. The net deferred tax liability recorded for PolicyFuel primarily relates to the intangible assets recognized in purchase accounting which are non-deductible for tax purposes and result in a deferred tax liability. The net deferred tax liability is a source of income to support the recognition of a portion of our existing deferred tax assets. Therefore, we recorded a tax benefit for the release of a portion of our valuation allowance related to the net deferred tax liability recorded in purchase accounting. We maintain a valuation allowance on our overall net deferred tax asset as we deem it more likely than not that the net deferred tax asset will not be realized. Quote Requests Year Ended December 31, Change 2021 2020 Amount % (in thousands except percentages) Quote requests 30,270 27,013 3,257 12.1 %
Quote requests increased by 3.3 million for 2021 as compared to 2020 due to
increased spending on advertising.
Variable Marketing Margin
Year Ended December 31, Change
2021 2020 Amount %
(dollars in thousands)
Revenue $ 418,515 $ 346,935 $ 71,580 20.6 %
Less: total advertising
expense (a component of
sales and marketing expense) 288,962 238,293
Variable marketing margin $ 129,553 $ 108,642 $ 20,911 19.2 %
Percentage of revenue 31.0 % 31.3 %
The increase in variable marketing margin was due primarily to increased quote
requests and growth in our commissions revenue.
Comparison of the Years Ended
For a discussion of our results of operations for the year ended
2020
see
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations-Results of Operations-Comparison of the Years Ended
10-K
for the fiscal year ended
Liquidity and Capital Resources
At
equivalents of
revolving line of credit. In
shares of Class A common stock resulting in proceeds to us of
Borrowings under our revolving line of credit are collateralized by substantially all of our assets and property. Additionally, we are subject under our revolving line of credit to affirmative and negative covenants to which we will remain subject until maturity. These covenants include limitations on our ability to incur additional indebtedness and engage in certain fundamental business transactions, such as mergers or acquisitions of other businesses. As ofDecember 31, 2021 , we were in compliance with these covenants. In addition, we are required to maintain a minimum asset coverage ratio of 1.5 to 1 calculated as the sum of unrestricted cash and qualified accounts receivable divided by borrowings outstanding under the revolving line of credit. Events of default under our revolving line of credit include failure to make payments when due, insolvency events, failure to comply with covenants and material adverse events with respect to us. In the event of a default, the lender may declare all borrowings immediately due and payable. Since our inception, we have incurred operating losses and may continue to incur losses in the foreseeable future. We anticipate that our operating expenses and capital expenditures will increase substantially in the near term as we continue to expand our DTC agency, hire additional employees and improve our technology and infrastructure capabilities. Additionally, a significant portion of the commission revenue we record will be collected over a multi-year time frame as policyholders renew their policies, and we are paid commissions on those renewals. As ofDecember 31, 2021 ,$13.4 million of our$22.7 million commissions receivable contract asset was classified as long term. We believe our existing cash and cash equivalents will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next 12 months, without considering the borrowing availability under our revolving line of credit. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on business initiatives, purchases of capital equipment to support our growth, the expansion of sales and marketing activities, expansion of our business through acquisitions or our investments in complementary offerings, technologies or businesses, market acceptance of our platform and overall economic conditions. If we do not achieve our revenue goals as planned, we believe that we can reduce our operating costs. If we need additional funds and are unable to obtain funding on a timely basis, we may need to significantly curtail our operations in an effort to provide sufficient funds to continue our operations, which could adversely affect our business prospects.
Cash Flows
The following table shows a summary of our cash flows:
Year Ended December 31,
2021 2020 2019
(in thousands)
Net cash provided by operating
activities $ 7,189 $ 10,668 $ 4,413
Net cash used in investing
activities (18,817 ) (18,752 ) (2,975 )
Net cash provided by financing
activities 3,615 4,907 2,982
Effect of exchange rate changes
on cash, cash equivalents and
restricted cash (6 ) (7 ) -
Net increase (decrease) in cash,
cash equivalents and restricted
cash $ (8,019 ) $ (3,184 ) $ 4,420
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Net cash provided by operating activities
Operating activities provided$7.2 million and$10.7 million of cash during the years endedDecember 31, 2021 and 2020, respectively. Cash provided by operating activities in the year endedDecember 31, 2021 primarily resulted from the offset of net non-cash charges of$32.8 million to our net loss of$19.4 million , partially offset by net cash used by changes in our operating assets and liabilities of$6.1 million . Net cash used by changes in our operating assets and liabilities consisted primarily of a$10.9 million and$3.6 million increase in other assets and prepaid expenses and other current assets, respectively, and a$1.3 million decrease in accounts payable and accrued expenses and other current liabilities. These amounts were partially offset by a$10.5 million decrease in accounts receivable. Cash provided by operating activities in 2020 primarily resulted from the offset of net non-cash charges of$29.4 million to our net loss of$11.2 million and net cash used by changes in our operating assets and liabilities of$7.5 million . Net cash used by changes in our operating assets and liabilities consisted primarily of a$14.0 million increase in accounts receivable, partially offset by an aggregate$5.3 million increase in accounts payable and accrued expenses and other current liabilities and a$0.8 million increase in other long-term liabilities. Changes in accounts receivable, accounts payable and accrued expenses and other current liabilities were generally due to growth in our business, timing of customer and vendor invoicing and payments. The change in other long-term liabilities in 2020 was primarily due to the deferred payment of employer tax remittances. Collection of commissions receivable, which are included in prepaid expenses and other current assets and other assets depends upon the timing of our receipt of commission payments from insurance carriers. A significant portion of our commissions receivable asset is classified as long term.
Net cash used in investing activities
Net cash used in investing activities was$18.8 million for each of the years endedDecember 31, 2021 and 2020. Net cash used in investing activities for the years endedDecember 31, 2021 and 2020 included cash paid of$16.0 million and$14.9 million to purchase PolicyFuel and Eversurance, respectively. Cash used in investing activities for the years endedDecember 31, 2021 and 2020 also consisted of cash used to acquire property and equipment, which included the capitalization of software development costs. During the years endedDecember 31, 2021 and 2020, we capitalized$2.3 million and$3.0 million , respectively, of software development costs.
Net cash provided by financing activities
During the years ended
financing activities was
consisted of proceeds received from the exercise of common stock options.
For a discussion of our cash flows for the year ended
see
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Cash Flows included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 .
Contractual Obligations and Commitments
Our cash flows are dependent on a number of factors in addition to our operational expenditures, including our contractual and other obligations. As a result, our liquidity and capital resources in future periods should be analyzed in conjunction with such factors. We lease office space inCambridge, Massachusetts under a non-cancelable operating lease that expires inSeptember 2024 . We lease office space at various other locations under non-cancelable operating leases that expire at varying dates through 2030. As ofDecember 31, 2021 , we were obligated to make total minimum lease payments of$8.9 million under such leases, of which$3.0 million is payable in 2022. 60
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We have outstanding agreements with various vendors for hosting and other
technical services. We believe that we will be able to fund these obligations
through our existing cash and cash equivalents.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our audited consolidated financial statements, appearing in Part II of Item 8 of this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
We record goodwill when consideration paid in a business acquisition exceeds the value of the net assets acquired. Our estimates of fair value are based upon assumptions believed to be reasonable at that time but that are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events or circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results. During the measurement period, which extends no later than one year from the acquisition date, we may record certain adjustments to the carrying value of the assets acquired and liabilities assumed with the corresponding offset to goodwill. After the measurement period, all adjustments are recorded in the consolidated statements of operations and comprehensive loss as operating expenses or income. Our preliminary estimate of the fair value of specifically identifiable assets acquired and liabilities assumed as of the date of acquisition of PolicyFuel is subject to change upon finalizing our valuation analysis. We expect to finalize our fair value estimates in the first half of 2022.Goodwill is not amortized, but rather is tested for impairment annually, or more frequently if facts and circumstances warrant a review, such as significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. We have determined that there is a single reporting unit for the purpose of conducting our goodwill impairment assessment. We assess both the existence of potential impairment and the amount of impairment loss by comparing the fair value of the reporting unit with its carrying amount, including goodwill. Intangible assets are recorded at their estimated fair values at the date of acquisition. We amortize acquired intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis. To date, we have not recorded any impairments of goodwill or acquired intangible assets.
Valuation of Contingent Consideration
In connection with our acquisitions of Eversurance and PolicyFuel we agreed to
issue shares of Class A common stock to the former owners upon the achievement
of certain revenue targets. Achievement of revenue targets that will result in
the issuance of a variable number of shares of Class A common stock are
accounted for as a liability. We estimated the fair value of the shares of
Class A common stock issuable upon achievement of the targets as of the
acquisition date. We remeasure the fair value of the shares of Class A common
stock issuable at each subsequent reporting date until the liability is fully
settled. We use Monte Carlo simulation models in our estimates. The estimated
fair value of the contingent consideration is based upon available information
and
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certain assumptions, known at the time of our estimates, which management
believes are reasonable. Changes in the fair value of contingent consideration
related to updated assumptions and estimates are recognized as
acquisition-related costs.
We estimate the fair value of the maximum 58,754 shares of Class A common stock issuable as contingent consideration upon achievement of certain Eversurance revenue targets in 2023 using probability of achievement of the revenue target (acquisition specific input) and the market value of our Class A common stock (observable input). The fair value of our contingent consideration liability for the Eversurance shares was$0.9 million and$2.2 million as ofDecember 31, 2021 and 2020, respectively. The decrease in fair value of the contingent consideration liability for the year endedDecember 31, 2021 was due to the decrease in the market value of our Class A common stock during the year. A hypothetical change in the market value of our Class A common stock of 10% would change the fair value of our estimated liability as ofDecember 31, 2021 by$0.1 million . We used a Monte Carlo simulation model in our estimates of the fair value of the contingent consideration related to the PolicyFuel acquisition that will be settled over the next three years. The most significant assumptions and estimates utilized in the model include forecasted revenue (an acquisition specific input) and the market value of our Class A common stock (an observable input). Other assumptions utilized in the model include equity volatility, revenue volatility and discount rate. The fair value of our contingent consideration liability for the PolicyFuel shares was$3.8 million as of the date of acquisition and$5.3 million as ofDecember 31, 2021 . The increase in the fair value of the contingent consideration liability for the PolicyFuel shares was primarily due to a change in estimate of forecasted revenue, partially offset by the decrease in the market value of our Class A common stock during the period. A hypothetical change of 10% in our estimate of the number of shares of our Class A common stock to be released upon achievement of the revenue targets, assuming no change to the market value of Class A common stock, would change the fair value of our estimated liability as ofDecember 31, 2021 by$0.4 million . A hypothetical change of 10% in the market value of our Class A common stock, assuming no change to the estimated number of shares to be released upon achievement of the revenue targets, would change the fair value of our estimated liability as ofDecember 31, 2021 by$0.3 million .
Revenue Recognition
We derive our revenue primarily by selling consumer referrals to our insurance provider customers, including insurance carriers, agents and indirect distributors. We also generate less than 10% of our revenue from commission fees for the sale of policies, primarily in our health and automotive verticals. To determine revenue recognition for arrangements that we determine are within the scope of the revenue standard, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when collectability of the consideration to which we are entitled in exchange for the goods or services we transfer to the customer is determined to be probable. Amounts are recorded as accounts receivable when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less. Referral Revenue
We recognize referral revenue when we satisfy our performance obligations by
delivering the referrals to our customers in an amount that reflects the
consideration to which we expect to be entitled in exchange for those referrals.
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Commission Revenue
Our commission revenue is primarily comprised of commissions from health insurance carriers and, to a lesser extent, auto insurance carriers. Commission revenue is comprised of the estimated constrained lifetime values, or the constrained LTVs, of commission payments we expect to receive for selling an insurance policy. Commission revenue is recognized upon satisfaction of our performance obligation. We consider our performance obligation to be satisfied upon submission of the policy application. Commission revenue represents less than 10% of total revenue in each of the years endedDecember 31, 2021 , 2020 and 2019. We estimate commission revenue for each health insurance product by using a portfolio approach to a group of policies by product type and the application submission date of the relevant policy, which are referred to as "cohorts." Our estimate of constrained LTVs is based on an analysis of historical commission payment trends for relevant policies to establish an expected lifetime value and incorporates management's judgment in interpreting those trends to calculate LTVs and to apply constraints to such LTVs. Significant factors impacting historical trends include carrier mix, average policy duration and conversion rates of paying policies. Commission revenue from auto insurance carriers is comprised of constrained LTVs of commission payments we expect to receive for selling an insurance policy based on the effective date of the policy. Our estimate of constrained LTVs is based on an analysis of historical commission payment trends for relevant policies to establish an expected lifetime value and incorporates management's judgment in interpreting those trends to calculate LTVs and to apply constraints to such LTVs. The most significant factor impacting historical trends is average policy duration. We apply a constraint to our estimated LTVs to only recognize the amount of variable consideration that we believe is probable that we will be entitled to receive and that will not be subject to a significant revenue reversal in the future. To the extent that commission payment trends change or the underlying factors impacting commission payments change, our estimate of constrained LTVs could be materially impacted. To the extent we make changes to our estimates of constrained LTVs, we recognize any material impact of the change to commission revenue in the reporting period in which the change is made, including revisions of estimated lifetime commissions either below or in excess of previously estimated constrained LTVs recognized as an adjustment to revenue and the related contract asset. We have not recorded material adjustments to revenue or commissions receivable resulting from changes to estimated LTVs. We recognize revenue for new policies by applying the latest estimated constrained LTV for that product. Stock-Based Compensation We measure stock options and other stock-based awards granted to employees, non-employees and directors based on their fair value on the date of the grant. We recognize compensation expense of employee awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. We apply the straight-line method of expense recognition to all employee awards with only service-based vesting conditions and apply the graded-vesting method to all employee awards with both service-based and performance-based vesting conditions, commencing when achievement of the performance condition becomes probable. Compensation expense for nonemployee awards is recognized in the same manner as if we had paid cash for the goods or services received. We estimate the fair value of stock options with service-based vesting or performance-based vesting granted to employees, non-employees and directors using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our common stock options, the risk-free interest rate for a period that approximates the expected term of our common stock options, and our expected dividend yield. We measure stock options with 63
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market-based
vesting based on the fair value on the date of grant using a Monte Carlo
simulation model. We estimate the fair value of each restricted stock unit, or
RSU, based on the market value of our common stock.
The fair value of performance-based RSUs that are liability classified will be recorded as compensation expense based on the fair value of the number of shares issued at vesting. Prior to vesting, compensation expense is recognized over the period during which services are rendered, based on the performance conditions deemed to be probable of achievement. At the end of each financial reporting period prior to the vesting date, the fair value of these awards is remeasured using the then-current fair value of our Class A common stock. For a description of liability-classified performance-based RSUs refer to Note 10 of the Notes to Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our audited consolidated financial statements appearing in Part II, Item 8 of this Annual Report on Form 10-K.
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