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EVERQUOTE, INC. – 10-Q – 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 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, 2021 , on file with theSecurities and Exchange Commission . The following discussion and analysis 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."
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. In addition to our marketplace, we also operate a direct to consumer, or DTC, insurance agency. Our DTC agents bind policies for consumers, further streamlining the consumer shopping experience. Our services are 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 the
•
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 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 of
Services, LLC
•
In 2021, we launched our DTC insurance offerings in our auto and home and
renters verticals via the acquisition of
PolicyFuel.
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In the three months endedSeptember 30, 2022 and 2021, our total revenue was$103.2 million and$107.6 million , respectively, representing year-over-year decrease of 4.0%. We had net losses of$6.5 million and$5.3 million for the three months endedSeptember 30, 2022 and 2021, respectively, and had$2.0 million and$2.7 million in adjusted EBITDA for the three months endedSeptember 30, 2022 and 2021, respectively. In the nine months endedSeptember 30, 2022 and 2021, our total revenue was$315.8 million and$316.4 million , respectively, representing year-over-year decrease of 0.2%. We had net losses of$15.9 million and$11.0 million for the nine months endedSeptember 30, 2022 and 2021, respectively, and had$5.8 million and$14.1 million in adjusted EBITDA for the nine months endedSeptember 30, 2022 and 2021, 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 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 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 throughSeptember 30, 2022 , 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 financial performance in the auto insurance vertical. Auto insurance carriers experienced a sudden rise in the severity of claims caused by inflationary increases in the cost to repair and replace vehicles and settle medical and injury claims. The increase in claims severity has reduced underwriting performance for auto insurance carriers, causing them to implement policy premiums increases and reduce spending on new customer acquisition. The reductions in new customer acquisition spending by auto insurance carriers has had a negative impact on the pricing and demand for consumer referrals in our marketplace. The state of the auto insurance market remains dynamic. InAugust 2022 , we began to see the first major carrier return to more normalized historical spending patterns. However, Hurricane Ian, which made landfall inFlorida inSeptember 2022 , has put incremental, downward pressure on carrier marketing spend. We believe this trend will continue in the near term and could be prolonged by further cost inflation, claim severity and frequency, or insufficient policy premium increases.
Expanding consumer traffic
Our success depends in part on the growth of our consumer traffic. 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, 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
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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. Historically, we have generally expanded both the number of
insurance providers and the spend per provider on our platform.
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.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss), adjusted to exclude: stock-based compensation expense, depreciation and amortization expense, acquisition-related costs, 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 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".
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 consolidated 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.
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 revenue from commissions paid to us by insurance carriers for the sale of policies, primarily in our health and automotive verticals. Commission revenue represented approximately 9% and 12% of total revenue in the three and nine months endedSeptember 30, 2022 , respectively, and less than 10% of total revenue in the three and nine months endedSeptember 30, 2021 . Commission revenue is recognized upon satisfaction of our performance obligation, which we consider to be submission of the policy application to the insurance carrier. We recognize revenue based on our constrained estimate of commission payments we expect to 25
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receive over the lifetime of the policies sold, which we refer to as constrained
lifetime values, or constrained LTVs, of commission payments.
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:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Automotive $ 88,150 $ 89,666 $ 257,200 $ 260,505
Other 15,073 17,897 58,619 55,943
Total Revenue $ 103,223 $ 107,563 $ 315,819 $ 316,448
We expect revenue to decrease from the third quarter to the fourth quarter of
2022 as we anticipate increases in commission revenue to be more than 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 and
acquisition-related costs.
We allocate certain overhead expenses, such as rent, utilities, office supplies and depreciation and amortization of general office assets, to cost of revenue and operating expense categories based on headcount. As a result, an overhead expense allocation is reflected in cost of revenue and each operating expense category. Personnel-related costs included in cost of revenue and each operating expense category include wages, fringe benefit costs and stock-based compensation expense.
Cost of Revenue
Cost of revenue is comprised primarily of the costs of operating our marketplace and delivering consumer referrals to our customers. These costs consist primarily of technology service costs including hosting, software, data services, and third-party call center costs. In addition, cost of revenue includes depreciation and amortization of our platform technology assets and personnel-related costs. Sales and Marketing Sales and marketing expense consists primarily of advertising and marketing expenditures as well as personnel-related costs for employees engaged in sales, marketing, data analytics and consumer acquisition functions 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.
Research and Development
Research and development expense consists 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 expense will increase as we continue to enhance and expand our
platform technology.
General and Administrative
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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. 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 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; 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 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 items 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 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.
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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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Net loss $ (6,451 ) $ (5,272 ) $ (15,922 ) $ (10,954 )
Stock-based compensation 7,233 8,348 22,363 22,957
Depreciation and amortization 1,410 1,298 4,326 3,608
Acquisition-related (96 ) 819 (4,767 ) 1,005
Interest income (113 ) (9 ) (158 ) (33 )
Benefit from income taxes - (2,510 ) - (2,510 )
Adjusted EBITDA $ 1,983 $ 2,674 $ 5,842 $ 14,073
Results of Operations
Comparison of the Three and Nine Months Ended
The following tables set forth our results of operations for the periods shown:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Statement of Operations Data:
Revenue(1) $ 103,223 $ 107,563 $ 315,819 $ 316,448
Cost and operating expenses(2):
Cost of revenue 5,877 5,994 17,920 17,758
Sales and marketing 89,098 92,545 273,102 265,724
Research and development 7,832 9,259 24,273 26,885
General and administrative 7,102 6,731 21,400 18,527
Acquisition-related (96 ) 819 (4,767 ) 1,005
Total cost and operating expenses 109,813 115,348 331,928 329,899
Loss from operations (6,590 ) (7,785 ) (16,109 ) (13,451 )
Other income (expense):
Interest income 113 9 158 33
Other income (expense), net 26 (6 ) 29 (46 )
Total other income (expense), net 139 3 187 (13 )
Loss before income taxes (6,451 ) (7,782 ) (15,922 ) (13,464 )
Benefit from income taxes - 2,510 - 2,510
Net loss $ (6,451 ) $ (5,272 ) $ (15,922 ) $ (10,954 )
Other Financial and Operational Data:
Variable marketing margin $ 31,844 $ 32,401 $ 99,199 $ 96,669
Adjusted EBITDA(3) $ 1,983 $ 2,674 $ 5,842 $ 14,073
(1) Comprised of revenue from the following distribution channels:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Direct channels 85 % 89 % 86 % 90 %
Indirect channels 15 % 11 % 14 % 10 %
100 % 100 % 100 % 100 %
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(2) Includes stock-based compensation expense as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands) (in thousands)
Cost of revenue $ 67 $ 108 $ 221 $ 282
Sales and marketing 2,461 3,366 8,635 9,216
Research and development 2,687 2,692 7,748 7,340
General and administrative 2,018 2,182 5,759 6,119
$ 7,233 $ 8,348 $ 22,363 $ 22,957
(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 September 30, Change
2022 2021 Amount %
(dollars in thousands)
Revenue $ 103,223 $ 107,563 $ (4,340 ) -4.0 %
Revenue decreased by $4.3 million from $107.6 million for the three months ended
September 30, 2021 to $103.2 million for the three months ended September 30,
2022 . The decrease in revenue was due to a decrease of $1.5 million in revenue
from our automotive vertical and a decrease of $2.8 million in our other
insurance verticals. The decrease in revenue from our automotive vertical was
primarily due to a decrease in carrier spend for referrals of $5.2 million ,
partially offset by an increase of $3.7 million in commission revenue. The
decrease in revenue from our other insurance verticals was due to a decrease in
carrier spend for referrals of $4.3 million , partially offset by an increase of
$1.5 million in commission revenue.
Nine Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Revenue $ 315,819 $ 316,448 $ (629 ) -0.2 %
Revenue decreased by $0.6 million from $316.4 million for the nine months ended
September 30, 2021 to $315.8 million for the nine months ended September 30,
2022 . The decrease in revenue was due to a decrease of $3.3 million in revenue
from our automotive vertical, partially offset by an increase of $2.7 million in
our other insurance verticals. The decrease in revenue from our automotive
vertical was primarily due to a decrease in carrier spend for referrals of $17.9
million , partially offset by an increase of $14.6 million in commission revenue.
The increase in revenue from our other insurance verticals was due to an
increase of $12.9 million in commission revenue, partially offset by a decrease
in carrier spend for referrals of $10.2 million .
Cost of Revenue
Three Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Cost of revenue $ 5,877 $ 5,994 $ (117 ) -2.0 %
Percentage of revenue 5.7 % 5.6 %
Cost of revenue decreased by $0.1 million from $6.0 million for the three months
ended September 30, 2021 to $5.9 million for the three months ended September
30, 2022 . Cost of revenue decreased primarily due to a decrease in third-party
call center costs of $0.3 million as a result of shifting call referrals from
third-party call centers to employees. Hosting costs also decreased by $0.2
million . These decreases were partially offset by increased personnel-related
costs of $0.4 million .
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Nine Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Cost of revenue $ 17,920 $ 17,758 $ 162 0.9 %
Percentage of revenue 5.7 % 5.6 %
Cost of revenue increased by $0.2 million from $17.8 million for the nine months
ended September 30, 2021 to $17.9 million for the nine months ended September
30, 2022 . Cost of revenue increased primarily due to increased personnel-related
costs of $0.8 million , increased amortization of intangible assets of $0.3
million , increased third-party call center costs of $0.2 million related to
volume increases of call referrals, partially offset by decreases due to
shifting call referrals to employees. These increases were partially offset by
decreases in technical services costs of $0.8 million and hosting costs of $0.5
million .
Sales and Marketing
Three Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Sales and marketing expense $ 89,098 $ 92,545 $ (3,447 ) -3.7 %
Percentage of revenue 86.3 % 86.0 %
Sales and marketing expense decreased by
three months ended
ended
primarily due to a decrease in advertising costs of
Nine Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Sales and marketing expense $ 273,102 $ 265,724 $ 7,378 2.8 %
Percentage of revenue 86.5 % 84.0 %
Sales and marketing expense increased by $7.4 million from $265.7 million for
the nine months ended September 30, 2021 to $273.1 million for the nine months
ended September 30, 2022 . The increase in sales and marketing expense was
primarily due to an increase in personnel-related costs of $7.9 million and
office and occupancy costs of $0.5 million primarily due to increases in hiring
DTC agents and operating additional DTC sales offices. Referral verification
services and license fees related to DTC also increased by $0.8 million and $0.7
million , respectively. These increases were partially offset by a decrease in
advertising costs of $3.2 million .
Research and Development
Three Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Research and development expense $ 7,832 $ 9,259
Percentage of revenue
7.6 % 8.6 % Research and development expense decreased by$1.4 million from$9.3 million for the three months endedSeptember 30, 2021 to$7.8 million for the three months endedSeptember 30, 2022 . The decrease in research and development expense was primarily due to a decrease in personnel-related costs of$1.5 million , partially offset by an increase in technology services of$0.2 million . Nine Months Ended September 30, Change 2022 2021 Amount % (dollars in thousands)
Research and development expense
Percentage of revenue
7.7 % 8.5 %
Research and development expense decreased by
for the nine months ended
months ended
expense was
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primarily due to a decrease in personnel-related costs of$2.7 million and a decrease in consulting costs of$0.4 million , partially offset by an increase in technology services of$0.8 million . General and Administrative Three Months Ended September 30, Change 2022 2021 Amount % (dollars in thousands) General and administrative expense $ 7,102 $ 6,731$ 371 5.5 % Percentage of revenue 6.9 % 6.3 %
General and administrative expenses increased by
for the three months ended
months ended
expenses was primarily due to an increase in consulting costs of
Nine Months Ended September 30, Change
2022 2021 Amount %
(dollars in
thousands)
General and administrative expense$ 21,400 $ 18,527 $ 2,873 15.5 % Percentage of revenue 6.8 % 5.9 % General and administrative expenses increased by$2.9 million from$18.5 million for the nine months endedSeptember 30, 2021 to$21.4 million for the nine months endedSeptember 30, 2022 . The increase in general and administrative expenses was primarily due to an increase in personnel-related costs of$1.2 million , an increase in consulting fees of$0.7 million and an increase in credit card fees of$0.2 million . Travel costs also increased by$0.2 million as travel levels increased. Acquisition-related Acquisition-related costs for the three and nine months endedSeptember 30, 2022 solely consisted of the change in fair value of our contingent consideration liabilities recorded as the result of our acquisitions. We recorded a credit to acquisition-related costs for the three and nine months endedSeptember 30, 2022 of$0.1 million and$4.8 million , respectively, related to the decrease in the fair value of our contingent consideration liability. The decrease was related to our future revenue forecasts and to a lesser extent, change in market value of our Class A common stock. Acquisition-related costs for the three and nine months endedSeptember 30, 2021 included expenses associated with third-party professional services utilized of$0.4 million and$0.9 million , respectively, and the change in fair value of our contingent consideration liabilities, which resulted in a credit to acquisition-related costs of$0.4 million and$0.1 million , respectively.
Other Income (Expense)
Other expense, net was not significant for either of the three and nine months
ended
Benefit from income taxes
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We recorded an income tax benefit of$2.5 million for the three and nine months endedSeptember 30, 2021 due to the release of a portion of our valuation allowance as a result of the PolicyFuel acquisition. The net deferred tax liability recorded for the PolicyFuel acquisition primarily relates to the intangible assets recognized in purchase accounting which are non-deductible for tax purposes and result in a deferred tax liability. The net deferred tax liability is a source of income to support the recognition of a portion of our existing deferred tax assets. Therefore, we recorded a discrete tax benefit for the release of a portion of our valuation allowance related to the net deferred tax liability recorded in purchase accounting. We maintain a valuation allowance on our overall net deferred tax asset as it is deemed more likely than not the net deferred tax asset will not be realized. Variable Marketing Margin Three Months Ended September 30, Change 2022 2021 Amount % (dollars in thousands) Revenue$ 103,223 $ 107,563 $ (4,340 ) -4.0 % Less: total advertising expense (a
component of sales and marketing
expense) 71,379 75,162 Variable marketing margin $ 31,844 $ 32,401$ (557 ) -1.7 % Percentage of revenue 30.8 % 30.1 %
The decrease in variable marketing margin was due primarily to decreases in
referral revenue in our automotive vertical.
Nine Months Ended September 30, Change
2022 2021 Amount %
(dollars in thousands)
Revenue $ 315,819 $ 316,448 $ (629 ) -0.2 %
Less: total advertising expense (a
component of sales and marketing
expense) 216,620 219,779 Variable marketing margin $ 99,199 $ 96,669$ 2,530 2.6 % Percentage of revenue 31.4 % 30.5 %
The increase in variable marketing margin was due primarily to growth in
commissions revenue and decreased advertising spend.
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents of$36.6 million as ofSeptember 30, 2022 and availability of up to$45.0 million under our revolving line of credit and term loan, each of which were amended inJuly 2022 . OnJuly 15, 2022 , we entered into the Loan and Security Modification Agreement, which amended our existing Loan and Security Agreement, or the 2020 Loan Agreement, withWestern Alliance Bank , or the Lender, to extend the maturity date of the revolving line of credit toJuly 15, 2025 , to increase the revolving line of credit available thereunder from$25.0 million to$35.0 million , and to provide us with access to a term loan of up to$10.0 million . We refer to the 2020 Loan Agreement, as amended by the Loan and Security Modification Agreement, as the Amended Loan Agreement. Pursuant to the Amended Loan Agreement, borrowings under the revolving line of credit cannot exceed 85% of eligible accounts receivable balances, bear interest at the greater of 4.25% or the prime rate as published in theWall Street Journal and mature onJuly 15, 2025 . The term loan may be drawn throughDecember 31, 2023 and borrowings bear interest at 0.25% plus the greater of 4.25% or the prime rate as published in theWall Street Journal . Borrowings under the term loan of the Amended Loan Agreement are repayable in monthly interest-only payments throughDecember 31, 2023 . Commencing onJanuary 1, 2024 , the term loan is payable in 42 equal monthly installments of the then outstanding principal and accrued interest throughJune 2027 . We may prepay all, but not less than all, of any outstanding principal with respect to advances made under the term loan provided that such outstanding principal is paid in full along with any accrued but unpaid interest to date plus any fees that become payable under the Amended Loan Agreement. In an event of default, as defined in the Amended Loan Agreement, and until such event is no longer continuing, the annual interest rate to be charged would be the annual rate otherwise applicable to borrowings under the Amended Loan Agreement plus 5.00%. 32
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Borrowings are collateralized by substantially all of our assets and property. Under the Amended Loan Agreement, we agreed to affirmative and negative covenants to which we will remain subject until maturity. The 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, under the Amended Loan Agreement and throughDecember 31, 2023 , we are required to maintain a minimum asset coverage ratio of 1.5 to 1 calculated as the sum of unrestricted cash held at the Lender and eligible accounts receivable divided by all borrowings outstanding under the Amended Loan Agreement. CommencingDecember 31, 2023 , we are required to maintain, and test on a quarterly basis, a fixed charge coverage ratio and a leverage ratio. The fixed charge coverage ratio is measured as the ratio of (i) our trailing twelve-month adjusted "EBITDA" (as defined in the Amended Loan Agreement) less capital expenditures, less cash taxes, to (ii) our trailing twelve-month interest and principal payments to the Lender, of at least 1.25 to 1.00. The leverage ratio is measured as the ratio of (i) our outstanding obligations owing to the Lender, to (ii) our trailing twelve-month adjusted EBITDA (as defined in the Amended Loan Agreement), of not more than 3.00 to 1.00. As ofSeptember 30, 2022 , we were in compliance with these covenants. 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 ofSeptember 30, 2022 ,$28.2 million of our$38.4 million commissions receivable contract asset was classified as long-term. We believe our existing cash and cash equivalents will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next 12 months, without considering the borrowing availability under our credit facility. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on business initiatives, purchases of capital equipment to support our growth, the expansion of sales and marketing activities, expansion of our business through acquisitions or our investments in complementary offerings, technologies or businesses, market acceptance of our platform and overall economic conditions. If we do not achieve our revenue goals as planned, we believe that we can reduce our operating costs. If we need additional funds and are unable to obtain funding on a timely basis, we may need to significantly curtail our operations in an effort to provide sufficient funds to continue our operations, which could adversely affect our business prospects.
Cash Flows
The following table shows a summary of our cash flows for the nine months endedSeptember 30, 2022 and 2021: Nine Months Ended September 30, 2022 2021 (in thousands) Net cash provided by (used in) operating activities$ (10,893 ) $ 14,048 Net cash used in investing activities (3,219 ) (18,230 ) Net cash provided by financing activities 15,651
3,091
Effect of exchange rate changes on cash, cash equivalents and restricted cash (49 ) (6 )
Net increase (decrease) in cash, cash equivalents
and restricted cash $ 1,490 $ (1,097 )
Net cash provided by operating activities
Operating activities used$10.9 million during the nine months endedSeptember 30, 2022 primarily resulting from our net loss of$15.9 million and net cash used by changes in our operating assets and liabilities of$17.0 million , partially offset by net non-cash charges of$22.0 million . Net cash used by changes in our operating assets and liabilities consisted primarily of a$14.8 million increase in other assets and a$4.9 million increase in accounts receivable, partially offset by a net$4.4 million increase in accounts payable and accrued expenses and other current liabilities. Operating activities provided$14.0 million during the nine months endedSeptember 30, 2021 primarily resulting 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 current liabilities. Changes in accounts receivable, accounts payable and accrued expenses and other current liabilities were generally due to growth in our business and timing of customer and vendor invoicing and payments. Collection of commissions receivable, which are 33
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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 is classified as long-term.
Net cash used in investing activities
Net cash used in investing activities was$3.2 million and$18.2 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Net cash used in investing activities for the nine months endedSeptember 30, 2022 and 2021 included the acquisition of property and equipment, which included the capitalization of certain software development costs. During the nine months endedSeptember 30, 2022 and 2021, we capitalized$2.5 million and$1.7 million , respectively, of software development costs. Net cash used in investing activities for the nine months endedSeptember 30, 2021 included cash paid of$16.0 million to purchase PolicyFuel.
Net cash provided by financing activities
During the nine months endedSeptember 30, 2022 and 2021, net cash provided by financing activities was$15.7 million and$3.1 million , respectively. Net cash provided by financing activities during the nine months endedSeptember 30, 2022 consisted of$15.0 million of proceeds from the issuance and sale of shares of common stock in a private placement withRecognition Capital, LLC , an entity which is owned and controlled byDavid Blundin , Chairman of the Board of Directors and co-founder of the Company, and$0.7 million from the exercise of common stock options. Net cash provided by financing activities during the nine months endedSeptember 30, 2021 consisted of proceeds of$3.1 million received from the exercise of common stock options.
Contractual Obligations and Commitments
There have been no material changes to the contractual obligations reported in
our Annual Report on Form 10-K for the year ended
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. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.
The following critical accounting policies reflect significant judgments and
estimates used in the preparation of our condensed consolidated financial
statements:
•
goodwill and acquired intangible assets;
•
valuation of contingent consideration;
•
revenue recognition and the valuation of commissions and accounts receivable;
and
•
stock-based compensation expense.
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, 2021 , on file with theSecurities and Exchange Commission . For further disclosure, refer to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and our audited consolidated financial statements included in our Annual Report on Form 10-K.
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.
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