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EVERQUOTE, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and the related notes and other financial information included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , on file with theSecurities and Exchange Commission . The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the section titled "Risk Factors." OverviewEverQuote makes insurance shopping easy, efficient and personal, saving 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, which we view as including both carriers and agents, attract and connect with customers 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 service is free for consumers, and we derive our revenue from sales of consumer referrals to insurance providers and, in select verticals, directly from commissions on the sale of policies. Insurance providers operate in a highly competitive and regulated industry and typically specialize on pre-determined subsets of consumers. As a result, not every consumer is a good match for every provider, and some providers struggle to efficiently reach the segments that are most desirable for their business models. Traditional offline and online advertising channels reach broad audiences but lack the fine-grained consumer acquisition capabilities needed for optimally matching consumers to specific insurance products. We connect providers to a large volume of high-intent, pre-validated consumer referrals that match the insurers' specific requirements. The transparency of our marketplace, as well as the campaign management tools we offer, make it easy for insurance providers to evaluate the performance of their marketing spend on our platform and manage their own return on investment. Since 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. • 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, renters and commercial insurance in our
marketplace.
• In 2020, we launched our
direct-to-consumer
insurance offerings in our life vertical and in our health vertical via
the acquisition of
Crosspointe.
• In August 2021 , we launched our
direct-to-consumer
insurance offerings in our auto and home verticals via the acquisition of
Policy Fuel LLC and its affiliates, or PolicyFuel. 22
-------------------------------------------------------------------------------- Table of Contents In the three months endedSeptember 30, 2021 and 2020, our total revenue was$107.6 million and$90.0 million , respectively, representing year-over-year growth of 19.5%. We had net losses of$5.3 million and$3.2 million for the three months endedSeptember 30, 2021 and 2020, respectively, and had$2.7 million and$5.2 million in adjusted EBITDA for the three months endedSeptember 30, 2021 and 2020, respectively. In the nine months endedSeptember 30, 2021 and 2020, our total revenue was$316.4 million and$249.6 million , respectively, representing year-over-year growth of 26.8%. We had net losses of$11.0 million and$7.4 million for the nine months endedSeptember 30, 2021 and 2020, respectively, and had$14.1 million and$13.0 million in adjusted EBITDA for the nine months endedSeptember 30, 2021 and 2020, 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 inthe United States , or GAAP. COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic. The COVID-19 pandemic has continued to spread throughoutthe United States and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. 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 numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures 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 less 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 throughSeptember 30, 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 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. 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. 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. 23 -------------------------------------------------------------------------------- Table of Contents 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 visitorswho 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. 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. 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. Adjusted EBITDA We define adjusted EBITDA as net income (loss), adjusted to exclude: stock-based compensation expense, depreciation and amortization expense, acquisition-related costs, interest income and the provision for (benefit from) income taxes. Adjusted EBITDA is a non-GAAP financial measure that we present in this Quarterly Report on Form 10-Q 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". Key Components of Our Results of Operations Revenue We generate our revenue by selling consumer referrals to insurance provider customers, consisting of carriers and agents, as well as to indirect distributors. To simplify the quoting process for the consumer and improve performance for the provider, we are able to provide consumer-submitted quote request data along with each referral. We support three secure consumer referral formats: • Clicks: 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.
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We recognize revenue from consumer referrals at the time of delivery. Our
revenue is comprised of consumer referral fees from the automotive and other
insurance verticals, which includes home and renters, life, health and
commercial insurance verticals, as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands) (in thousands)
Automotive $ 89,666 74,779 $ 260,505 $ 207,014
Other 17,897 15,198 55,943 42,629
Total Revenue $ 107,563 $ 89,977 $ 316,448 $ 249,643
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, 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, but
decrease in the longer term as a percentage of revenue due to efficiencies of
scale and improvements in our marketplace technology.
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 the Crosspointe and
PolicyFuel acquisitions.
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Other Income
Other income consists of interest income and other income. Interest income
consists of interest earned on invested cash balances. Other income consists of
miscellaneous income unrelated to our core operations.
Income Taxes
We have not recorded income tax benefits for the net operating losses incurred
or the research and development tax credits generated in the nine months ended
September 30, 2021 and 2020, as we believe, based upon the weight of available
evidence, that it is more likely than not that all of our net operating loss and
tax credit carryforwards will not be realized. As of December 31, 2020 , we had
federal net operating loss carryforwards of $72.9 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 $63.9 million do not expire but are limited in their usage
to an annual deduction equal to 80% of annual taxable income. As of December 31,
2020 , we had state net operating loss carryforwards of $60.7 million , which may
be available to offset future taxable income and expire at various dates
beginning in 2027. As of December 31, 2020 , we also had federal and state
research and development tax credit carryforwards of $4.5 million and
$2.4 million , respectively, which may be available to reduce future tax
liabilities and expire at various dates beginning in 2030 and 2029,
respectively. We had recorded a full valuation allowance against our net
deferred tax assets at December 31, 2020 . During the three and nine months ended
September 30, 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 financial statements presented in accordance with GAAP and to
provide investors with additional information regarding our financial results,
we present in this Quarterly Report on
Form 10-Q
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; 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 Quarterly Report on
Form 10-Q adjusted
EBITDA because it is a key measure used by our management and board of directors
to understand and evaluate our operating performance, to establish budgets and
to develop operational goals for managing our business. In particular, we
believe that excluding the impact of these expenses in calculating adjusted
EBITDA can provide a useful measure
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 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
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• 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.
Reconciliation of Net Loss to Adjusted EBITDA:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands) (in thousands)
Net loss $ (5,272 ) $ (3,184 ) $ (10,954 ) $ (7,434 )
Stock-based compensation 8,348 7,200 22,957 17,990
Depreciation and amortization 1,298 731 3,608 2,174
Acquisition-related 819 480 1,005 480
Interest income (9 ) (18 ) (33 ) (176 )
Benefit from income taxes (2,510 ) - (2,510 ) -
Adjusted EBITDA $ 2,674 $ 5,209 $ 14,073 $ 13,034
Results of Operations
Comparison of the Three and Nine months ended September 30, 2021 and 2020
The following tables set forth our results of operations for the periods shown:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands) (in thousands)
Statement of Operations Data:
Revenue(1) $ 107,563 $
89,977
Cost and operating expenses(2): Cost of revenue 5,994 5,378 17,758 15,690 Sales and marketing 92,545 73,598 265,724 204,663 Research and development 9,259 8,149 26,885 21,574 General and administrative 6,731 5,661 18,527 15,134 Acquisition-related 819 480 1,005 480 Total cost and operating expenses 115,348 93,266 329,899 257,541 Loss from operations (7,785 ) (3,289 ) (13,451 ) (7,898 )
Other income (expense): Interest income 9 18 33 176 Other income (expense), net (6 ) 87 (46 ) 288 Total other income (expense), net 3 105 (13 ) 464 Loss before income taxes (7,782 ) (3,184 ) (13,464 ) (7,434 ) Benefit from income taxes 2,510 - 2,510 - Net loss $ (5,272 )$ (3,184 ) $ (10,954 ) $ (7,434 ) Other Financial and Operational Data: Quote requests 7,613 6,291 22,114 20,460 Variable marketing margin $ 32,401$ 29,428 $ 96,669 $ 76,721 Adjusted EBITDA(3) $ 2,674$ 5,209 $ 14,073 $ 13,034 27
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(1) Comprised of revenue from the following distribution channels:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Direct channels 89 % 93 % 90 % 93 %
Indirect channels 11 % 7 % 10 % 7 %
100 % 100 % 100 % 100 %
(2) Includes stock-based compensation expense as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands) (in thousands)
Cost of revenue $ 108 $ 111 $ 282 $ 253
Sales and marketing 3,366 3,080 9,216 7,322
Research and development 2,692 2,228 7,340 5,366
General and administrative 2,182 1,781 6,119 5,049
$ 8,348 $ 7,200 $ 22,957 $ 17,990
(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.
Revenue:
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 Amount % 2021 2020 Amount %
(dollars in thousands) (dollars in thousands)
Revenue $ 107,563 $ 89,977 $ 17,586 19.5 % $ 316,448 $ 249,643 $ 66,805 26.8 %
Revenue increased by $17.6 million from $90.0 million for the three months ended
September 30, 2020 to $107.6 million for the three months ended September 30,
2021 . The increase in revenue was due to increases of $14.9 million and
$2.7 million 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, partially offset by a decrease in revenue per
quote request. The increase in revenue from our other marketplace verticals was
driven by an increase in revenue per quote request as a result of increased
demand for consumer referrals by our insurance providers.
Revenue increased by $66.8 million from $249.6 million for the nine months ended
September 30, 2020 to $316.4 million for the nine months ended September 30,
2021 . The increase in revenue was due to increases of $53.5 million and
$13.3 million from our automotive and other insurance marketplace verticals,
respectively. The increase in revenue from our automotive vertical was primarily
due to an increase in revenue per quote request as a result of increased demand
for higher performing consumer referrals by our insurance providers and an
increase in the volume of quote requests resulting from increased advertising to
attract consumers. The increase in revenue from our other marketplace verticals
was primarily driven by an increase in revenue per quote request as a result of
increased demand for consumer referrals by our insurance providers.
Cost of Revenue
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 Amount % 2021 2020 Amount %
(dollars in thousands) (dollars in thousands)
Cost of revenue $ 5,994 $ 5,378 $ 616 11.5 % $ 17,758 $ 15,690 $ 2,068 13.2 %
Percentage of revenue 5.6 % 6.0 % 5.6 % 6.3 %
28
-------------------------------------------------------------------------------- Table of Contents Cost of revenue increased by$0.6 million from$5.4 million for the three months endedSeptember 30, 2020 to$6.0 million for the three months endedSeptember 30, 2021 . The increase in cost of revenue was primarily due to increased third-party call center costs of$0.8 million related to volume increases of call referrals and increased depreciation and amortization expense of$0.2 million , partially offset by a decrease in hosting costs of$0.3 million . Cost of revenue increased by$2.1 million from$15.7 million for the nine months endedSeptember 30, 2020 to$17.8 million for the nine months endedSeptember 30, 2021 . The increase in cost of revenue was primarily due to increased third-party call center costs of$1.3 million related to volume increases of call referrals, increased depreciation and amortization expense of$0.5 million , increased hosting costs of$0.2 million and increased technical service costs of$0.2 million . Sales and Marketing Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 Amount % 2021 2020 Amount % (dollars in thousands) (dollars in thousands) Sales and marketing expense$ 92,545 $ 73,598 $ 18,947 25.7 %$ 265,724 $ 204,663 $ 61,061 29.8 % Percentage of revenue 86.0 % 81.8 % 84.0 % 82.0 % Sales and marketing expenses increased by$18.9 million from$73.6 million for the three months endedSeptember 30, 2020 to$92.5 million for the three months endedSeptember 30, 2021 . The increase in sales and marketing expense was primarily due to an increase in advertising expenditures of$14.6 million and an increase in personnel-related costs of$3.7 million . Sales and marketing expenses increased by$61.1 million from$204.7 million for the nine months endedSeptember 30, 2020 to$265.7 million for the nine months endedSeptember 30, 2021 . The increase in sales and marketing expense was primarily due to an increase in advertising expenditures of$46.8 million and an increase in personnel-related costs of$12.2 million . Personnel-related costs for the nine months endedSeptember 30, 2021 and 2020 included stock-based compensation expense of$9.2 million and$7.3 million , respectively. Research and Development Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 Amount % 2021 2020 Amount % (dollars in thousands) (dollars in thousands) Research and development expense$ 9,259 $ 8,149 $ 1,110 13.6 %$ 26,885 $ 21,574 $ 5,311 24.6 % Percentage of revenue 8.6 % 9.1 % 8.5 % 8.6 % Research and development expenses increased by$1.1 million from$8.1 million for the three months endedSeptember 30, 2020 to$9.3 million for the three months endedSeptember 30, 2021 . The increase in research and development expense was primarily due to an increase in personnel-related costs of$0.6 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 three months endedSeptember 30, 2021 and 2020 included stock-based compensation expense of$2.7 million and$2.2 million , respectively. Technical service costs also increased by$0.4 million for the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 . Research and development expenses increased by$5.3 million from$21.6 million for the nine months endedSeptember 30, 2020 to$26.9 million for the nine months endedSeptember 30, 2021 . The increase in research and development expense was primarily due to an increase in personnel-related costs of$4.4 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 nine months endedSeptember 30, 2021 and 2020 included stock-based compensation expense of$7.3 million and$5.4 million , respectively. Technical service costs also increased by$0.9 million for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . 29 --------------------------------------------------------------------------------
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General and Administrative
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 Amount % 2021 2020 Amount %
(dollars in thousands) (dollars in thousands)
General and
administrative expense $ 6,731 $ 5,661 $ 1,070 18.9 % $ 18,527 $ 15,134 $ 3,393 22.4 %
Percentage of revenue 6.3 % 6.3 % 5.9 % 6.1 %
General and administrative expenses increased by $1.1 million from $5.7 million
for the three months ended September 30, 2020 to $6.7 million for the three
months ended September 30, 2021 . The increase in general and administrative
expenses was primarily due to an increase in personnel-related costs of
$0.8 million . Personnel-related costs for the three months ended September 30,
2021 and 2020 included stock-based compensation expense of $2.2 million and
$1.8 million , respectively.
General and administrative expenses increased by $3.4 million from $15.1 million
for the nine months ended September 30, 2020 to $18.5 million for the nine
months ended September 30, 2021 . The increase in general and administrative
expenses was primarily due to an increase in personnel-related costs of
$2.1 million , an increase in professional and accounting fees of $0.5 million
and an increase in insurance costs of $0.4 million . Personnel-related costs for
the nine months ended September 30, 2021 and 2020 included stock-based
compensation expense of $6.1 million and $5.0 million , respectively.
Acquisition-related
Acquisition-related costs for the three and nine months ended September 30, 2021
include expenses associated with third-party professional services we utilized
for the evaluation of our anticipated acquisition of PolicyFuel of $0.4 million
and $0.9 million , respectively, as well as changes in the fair value of our
contingent consideration liabilities related to our acquisitions of $0.4 million
and $0.1 million , respectively. The change in the fair value of our contingent
consideration liabilities was primarily due to a change in estimate of our
forecasted revenue related to PolicyFuel, partially offset by a decrease in the
market value of our Class A common stock during the periods.
Acquisition-related costs for each of the three and nine months ended
September 30, 2020 were $0.5 million consisting of expenses associated with
third-party professional services we utilized for our acquisition of
Crosspointe.
Other Income (Expense)
Other income (expense), net was not significant for the three and nine months
ended September 30, 2021 . Other income (expense), net included sublease income
of $0.1 million and $0.3 million in the three and nine months ended
September 30, 2020 , respectively.
Benefit from income taxes
We recorded an income tax benefit of $2.5 million for the three and nine months
ended September 30, 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 discrete 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 it is deemed more likely than not the
net deferred tax asset will not be realized.
Quote Requests
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 Amount % 2021 2020 Amount %
(in thousands except percentages) (in thousands except percentages)
Quote requests 7,613 6,291 1,322 21.0 % 22,114 20,460 1,654 8.1 %
Quote requests increased for the three and nine months ended
as compared to prior year periods due to increased spending on advertising.
30 --------------------------------------------------------------------------------
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Variable Marketing Margin
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 Amount % 2021 2020 Amount %
(dollars in thousands) (dollars in thousands)
Revenue $ 107,563 $ 89,977 $ 17,586 19.5 % $ 316,448 $ 249,643 $ 66,805 26.8 %
Less: total advertising expense (a
component of sales and marketing
expense) 75,162 60,549 219,779 172,922
Variable marketing margin $ 32,401 $ 29,428 $ 2,973 10.1 % $ 96,669 $ 76,721 $ 19,948 26.0 %
Percentage of revenue 30.1 % 32.7 % 30.5 % 30.7 %
The increase in variable marketing margin was due primarily to increased quote
requests.
Liquidity and Capital Resources
At September 30, 2021 , our principal sources of liquidity were cash and cash
equivalents of $41.8 million and availability of $25.0 million under our
revolving line of credit.
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. 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. As of
September 30, 2021 , we were in compliance with these covenants. 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 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 for the nine months ended
September 30, 2021 and 2020:
Nine Months Ended
September 30,
2021 2020
(in thousands)
Net cash provided by operating activities $ 14,048 $ 13,903
Net cash used in investing activities (18,230 ) (17,638 )
Net cash provided by financing activities 3,091
3,562
Effect of exchange rate changes on cash, cash equivalents
and restricted cash
(6 )
-
Net decrease in cash, cash equivalents and restricted cash
Net cash provided by operating activities Operating activities provided$14.0 million and$13.9 million of cash during the nine months endedSeptember 30, 2021 and 2020, respectively. Cash provided by operating activities in the nine months endedSeptember 30, 2021 primarily resulted from the offset of net non-cash charges of$24.2 million to our net loss of$11.0 million and net cash provided by changes in our operating assets and liabilities of$0.8 million . Net cash provided by changes in our operating assets and liabilities consisted primarily of a$1.7 million decrease in accounts receivable and an aggregate$1.2 million increase in accounts payable and accrued expenses and other 31 -------------------------------------------------------------------------------- Table of Contents current liabilities, partially offset by a$0.9 million increase in prepaid expenses and other current assets and a$1.1 million increase in other assets. During the nine months endedSeptember 30, 2020 , operating activities provided$13.9 million of cash, which primarily resulted from the offset of net non-cash charges of$20.2 million to our net loss of$7.4 million and net cash provided by changes in our operating assets and liabilities of$1.2 million . Net cash provided by changes in our operating assets and liabilities for the nine months endedSeptember 30, 2020 consisted primarily of a$7.7 million increase in accounts payable and accrued expenses and other current liabilities and a$2.0 million decrease in prepaid expenses and other current assets, partially offset by a$9.3 million increase in accounts receivable. Other long-term liabilities also increased by$0.8 million primarily due to the deferred payment of employer tax remittances. Changes in accounts receivable, accounts payable and accrued expenses and other current liabilities in both periods were generally due to growth in our business and timing of customer and vendor invoicing and payments. Net cash used in investing activities Net cash used in investing activities was$18.2 million and$17.6 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Net cash used in investing activities for the nine months endedSeptember 30, 2021 and 2020 included cash paid of$16.0 million and$14.9 million to purchase PolicyFuel and Crosspointe, respectively. Net cash used in investing activities for the nine months endedSeptember 30, 2021 and 2020 also included the acquisition of property and equipment, which included the purchase of computer equipment for our operations and employees, equipment, furniture and leasehold improvements and the capitalization of certain software development costs. During the nine months endedSeptember 30, 2021 and 2020, we capitalized$1.7 million and$2.1 million of software development costs, respectively. Net cash provided by financing activities During the nine months endedSeptember 30, 2021 and 2020, net cash provided by financing activities was$3.1 million and$3.6 million , respectively, and consisted of proceeds received from the exercise of common stock options. Contractual Obligations and Commitments The following table summarizes our contractual obligations and commitments as ofDecember 31, 2020 : Payments Due By Period Less Than 1 More Than Total Year 1 to 3 Years 4 to 5 Years 5 Years (in thousands)
Operating lease commitments(1)
5,657$ 2,276 $ 826 Total$ 11,784 $ 3,025 $ 5,657 $ 2,276 $ 826
(1) Amounts in the table reflect payments due for our office leases under
operating lease agreements that expire at various dates through 2030.
There have been no material changes to our contractual obligations and commitments from those disclosed in the table above as ofDecember 31, 2020 . Critical Accounting Policies and Significant Judgments and Estimates Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of our condensed 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 condensed 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. There have been no material changes to our critical accounting policies from those disclosed in our financial statements and the related notes and other financial information included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , on file with theSecurities and Exchange Commission . Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSecurities and Exchange Commission . 32 -------------------------------------------------------------------------------- Table of Contents Recently Issued Accounting Pronouncements A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. During the nine months endedSeptember 30, 2021 and 2020, inflation and changing prices have not had a material effect on our business. We are unable to predict whether inflation or changing prices will materially affect our business in the foreseeable future. Item 3. Quantitative and Qualitative Disclosures About Market Risk. We have a credit agreement that provides us with a revolving line of credit of up to$25.0 million . Borrowings bear interest at a floating rate of the greater of 3.25% or the prime rate. As ofSeptember 30, 2021 , we had no outstanding borrowings under our revolving line of credit and therefore no material exposure to fluctuations in interest rates. We contract with vendors in foreign countries and have foreign subsidiaries. As such, we have exposure to adverse changes in exchange rates of foreign currencies associated with our foreign transactions and our foreign subsidiaries. We believe this exposure to be immaterial. We do not hedge against this exposure to fluctuations in exchange rates. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were not effective due to the material weaknesses described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis. We have identified deficiencies in control over certain information technology (IT) general controls for revenue-related systems that are relevant to the preparation of our financial statements that constitute material weaknesses. Specifically, we did not design and maintain: • User access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to certain financial applications, programs, and data to appropriate company personnel;
• Program change management controls for certain financial applications
to ensure that IT program and data changes affecting financial IT
applications and underlying accounting records are identified, tested,
authorized and implemented appropriately; and
• Controls over the completeness and accuracy of data relevant to
certain automated revenue calculations
These material weaknesses did not result in a misstatement to the financial
statements. However, the material weaknesses could impact the effectiveness of
segregation of duties controls, as well as the effectiveness of
IT-dependent
controls that could result in misstatements impacting revenue-related financial
statement accounts and disclosures that would result in a material misstatement
of the annual or interim consolidated financial statements that would not be
prevented or detected.
Remediation Plan
We and our board of directors are committed to maintaining a strong internal
control environment. Management, with the oversight of the audit committee of
our board of directors, has evaluated the material weaknesses described above
and designed a remediation plan to address the material weaknesses and enhance
our internal control environment. The remediation plan is being implemented and
includes a robust risk assessment process coupled with additional controls and
procedures. Management is committed to successfully implementing the remediation
plan as promptly as possible.
33
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Table of Contents
Changes in Internal Control over Financial Reporting
Other than the identification of the material weaknesses and remediation efforts
described above, there were no changes in our internal control over financial
reporting (as defined in Rules
13a-15(f)
and
15d-15(f)
under the Exchange Act) that occurred during the three months ended
September 30, 2021 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
34
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PROASSURANCE CORP – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
BRP GROUP, INC. FILES (8-K) Disclosing Unregistered Sale of Equity Securities
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