PORCH GROUP, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report and the documents incorporated herein by reference contain forward- looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and assumptions of management. Although the Company believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, the Company cannot assure you that it will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning the Company's possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. These statements may be preceded by, followed by or include the words "believes," "estimates," "expects," "projects," "forecasts," "may," "will," "should," "seeks," "plans," "scheduled," "anticipates" or "intends" or similar expressions. Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements which speak only as of the date hereof. Unless specifically indicated otherwise, the forward-looking statements in this Quarterly Report do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that have not been completed as of the date of this filing. You should understand that the following important factors, among others, could affect the Company's future results and could cause those results or other outcomes to differ materially from those expressed or implied in the Company's forward-looking statements:
? expansion plans and opportunities, including recently completed acquisitions as
well as future acquisitions or additional business combinations;
? costs related to being a public company;
?litigation, complaints, and/or adverse publicity;
the impact of changes in consumer spending patterns, consumer preferences,
? local, regional and national economic conditions, crime, weather, demographic
trends and employee availability;
? further expansion into the insurance industry, and the related federal and
state regulatory requirements;
?privacy and data protection laws, privacy or data breaches, or the loss of
data; and
? the duration and scope of the COVID pandemic, and its continued effect on the
business and financial conditions of the Company.
These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this Quarterly Report are more fully described in Part II, Item 1A of this Quarterly Report, Item 1A of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onMarch 16, 2022 and in any of the Company's subsequentSEC filings. The risks described in these filings are not exhaustive. New risk factors emerge from time to time, and it is not possible for us to predict all such risk factors, nor can the Company assess the impact of all such risk factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. The Company undertakes no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. 38 Table of Contents Business OverviewPorch Group is a vertical software platform for the home, providing software and services to over 30,900 home services companies, such as home inspectors, mortgage companies and loan officers, title companies, moving companies, real estate agencies, utility companies, roofers and others, helping these service providers grow their business and improve their customer experience. The Company provides software and services to home services companies and, through these relationships, gains unique and early access to homebuyers and homeowners, assists homebuyers and homeowners with critical services such as insurance and moving, and, in turn, the Company's platform drives demand for other services from such companies as part of the value proposition. Porch has three types of customers: (1) home services companies, such as home inspectors, mortgage companies, and loan officers and title companies, for whom Porch provides software and services and who pay recurring SaaS fees and increasingly provide introductions to homebuyers and homeowners; (2) consumers, such as homebuyers and homeowners, whom Porch assists with the comparison and provision of various critical home services, such as insurance, moving, security, TV/Internet, and home repair and improvement; and (3) service providers, such as insurance carriers, moving companies, security companies, title companies, mortgage companies and TV/Internet providers, who pay for new customer sign-ups. The Company sells software and services to companies using a variety of sales and marketing tactics, including teams of inside sales representatives organized by vertical market who engage directly with companies, and enterprise sales teams that target the large named accounts in each of the vertical markets. These teams are supported by various typical software marketing tactics, including digital, in-person (such as trade shows and other events) and content marketing.
The Company's Insurance segment offers various forms of homeowner insurance
policies through its own insurance carrier and certain homeowner and auto
insurance policies through its licensed insurance agency. The Insurance segment
also includes home warranty service revenue.
For consumers, Porch largely relies on our unique and proprietary relationships with over 30,900 companies using the Company's software to provide the company with end customer access and introductions. The Company then utilizes technology, lifecycle marketing and teams in lower cost locations to operate as a Moving Concierge to assist these consumers with services. The Company has invested in limited direct-to-consumer marketing capabilities, but expects to become more advanced over time with capabilities such as digital and social retargeting.
Key Performance Measures and Operating Metrics
In the management of these businesses, the Company identifies, measures and evaluates various operating metrics. The key performance measures and operating metrics used in managing the businesses are set forth below. These key performance measures and operating metrics are not prepared in accordance with generally accepted accounting principles inthe United States ("GAAP"), and may not be comparable to or calculated in the same way as other similarly titled measures and metrics used by other companies. The key performance measures presented have been adjusted for divested businesses in 2020.
Average Companies in Quarter - Porch provides software and services to home
services companies and, through these relationships, gains unique and early
access to homebuyers and homeowners, assists homebuyers and homeowners with
critical services such as insurance, warranty and moving. The Company's
customers include home services companies, for whom the Company provides
software and services and who provide introductions to homebuyers and
homeowners and tracks the average number of home services companies from which
? it generates revenue each quarter in order to measure the ability to attract,
retain and grow relationships with home services companies. Porch management
defines the average number of companies in a quarter as the straight-line
average of the number of companies as of the end of period compared with the
beginning of period across all of the Company's home services verticals that
(i) generate recurring revenue and (ii) generated revenue in the quarter. For
new acquisitions, the number of companies is determined in the initial quarter
based on the percentage of the quarter the acquired business is a part of the
Company.
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Average Revenue per Account per Month in Quarter - Management views the
Company's ability to increase revenue generated from existing customers as a
key component of Porch's growth strategy. Average Revenue per Account per Month
? in Quarter is defined as the average revenue per month generated across all
home services company customer accounts in a quarterly period. Average Revenue
per Account per Month in Quarter is derived from all customers and total
revenue, not only customers and revenues associated with the Company's referral
network.
The following table summarizes Average Companies in Quarter and Average Revenue
per Account per Month in Quarter for each of the quarterly periods indicated:
2022 2022 2022 2022
Q1 Q2 Q3 Q4
Average Companies in Quarter 25,545 (2) 28,773 (2) 30,951 -
Average Revenue per Account per Month
in Quarter $ 816 (1)(2) $ 820 (1)(2) $ 812 $ -
2021 2021 2021 2021
Q1 Q2 Q3 Q4
Average Companies in Quarter 13,995 17,082 (2) 20,419 (2) 24,601 (2)
Average Revenue per Account per Month
in Quarter (adjusted)(1) $ 637 $ 935 (1)(2) $ 987 (1)(2) $ 776 (1)
2020 2020 2020 2020
Q1 Q2 Q3 Q4
Average Companies in Quarter 10,903 10,523 10,792 11,157
Average Revenue per Account per Month
in Quarter $ 484 $ 556
$ 664 $ 556 During the quarter endedDecember 31, 2021 , the Company corrected an
immaterial error that impacted revenue and cost of revenue for the three
(1) months ended
Account per Month in Quarter metrics were recalculated for the affected
quarters to show the impact of the adjustments.
The following tables shows the impact of this error on Average Revenue per
Account per Month in Quarter:
2021 2021 2021
2021
Q1 Q2 Q3
Q4
Total Revenue (as previously reported)$ 26,742 $ 51,340 $ 62,769 $ 51,582 Quarterly Impact of Revenue Adjustment Recorded in Q4 - (3,400) (2,300) 5,700 Total Revenue (as adjusted)$ 26,742 $ 47,940 $ 60,469 $ 57,282 Average Revenue per Account per Month in Quarter (as adjusted)$ 637 $ 935 $ 987 $ 776 Average Revenue per Account per Month in Quarter (as previously reported)$ 637 $ 1,000 $
1,022
During the quarter ended
immaterial error that impacted the number of Average Companies in Quarter.
(2) Average Companies in Quarter and Average Revenue per Account per Month in
Quarter metrics for the reporting periods starting
June 30, 2022 were recalculated for the affected quarters to show the impact
of the adjustments.
2022 2022 2022 2022
Q1 Q2 Q3 Q4
Average Companies in Quarter (as
previously reported) 25,512 28,730 - -
Adjustment 33 43 - -
Average Companies in Quarter (as
adjusted) 25,545 28,773 - -
Average Revenue per Account per Month in
Quarter (as previously reported) $ 817 $ 821 $ - $ -
Adjustment $ (1) $ (1) $ - $ -
Average Revenue per Account per Month in
Quarter (as adjusted) $ 816 $ 820 $ - $ -
2021 2021 2021 2021
Q1 Q2 Q3 Q4
Average Companies in Quarter (as
previously reported) 13,995 17,120 20,472 24,603
Adjustment - (38) (53) (2)
Average Companies in Quarter (as
adjusted) 13,995 17,082
20,419 24,601
Average Revenue per Account per Month in Quarter (as previously reported)$ 637 $ 933 $ 985 $ 776 Adjustment $ -$ 2 $ 2 $ - Average Revenue per Account per Month in Quarter (as adjusted)$ 637 $ 935 $
987
In 2022, the Company completed the acquisition of RWS. In 2021, the Company
completed acquisitions of V12 Data in Q1,
Rynoh in Q2, American Home Protect ("AHP") in Q3 and Floify in Q4, that impacted
the average number of companies in the quarter.
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Monetized Services in Quarter - Porch connects consumers with home services
companies nationwide and offers a full range of products and services where
homeowners can, among other things: (i) compare and buy home insurance policies
(along with auto, flood and umbrella policies) and warranties with competitive
rates and coverage; (ii) arrange for a variety of services in connection with
their move, from labor to load or unload a truck to full-service, long-distance
moving services; (iii) discover and install home automation and security
systems; (iv) compare Internet and television options for their new home;
(v) book small handyman jobs at fixed, upfront prices with guaranteed quality;
? and (vi) compare bids from home improvement professionals who can complete
bigger jobs. The Company tracks the number of monetized services performed
through its platform each quarter and the revenue generated per service
performed in order to measure market penetration with homebuyers and homeowners
and the Company's ability to deliver high-revenue services within those groups.
Monetized Services in Quarter is defined as the total number of unique services
from which the Company generated revenue, including, but not limited to, new
and renewing insurance and warranty customers, completed moving jobs, security
installations, TV/Internet installations or other home projects, measured over
a quarterly period.
Average Revenue per Monetized Service in Quarter - Management believes that
shifting the mix of services delivered to homebuyers and homeowners toward
higher revenue services is a key component of Porch's growth strategy. Average
? Revenue per Monetized Services in Quarter is the average revenue generated per
monetized service performed in a quarterly period. When calculating Average
Revenue per Monetized Service in quarter, average revenue is defined as total
quarterly service transaction revenues generated from monetized services.
The following table summarizes our monetized services and average revenue per
monetized service for each of the quarterly periods indicated:
2022 2022 2022 2022
Q1 Q2 Q3 Q4
Monetized Services in Quarter 263,163 333,596 318,452 -
Average Revenue per Monetized Service in
Quarter $ 170 (1) $ 157 (1) $ 181 $ -
2021 2021 2021 2021
Q1 Q2 Q3 Q4
Monetized Services in Quarter 190,733 (2) 316,674 (2) 338,157 (2) 267,683 (2) Average Revenue per Monetized Service in Quarter (adjusted)(1)$ 88 (1)(2)$ 113 (1)(2)$ 133 (1)(2)$ 150 (1)(2) 2020 2020 2020 2020 Q1 Q2 Q3 Q4
Monetized Services in Quarter 152,165 181,520 198,165 169,949 Average Revenue per Monetized Service in Quarter$ 93 $ 86
$ 97 $ 98 During the quarter endedDecember 31, 2021 , the Company corrected an
immaterial error that impacted revenue and cost of revenue for the three
(1) months ended
Monetized Service in Quarter metrics were recalculated for the affected
quarters to show the impact of the adjustments.
The following tables shows the impact of this error on Average Revenue per
Monetized Service in Quarter:
2021 2021
2021 2021
Q1 Q2 Q3
Q4
Service Revenue (as previously reported)$ 45,098 $ 39,102 $ 47,398 $ 34,351 Quarterly Impact of Revenue Adjustment Recorded in Q4 - (3,400) (2,300) 5,700 Service Revenue (as adjusted)$ 45,098 $ 35,702 $ 45,098 $ 40,051 Average Revenue per Monetized Service in Quarter (adjusted)$ 92 $ 113 $ 133 $ 150 Average Revenue per Monetized Service in Quarter (as previously reported)$ 92 $ 129 $ 144 $ 132 41 Table of Contents During the quarter endedSeptember 30, 2022 , the Company corrected an
immaterial error that impacted the number of Monetized Services in Quarter.
(2) Monetized Services in Quarter and Average Revenue per Monetized Service in
Quarter metrics for the reporting periods starting
June 30, 2022 were recalculated for the affected quarters to show the impact
of the adjustments.
2022 2022 2022 2022
Q1 Q2 Q3 Q4
Monetized Services in Quarter (as
previously reported) 254,249 331,889 - -
Adjustment 8,914 1,707 - -
Monetized Services in Quarter (as
adjusted) 263,163 333,596 - -
Average Revenue per Monetized Service in
Quarter (as previously reported) $ 176 $ 158 $ - $ -
Adjustment $ (6) $ (1) $ - $ -
Average Revenue per Monetized Service in
Quarter (as adjusted) $ 170 $ 157 $ - $ -
2021 2021 2021 2021
Q1 Q2 Q3 Q4
Monetized Services in Quarter (as
previously reported) 182,779 302,462 329,359 260,352
Adjustment 7,954 14,212 8,798 7,331
Monetized Services in Quarter (as
adjusted) 190,733 316,674
338,157 267,683
Average Revenue per Monetized Service in Quarter (as previously reported)$ 92 $ 118 $ 137 $ 154 Adjustment$ (4) $ (5) $ (4) $ (4) Average Revenue per Monetized Service in Quarter (as adjusted)$ 88 $ 113 $
133
In 2022, the Company completed the acquisition of RWS. In 2021, the Company
completed acquisitions of V12 Data in Q1, HOA and Rynoh in Q2, AHP in Q3 and
Floify in Q4, which impacted the number of monetized services in the quarter.
Recent Developments
Adoption of New Accounting Standards
The Company early adopted Accounting Standards Update No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers onJanuary 1, 2022 and will apply the guidance prospectively for business combinations that occur after the adoption date. The adoption has no impact to the existing unaudited condensed consolidated balance sheets, statements of operations, and statements of cash flows.
Key Factors Affecting Operating Results
The Company has been implementing its strategy as a vertical software platform for the home, by providing software and services to over 30,900 home services companies, such as home inspectors, moving companies, utility companies, warranty companies, etc. The Company's Insurance segment continues to grow scale, through both policy count, and geographic expansion. The following are key factors affecting the Company's operating results in the three and nine months endedSeptember 30, 2022 :
The
? existing home inventory tightening, and affordability challenges, impacting the
home sales have declined over 22% on year over year.
The Company's Insurance division paid out a higher volume of claims from
? volatile weather events, including Hurricane Ian, during the quarter. Claims
costs for these events were driven higher due in part to inflation-related
pressures.
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During the third quarter of 2022, management identified various qualitative
factors and macroeconomic trends that collectively indicated that the Company
? had trigger events resulting in a
Company's Insurance segment, and a
assets for certain intangible assets within the
? In
Services ("RWS") with an aggregate purchase price of
In 2021, the Company completed several acquisitions with an aggregate purchase
price of
the Company's services offerings, add additional team members with important
skillsets, and realize synergies. These acquisitions included V12 Data
? (acquired in
2021). For a complete discussion of 2021 acquisitions, refer to Item 8 in the
Company's Annual Report on Form 10-K for the fiscal year ended
2021, as filed on
Continued investment in growing and expanding the Company's position in the
? home inspection industry including through core enterprise resource planning
and customer relationship management software offered by Inspection Support
Continued investment in growing and expanding the Company's position in
? providing moving services to consumers as a result of the 2018 acquisition of
HireAHelper™, a provider of software and demand for moving companies.
Intentionally building operating leverage in the business by focusing on
? growing operating expenses at a slower rate than the growth in revenue.
Specifically, by increasing economies of scale related to fixed selling costs,
Moving Concierge call center operations and product and technology costs.
? Ongoing expansion in other software verticals related to the home and related
services such as title, warranty and mortgage software.
? Investments in consumer experience to drive higher conversion rates, including
investments in apps.
Investments in establishing and maintaining controls required by the
? Sarbanes-Oxley Act of 2002 ("SOX") and other internal controls across IT and
accounting organizations.
? Investments in data platforms and leveraging that data in pricing optimization
within insurance.
? Growth across the insurance business, including geographic expansion.
Basis of Presentation
The unaudited condensed consolidated financial statements and accompanying notes
of the Company include the accounts of the Company and its consolidated
subsidiaries and were prepared in accordance with GAAP. All significant
intercompany accounts and transactions are eliminated in consolidation.
The Company operates in two operating segments:Vertical Software and Insurance. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker ("CODM") in making decisions regarding resource allocation and assessing performance. The Company has determined that its Chief Executive Officer is the CODM. 43
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Components of Results of Operations
Total Revenue
The Company generates revenue from (1) software and service subscription revenue generated from fees received for providing subscription access to the Company's software platforms and subscription services across various industries; (2) insurance revenue in the form of commissions from third-party insurance carriers where Porch acts as an independent agent and commissions from reinsurers, insurance and warranty premiums, policy fees and other insurance-related fees generated through its own insurance carrier; (3) move-related service revenue through fees received for connecting homeowners to service providers during time of a move including movers, TV/Internet, warranty, and security monitoring providers and for certain move related services for providing select services directly to the homeowner; (4) post-move related revenue in the form of fees earned from introducing homeowners to home service professionals including handymen, plumbers, electricians, roofers etc., and for certain projects for providing select services directly to the homeowner. Software and service subscription revenue primarily relates to subscriptions to the Company's software offerings across its verticals as well as marketing software and services. The Company's subscription arrangements for this revenue stream do not provide the customer with the right to take possession of the software supporting the cloud-based application services. The Company's standard subscription contracts are monthly contracts in which pricing is based on a specified price per inspection completed through the software. Marketing software and services are primarily contractual monthly recurring billings. Fees earned for providing access to the subscription software are non-refundable and there is no right of return. Revenue is recognized based on the amount which the Company is entitled to for providing access to the subscription software during the monthly contract term. The Insurance segment offers various property-related insurance policies through its own risk-bearing carrier and independent agency as well as a risk-bearing home warranty company. Third-party insurance companies pay our agency upfront and renewal commissions for selling their policies, reinsurers pay the Company ceding commissions when premiums are ceded from owned insurance products, and revenues are earned in the form of policy premiums collected from insureds from owned insurance products. The Insurance segment also includes home warranty revenue which mainly consists of premiums paid by warranty customers for the Company's home warranty products. Move-related transactions revenue arises when the Company connects service providers with homeowners that meet pre-defined criteria and may be looking for relevant services. Service providers include movers, TV/Internet, warranty, and security monitoring providers. The Company earns revenue when consumers purchase services from third-party providers. For moving products where the Company manages the process of selecting the service provider and setting the price, the Company generally invoices for projects on a fixed fee or time and materials basis. Post-move-related transaction revenue includes fees earned from introducing consumers to home service providers as well as directly to the homeowner when the Company manages the service. Revenue generated from service providers is recognized at a point in time upon the connection of a homeowner to the service provider. The Company generally invoices for managed services projects on a fixed fee or time and materials basis.
Total Costs and Expenses
Operating expenses
Operating expenses are categorized into five categories:
? Cost of revenue;
? Selling and marketing;
? Product and technology;
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? General and administrative; and
? Impairment loss on intangible assets and goodwill.
The categories of operating expenses include both cash expenses and non-cash charges, such as stock-based compensation, depreciation and amortization. Depreciation and amortization are recorded in all operating expense categories, and consist of depreciation from property, equipment and software and intangible assets. Cost of revenue primarily consists of insurance claims losses and loss adjustment expenses, claims personnel costs, warranty claims, third-party providers for executing moving labor and handyman services when the Company is managing the job, data costs related to marketing campaigns, certain call center costs, credit card processing and merchant fees and operational cost of SaaS businesses.
Selling and marketing expenses primarily consist of payroll, employee benefits
and stock-based compensation expense, and other headcount related costs
associated with sales efforts directed toward companies and consumers, and
deferred policy acquisition costs ("DAC") of new and renewal insurance
contracts. Also included are any direct costs to acquire customers, such as
search engine optimization, marketing costs and affiliate and partner leads.
The Company capitalizes DAC, which consists primarily of commissions, premium taxes, policy underwriting, and production expenses directly related to the successful acquisition by the Company's insurance subsidiary of new or renewal insurance contracts. DAC are amortized to expense on a straight-line basis over the terms of the policies to which they relate, which is generally one year. DAC is also reduced by ceding commissions paid by reinsurance companies which represent recoveries of acquisition costs. DAC is periodically reviewed for recoverability and adjusted if necessary. Product and technology development costs primarily consist of payroll, employee benefits, stock-based compensation expense, other headcount-related costs associated with product development, net of costs capitalized as internally developed software. Also included are cloud computing, hosting and other technology costs, software subscriptions, professional services and amortization of internally developed software. General and administrative expenses primarily consist of expenses associated with functional departments for finance, legal, human resources and executive management. The primary categories of expenses include payroll, employee benefits, stock-based compensation expense and other headcount related costs, rent for office space, legal and professional fees, taxes, licenses and regulatory fees, merger and acquisition transaction costs, and other administrative costs. Impairment loss on intangible assets and goodwill results from circumstances when the fair value of a reporting unit or asset group is less than its carrying amount.Goodwill and indefinite-lived intangible assets are subject to annual impairment assessments. All intangible assets and goodwill are also subject to impairment assessments whenever facts and circumstances indicate that these assets may be impaired. See Impairment of Long-Lived Assets and Impairment ofGoodwill sections of Critical Accounting Policies and Estimates for the description of methods used to determine these impairment losses.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the amounts reported and disclosed in the unaudited condensed consolidated financial statements and accompanying notes. On an ongoing basis these estimates, which include, but are not limited to, impairment losses on intangible assets and goodwill, estimated variable consideration for services performed, estimated lifetime value of the insurance agency commissions, current estimate for credit losses, depreciable lives for property and equipment, the valuation of and useful lives for acquired intangible assets, the valuation allowance on deferred tax assets, assumptions used in stock-based compensation expense, unpaid losses for insurance claims and loss adjustment expenses, contingent consideration, earnout liabilities and private warrant liabilities, all of which are evaluated by management. Actual results could differ materially from those estimates,
judgments, and assumptions.
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At least quarterly, the Company evaluates estimates and assumptions and makes
changes accordingly. For information on the Company's significant accounting
policies, see Note 1 in the notes to the unaudited condensed consolidated
financial statements included in Part I, Item 1 of this Quarterly Report.
During the three months ended September 30, 2022 , we identified additional
critical accounting estimates related to the impairment of long-lived assets and
impairment of goodwill. During the fiscal year, we identified various
qualitative factors with respect to long-lived assets and goodwill in the
Company's reporting units that collectively indicated that the Company had
triggering events including a sustained decrease in stock price, increased costs
due to inflationary pressures, and a deterioration of the macroeconomic
environment in the housing and real estate industry.
Impairment of Long-Lived Assets
We test our long-lived asset groups when changes in circumstances indicate their carrying value may not be recoverable. Events that trigger a test for recoverability include a significant decrease in the market price for a long-lived asset, significant negative industry or economic trends, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-live asset, a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or a sustained decrease in share price. When a triggering event occurs, a test for recoverability is performed, comparing projected undiscounted future cash flows to the carrying value of the asset group. If the test for recoverability identifies a possible impairment, the asset group's fair value is measured relying primarily on a discounted cash flow method. An impairment charge is recognized for the amount by which the carrying value of the asset group excess its estimated fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amounts for those assets are depreciated over their remaining useful life. We evaluate long-lived assets at the lowest level at which independent cash flows can be identified, which is dependent on the strategy and expected future use of our long-lived assets. We evaluate corporate assets or other long-lived assets that are not asset group-specific at the consolidated level. We estimate the fair value of an asset group using the income approach. The income approach uses cash flow projections. Inherent in our development of cash flow projections are assumptions and estimates derived from a review of our operating results, business plan forecasts, expected growth rates, and cost of capital, similar to those a market participant would use to assess fair value. We also make certain assumptions about future economic conditions and other data. Many of these factors used in assessing fair value are outside the control of management and these assumptions and estimates may change in future periods.
During the three months ended
impairment charges of
Impairment of
We test goodwill for impairment annually or whenever events or changes in circumstances indicate that an impairment may exist. We assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Factors that indicate the fair value of a reporting unit may be less than its carrying amount include industry and market considerations such as a deterioration in the economic environment or a decline in market-dependent multiples or metrics, overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings, increased cost factors that have a negative effect on earnings and cash flows, or a sustained decrease in share price. The process for evaluating potential impairment of goodwill is highly subjective and requires significant judgment. If factors indicate that the fair value of the reporting unit is less than its carrying amount, we perform a quantitative assessment and the fair value of the reporting unit is estimated by using a combination of market approaches based on peer performance and discounted cash flow methodologies. If the carrying value of the reporting unit exceeds its fair value, an impairment loss equal to the excess is recorded.
Determining the fair value of a reporting unit is judgmental in nature and
involves the use of significant estimates and assumptions to evaluate the impact
of operating and macroeconomic changes on each reporting unit. The fair value
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of each reporting unit was estimated using a combination of a discounted cash
flow methodology and the market valuation approach using publicly traded company
multiples in similar businesses. This analysis requires significant judgments,
including estimation of future cash flows, which is dependent on internally
developed forecasts, estimation of the long-term rate of growth for our
business, estimation of the useful life over which cash flows will occur, and
determination of our weighted average cost of capital, which is risk-adjusted to
reflect the specific risk profile of the reporting unit being tested. The
weighted average cost of capital used in our most recent impairment test was
risk-adjusted to reflect the specific risk profile of the reporting units and
ranged from 17% to 20%.
During the three months ended September 30, 2022 , management identified various
qualitative factors that collectively, indicated that the Company had triggering
events, including a sustained decrease in stock price, increased costs due to
inflationary pressures, and a deterioration of the macroeconomic environment in
the housing and real estate industry. The Company performed a valuation of both
the Vertical Software and Insurance reporting units using a combination of
market approaches based on peer performance and discounted cash flow or dividend
discount model methodologies. Given the results of the quantitative assessment,
the Company determined that the Insurance reporting unit's goodwill was
impaired.
During the three months ended
impairment charges of
There were no other changes to the critical accounting policies discussed in the
Company's Annual Report on Form 10-K. For a complete discussion of the Company's
Annual Report.
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Results of Operations
The following table sets forth the Company's historical operating results for
the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
(dollar amounts in thousands)
Revenue $ 75,366 $ 62,769 12,597 20 % $ 208,696 $ 140,852 $ 67,844 48 %
Operating expenses:
Cost of revenue 33,269 19,158 14,111 74 % 83,016 44,587 38,429 86 %
Selling and marketing 30,245 22,874 7,371 32 % 84,815 60,636 24,179 40 %
Product and technology 14,438 11,317 3,121 28 % 44,446 34,158 10,288 30 %
General and administrative 25,257 22,034 3,223 15 % 80,360 66,463 13,897 21 %
Impairment loss on intangible assets and goodwill 57,057 - 57,057 NM 57,057 - 57,057
NM
Total operating expenses 160,266 75,383 84,883 113 % 349,694 205,844 143,850 70 % Operating loss (84,900) (12,614) (72,286) 573 % (140,998) (64,992) (76,006) 117 % Other income (expense): Interest expense (2,085) (1,857) (228) 12 % (6,236) (4,296) (1,940) 45 % Change in fair value of earnout liability 43 7,413 (7,370) NM 13,809 (15,388) 29,197
NM
Change in fair value of private warrant liability 124 2,692 (2,568) NM
14,391 (17,521) 31,912
NM
Gain (loss) on extinguishment of debt - (3,133) 3,133 NM - 5,110 (5,110)
NM
Investment income and realized gains, net of investment expenses 335 248 87 35 % 775 448 327 73 % Other income, net 69 316 (247) (78) % (37) 225 (262) (116) % Total other income (expense) (1,514) 5,679 (7,193) NM 22,702 (31,422) 54,124
NM
Loss before income taxes (86,414) (6,935) (79,479) 1,146 % (118,296) (96,414) (21,882) 23 % Income tax benefit (expense) 23 1,836 (1,813) NM (268) 9,917 (10,185) NM Net loss$ (86,391) $ (5,099) (81,292) 1,594 %$ (118,564) $ (86,497) $ (32,067) 37 % NM = Not Meaningful Revenue
Three months ended
Total revenue increased by$12.6 million , or 20%, from$62.8 million in the three months endedSeptember 30, 2021 to$75.4 million in the same period in 2022. The increase in revenue in 2022 is primarily driven by the 2022 and 2021 acquisitions, organic growth, and accelerated growth of these acquisitions. InApril 2022 , the Company acquired RWS for an aggregate purchase price of$39.0 million . During 2021, the Company acquired a number of businesses with an aggregate purchase price of$346.3 million as disclosed in the Company's Annual Report on Form 10-K. These acquisitions included V12 Data (acquired inJanuary 2021 ), HOA (acquired inApril 2021 ), Rynoh (acquired inMay 2021 ), AHP (acquired inSeptember 2021 ) and Floify (acquired inOctober 2021 ). Floify and RWS were not owned by the Company during the three months endedSeptember 30, 2021 , and, therefore no revenue was recognized from these businesses during that period. During the quarter endedDecember 31, 2021 , the Company corrected an immaterial error related to revenue from claims fees and contra claims expense, which was recorded in the fourth quarter of 2021. This error impacted revenue 48
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and cost of revenue for the three months ended
2021
The following table summarizes the impact of the correction by quarter (in
thousands):
Quarter ended
March 31, 2021 June 30, 2021 September 30, 2021 December 31, 2021 Total
Revenue increase
(decrease) $ - $ (3,400) $ (2,300) $ 5,700 $ -
Cost of revenue increase
(decrease) - 3,400 2,300 (5,700) -
Net loss impact $ - $ - $ - $ - $ -
Nine months ended
Total revenue increased by$67.8 million , or 48% from$140.9 million in the nine months endedSeptember 30, 2021 , to$208.7 million in the same period in 2022. During 2022 and 2021, the Company acquired a number of businesses with an aggregate purchase price of$346.3 million as disclosed in the Company's Annual Report on Form 10-K. These acquisitions included V12 Data (acquired inJanuary 2021 ), HOA (acquired inApril 2021 ), Rynoh (acquired inMay 2021 ), AHP (acquired inSeptember 2021 ), Floify (acquired inOctober 2021 ) and RWS (acquired inApril 2022 ). Thus, the increase in revenue in 2022 is primarily driven by the 2022 and 2021 acquisitions, accelerated growth after acquisition and organic growth. During the quarter endedDecember 31, 2021 , the Company corrected an immaterial error related to revenue from claims fees and contra claims expense, which was recorded in the fourth quarter of 2021. This error impacted revenue and cost of revenue for the three months endedJune 30, 2021 andSeptember 30, 2021 . The correction did not impact operating loss or net loss in these periods. See the table above for the impact of the correction by quarter.
Cost of Revenue
Three months ended
Cost of revenue increased by$14.1 million , or 74%, from$19.2 million in the three months endedSeptember 30, 2021 to$33.3 million in the same period in 2022. The increase in the cost of revenue was primarily attributable to the 2022 and 2021 acquisitions of RWS (acquired inApril 2022 ), V12 Data (acquired inJanuary 2021 ), HOA (acquired inApril 2021 ), Rynoh (acquired inMay 2021 ), AHP (acquired inSeptember 2021 ), and Floify (acquired inOctober 2021 ). Floify and RWS was not owned by the Company during the three months endedSeptember 30, 2021 and, therefore, no cost of revenue was recognized from this business during that period. Thus, the increase in cost of revenue in 2022 is primarily driven by the 2022 and 2021 acquisitions. Higher loss and loss adjustment expense at the Company's insurance segment, due primarily to a higher number of claims paid due to weather events, including Hurricane Ian, during the quarter. Claims costs for these events were driven higher due in part to inflation-related pressures. As a percentage of revenue, cost of revenue represented 44% of revenue in the three months endedSeptember 30, 2022 compared with 31% in the same period in 2021. Cost of revenue as a percentage of revenue is higher due to the mix shift in business with insurance as the claims and loss and loss adjustment expense is recorded in cost of revenue.
Nine months ended
Cost of revenue increased by$38.4 million , or 86% from$44.6 million in the nine months endedSeptember 30, 2021 , to$83 million in the same period in 2022. The increase in the cost of revenue was primarily attributable to the 2022 and 2021 acquisitions of RWS (acquired in April 2022),V12 Data (acquired inJanuary 2021 ), HOA (acquired inApril 2021 ), Rynoh (acquired inMay 2021 ), AHP (acquired inSeptember 2021 ), Floify (acquired inOctober 2021 ). Thus, the increase in cost of revenue in 2022 is primarily driven by the 2022 and 2021 acquisitions. Higher loss and loss adjustment expense at the Company's insurance segment, due primarily to a higher number of claims paid due to volatile non-catastrophe summer weather events, including Hurricane Ian, during the quarter. Claims costs for these events were driven higher due in part to inflation-related pressures. As a percentage of revenue, cost of revenue represented 40% of 49
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revenue in the nine months endedSeptember 30, 2022 , compared with 32% in the same period in 2021. Cost of revenue as a percentage of revenue is higher due to the mix shift in business with insurance as the claims and loss and loss adjustment expense is recorded in cost of revenue.
Selling and marketing
Three months ended
Selling and marketing expenses increased by$7.4 million , or 32%, from$22.9 million in the three months endedSeptember 30, 2021 to$30.2 million in the same period in 2022. The increase is due to$7.7 million related to the selling and marketing costs of the acquired businesses comprised of RWS, Floify, AHP. As a percentage of revenue, selling and marketing expenses represented 40% of revenue in the three months endedSeptember 30, 2022 compared with 36% in the same period in 2021.
Nine months ended
Selling and marketing expenses increased by$24.2 million , or 40% from$60.6 million in the nine months endedSeptember 30, 2021 , to$84.8 million in the same period in 2022. The increase is due to$21.6 million related to the selling and marketing costs of the acquired businesses comprised of RWS, Floify and AHP, Rynoh, HOA. Growth in the insurance and software and subscription businesses further contributed to the increase. This was partially offset by a decrease of$1.3 million in stock-based compensation expenses. As a percentage of revenue, selling and marketing expenses represented 41% of revenue in the nine months endedSeptember 30, 2022 , compared with 43% in the same period in 2021. The improvement in selling and marketing expenses as a percentage of revenue is due to the growing economies of scale across the Company'sVertical Software and Insurance segments. Product and technology
Three months ended
Product and technology expenses increased by$3.1 million , or 28%, from$11.3 million in the three months endedSeptember 30, 2021 to$14.4 million in the same period in 2022. The increase is mainly due to$4.9 million increase in product and technology costs of the acquired businesses, most notably Floify. This was partially offset by$0.5 million lower stock-based compensation expense. As a percentage of revenue, product and technology expenses represented 19% of revenue in the three months endedSeptember 30, 2022 compared with 18% in the same period in 2021.
Nine months ended
Product and technology expenses increased by$10.3 million , or 30% from$34.2 million in the nine months endedSeptember 30, 2021 , to$44.4 million in the same period in 2022. The increase is mainly due to$13.6 million increase in product and technology costs of the acquired businesses, most notably HOA, Floify, Rynoh, RWS and AHP. This was partially offset by$1.6 million lower stock-based compensation expense. As a percentage of revenue, product and technology expenses represented 21% of revenue in the nine months endedSeptember 30, 2022 , compared with 24% in the same period in 2021. The improvement in product and technology expenses as a percentage of revenue is due to the growing economies of scale in the overall business.
General and administrative
Three months ended
General and administrative expenses increased by$3.2 million , or 15%, from$22 million in the three months endedSeptember 30, 2021 to$25.3 million in the same period in 2022, primarily due to higher general and administrative expenses of Floify and RWS, and additional investment in corporate resources and systems, as well as SOX implementation. 50
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Also, stock-based compensation expense for the three months ended
Nine months ended
General and administrative expenses increased by$13.9 million , or 21% from$66.5 million in the nine months endedSeptember 30, 2021 , to$80.4 million in the same period in 2022. In the nine months endedSeptember 30, 2022 , general and administrative expenses included$9.5 million related to the HOA, RWS, AHP, Floify and Rynoh. The increase is also due to costs related to increased hiring of corporate administrative resources, audit and accounting fees, as well as consulting fees related to the ongoing SOX requirements. In addition, during the nine months endedSeptember 30, 2022 , there was a loss on revaluation of contingent consideration of$5.3 million as compared to a gain of$0.4 million during the same period in 2021. This was offset by stock-based compensation expense for the nine months endedSeptember 30, 2022 , which was$5.8 million lower than in the same period in 2021.
Impairment loss on intangible assets and goodwill
Three months ended
In the three months endedSeptember 30, 2022 , the Company recorded impairment losses on intangible assets and goodwill totaling$57.1 million , which included a$39.4 million goodwill impairment at its Insurance segment, and a$17.7 million intangible impairment at itsVertical Software segment. These impairment charges reflect recent continued inflationary pressures, the Company's common stock valuation, and broad disruptions in the equity markets, specifically for technology and property and casualty insurance companies. There were no impairment losses on intangible assets and goodwill in the same period in 2021.
Nine months ended
In the nine months endedSeptember 30, 2022 , the Company recorded impairment losses on intangible assets and goodwill totaling$57.1 million , which included a$39.4 million goodwill impairment at its Insurance segment, and a$17.7 million intangible impairment at itsVertical Software segment. These impairment charges reflect recent continued inflationary pressures, the Company's common stock valuation, and broad disruptions in the equity markets, specifically for technology and property and casualty insurance companies. There were no impairment losses on intangible assets and goodwill in the same period in 2021.
Interest expense, net
Three months ended
Interest expense increased by$0.3 million , or 12%, from$1.9 million in the three months endedSeptember 30, 2021 to$2.1 million in the same period in 2022. This was primarily due to issuance of$425 million of Convertible Senior Notes inSeptember 2021 , that in part was used to pay off the$42.1 million of Senior Secured Term Loans that were outstanding atJune 30, 2021 . The total level of interest-bearing debt balance was$425.6 million atJanuary 1, 2022 and$50.8 million atJanuary 1, 2021 and this higher outstanding debt balance was the primary reason for the increased interest expense.
Nine months ended
Interest expense increased by$1.9 million , or 44% from$4.3 million in the nine months endedSeptember 30, 2021 , to$6.2 million in the same period in 2022. This was primarily due to issuance of$425 million of Convertible Senior Notes inSeptember 2021 , that in part was used to pay off the$42.1 million of Senior Secured Term Loans that were outstanding atJune 30, 2021 . The higher outstanding debt balance was the primary reason for the increased interest
expense.
51
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Change in fair value of earnout liability
Three months ended
Changes in fair value of earnout liability were less than$0.1 million (gain) and$7.4 million (gain) in the three months endedSeptember 30, 2022 and 2021, respectively. The decrease in fair value was primarily due to the decline in the stock price atSeptember 30, 2022 as compared toSeptember 30, 2021 .
Nine months ended
Changes in fair value of earnout liability were$14.4 million (gain) and$15.4 million (loss) in the nine months endedSeptember 30, 2022 and 2021, respectively. The decrease in fair value was primarily due to the decline in the stock price atSeptember 30, 2022 as compared toSeptember 30, 2021 . During the nine months endedSeptember 30, 2021 ,$25.8 million of the earnout liability was reclassified to additional paid in capital as a result of a vesting event inMarch 2021 .
Change in fair value of private warrant liability
Three months ended
Changes in fair value of private warrant liability were$0.1 million (gain) and$2.7 million (gain) in the three months endedSeptember 30, 2022 and 2021, respectively. The decrease in fair value was primarily due to the decline in the stock price atSeptember 30, 2022 as compared toSeptember 30, 2021 .
Nine months ended
Changes in fair value of private warrant liability were$14.4 million (gain) and$17.5 million (loss) in the nine months endedSeptember 30, 2022 and 2021, respectively. The decrease in fair value was primarily due to the decline in the stock price atSeptember 30, 2022 as compared toSeptember 30, 2021 .
Investment income and realized gains, net of investment expenses
Three months ended
Investment income and realized gains, net of investment expenses was$0.3 million and$0.2 million in the three months endedSeptember 30, 2022 and 2021, respectively. InApril 2021 , the Company acquired HOA, which maintains a short-term and long-term investment portfolio that generated investment income for nine months in 2021.
Nine months ended
Investment income and realized gains, net of investment expenses was$0.8 million and$0.4 million in the nine months endedSeptember 30, 2022 and 2021, respectively. InApril 2021 , the Company acquired HOA, which maintains a short-term and long-term investment portfolio that generated investment income for nine months in 2021. The Company did not have any material investments
prior toApril 2021 . Income tax benefit (expense)
Three months ended
Income tax benefit of$23 thousand and$1.8 million was recognized for the three months endedSeptember 30, 2022 and 2021, respectively. The difference between the Company's effective tax rates for the 2022 period and theU.S. statutory rate of 21% was primarily due to a full valuation allowance related to the Company's net deferred assets. The difference between the Company's effective tax rates for the 2021 period and theU.S. statutory rate of 21% was 52
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primarily due to the release of a portion of the valuation allowance due to
deferred tax liabilities created by certain acquisitions.
Nine months ended
Income tax expense of$0.3 million and income tax benefit of$9.9 million was recognized for the nine months endedSeptember 30, 2022 and 2021, respectively. The difference between the Company's effective tax rates for the 2022 period and theU.S. statutory rate of 21% was primarily due to a full valuation allowance related to the Company's net deferred assets. The difference between the Company's effective tax rates for the 2021 period and theU.S. statutory rate of 21% was primarily due to the release of a portion of the valuation allowance due to deferred tax liabilities created by certain acquisitions.
Segment Results of Operations
The Company operates the business as two reportable segments that are also operating segments:Vertical Software and Insurance. For additional information about these segments, see Note 14 in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report. Segment Revenue Three Months EndedSeptember 30, 2022 Nine
Months Ended
Vertical Software
Segment Insurance Segment Vertical Software Segment Insurance Segment
Revenue:
Software and service subscriptions $ 17,529 $ - $ 55,165 $ - Move-related transactions (excluding insurance) 21,569
- 51,155 -
Post-move transactions 5,365 - 15,644 -
Insurance - 30,903 - 86,732
Total revenue $ 44,463 $ 30,903 $ 121,964 $ 86,732
Three Months Ended September 30, 2021 Nine
Months Ended
Vertical Software
Segment Insurance Segment Vertical Software Segment Insurance Segment
Revenue:
Software and service subscriptions $ 15,238 $ - $ 38,716 $ - Move-related transactions (excluding insurance) 21,576
- 46,742 - Post-move transactions 5,473 - 16,171 - Insurance - 20,482 - 39,223 Total revenue $ 42,287 $ 20,482 $ 101,629 $ 39,223
Three months ended
30, 2021
For the three months endedSeptember 30, 2022 ,Vertical Software segment revenue was$44.5 million or 59.0% of total revenue for the same period. For the three months endedSeptember 30, 2021 ,Vertical Software segment revenue was$42.3 million or 67.0% of total revenue for the same period. Software and service subscriptions revenue increased from$13.0 million to$20.5 million as the Company acquired RWS inApril 2022 , and Floify inOctober 2021 . Thus, the increase in revenue in 2022 is primarily driven by the recent acquisitions, accelerated growth after acquisition and organic growth. 53
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Insurance segment revenue was$30.9 million or 41.0% of total revenue for the three months endedSeptember 30, 2022 . Insurance segment revenue was$20.5 million or 33.0% of total revenue for the three months endedSeptember 30, 2021 . The increase is mainly due to the acquisitions of RWS (acquired inApril 2022 ) and AHP (acquired inSeptember 2021 ), and the accelerated growth of these businesses after acquisition, as well as organic growth of the Company's existing insurance operation of HOA.
Nine months ended
For the nine months endedSeptember 30, 2022 ,Vertical Software segment revenue was$122.0 million or 58.4% of total revenue for the same period. For the nine months endedSeptember 30, 2021 ,Vertical Software segment revenue was$101.6 million or 72.0% of total revenue for the same period. Software and service subscriptions revenue increased as the Company acquired RWS inApril 2022 , Rynoh inMay 2021 and Floify inOctober 2021 . Thus, the increase in revenue in 2022 is primarily driven by the 2021 acquisitions, accelerated growth after acquisition and organic growth. Insurance segment revenue was$86.7 million for the nine months endedSeptember 30, 2022 , and represented 41.6% of total revenue for the same period. For the nine months endedSeptember 30, 2021 , Insurance segment revenue was$39.2 million or 28.0% of total revenue for the same period. The increase is mainly due to the acquisitions of RWS (acquired inApril 2022 ), AHP (acquired inSeptember 2021 ) and HOA (acquired inApril 2021 ), and the accelerated growth of these businesses after acquisition, as well as the organic growth of HOA.
Segment Adjusted EBITDA (Loss)
Segment Adjusted EBITDA (loss) is defined as revenue less operating expenses
associated with the segments. Segment Adjusted EBITDA (loss) also excludes
non-cash items, certain transactions that are not indicative of ongoing segment
operating and financial performance and are not reflective of the Company's core
operations. See Note 14 in the notes to the unaudited condensed consolidated
financial statements included in Part I, Item 1 of this Quarterly Report for
additional information.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Segment adjusted EBITDA (loss):
Vertical Software $ 4,956 $ 7,712 $ 13,978 $ 19,041
Insurance (2,317) 5,473 (4,099) 3,067
Corporate and Other(1) (15,611) (12,312) (44,190) (40,754)
Total segment adjusted EBITDA (loss)(2) $ (12,972)$ 873 $ (34,311)$ (18,646)
(1) Includes costs that are not directly attributable to reportable segments, as
well as certain shared costs.
(2) See reconciliation of adjusted EBITDA (loss) to net loss below.
Non-GAAP Financial Measures
This Quarterly Report includes non-GAAP financial measures, such as Adjusted
EBITDA (loss), Adjusted EBITDA (loss) as a percent of revenue, and average
revenue per monetized service.
The Company defines Adjusted EBITDA (loss) as net income (loss) adjusted for
interest expense, net, income taxes, other expenses, net, depreciation and
amortization, impairment loss on intangible assets and goodwill, non-cash long-
losses and impairment of property, equipment and software, stock-based
compensation expense and acquisition-related impacts, amortization of intangible
assets, gains (losses) recognized on changes in the value of contingent
consideration arrangements, if any, gain or loss on divestures and certain
transaction costs. Adjusted EBITDA (loss) as a percent of revenue is defined as
Adjusted EBITDA (loss) divided by GAAP total revenue. Average revenue per
monetized services in quarter is the average revenue generated per monetized
service performed in a quarterly period. When calculating average revenue per
monetized service in a quarter, average revenue is defined as total quarterly
service transaction revenues generated from monetized services.
54
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Company management uses these non-GAAP financial measures as supplemental measures of the Company's operating and financial performance, for internal budgeting and forecasting purposes, to evaluate financial and strategic planning matters, and to establish certain performance goals for incentive programs. The Company believes that the use of these non-GAAP financial measures provides investors with useful information to evaluate the Company's operating and financial performance and trends and in comparing Porch's financial results with competitors, other similar companies and companies across different industries, many of which present similar non-GAAP financial measures to investors. However, the Company's definitions and methodology in calculating these non-GAAP measures may not be comparable to those used by other companies. In addition, the Company may modify the presentation of these non-GAAP financial measures in the future, and any such modification may be material. You should not consider these non-GAAP financial measures in isolation, as a substitute to or superior to financial performance measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude specified income and expenses, some of which may be significant or material, that are required by GAAP to be recorded in the Company's consolidated financial statements. The Company may also incur future income or expenses similar to those excluded from these non-GAAP financial measures, and the presentation of these measures should not be construed as an inference that future results will be unaffected by unusual or non-recurring items. In addition, these non-GAAP financial measures reflect the exercise of management judgment about which income and expense are included or excluded in determining these non-GAAP financial measures. See the reconciliation tables below for more details regarding these non-GAAP financial measures, including the reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures.
Revenue Less Cost of Revenue
The following table reconciles revenue less cost of revenue to operating loss for the three and nine months endedSeptember 30, 2022 and 2021, respectively (dollar amounts in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenue $ 75,366 $ 62,769 $ 208,696$ 140,852 Less: Cost of revenue (33,269) (19,158) (83,016) (44,587) Revenue less cost of revenue 42,097 43,611 125,680 96,265 Less: Selling and marketing costs 30,245 22,874 84,815 60,636 Less: Product and technology costs 14,438 11,317 44,446 34,158 Less: General and administrative costs 25,257 22,034 80,360 66,463 Less: Impairment loss on intangible assets and goodwill 57,057 - 57,057 - Total operating expenses $ 160,266 $
75,383 $ 349,694$ 205,844 Operating loss$ (84,900) $ (12,614) $ (140,998) $ (64,992)
Three months ended
30, 2021
Revenue less cost of revenue decreased by$1.5 million , or 3.5% from$43.6 million in the three months endedSeptember 30, 2021 to$42.1 million in the three months endedSeptember 30, 2022 . During 2022, the Company acquired RWS. During 2021, the Company acquired a number of businesses, including Rynoh (acquired inMay 2021 ), AHP (acquired inSeptember 2021 ) and Floify (acquired inOctober 2021 ). Floify and RWS were not owned by the Company during the three months endedSeptember 30, 2021 and, therefore, no cost of revenue was recognized from these businesses during that period. The decreased revenue less cost of revenue in 2022 is primarily driven by higher loss and loss adjustment expense related to the insurance business. 55
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Nine months ended
Revenue less cost of revenue increased by$29.4 million , or 30.6% from$96.3 million in the nine months endedSeptember 30, 2021 to$125.7 million in the nine months endedSeptember 30, 2022 . During 2022, the Company acquired RWS. During 2021, the Company acquired a number of businesses with an aggregate purchase price of$346.3 million as disclosed in the Company's Annual Report on Form 10-K. These acquisitions included V12 Data (acquired inJanuary 2021 ), HOA (acquired inApril 2021 ), Rynoh (acquired inMay 2021 ), AHP (acquired inSeptember 2021 ) and Floify (acquired inOctober 2021 ). These businesses were not owned by the Company for the entire nine months endedSeptember 30, 2022 , therefore, less revenue less cost of revenue was recognized from these businesses during that period. Thus, the increase revenue less cost of revenue in 2022 is primarily driven by the 2022 and 2021 acquisitions, accelerated growth after acquisition and organic growth.
Adjusted EBITDA (loss)
The following table reconciles net loss to Adjusted EBITDA (loss) for the three and nine months endedSeptember 30, 2022 and 2021 (dollar amounts in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net loss$ (86,391) $ (5,099) $ (118,564) $ (86,497) Interest expense 2,085 1,857 6,236 4,296
Income tax benefit (expense) (23) (1,836) 268 (9,917) Depreciation and amortization 8,676 4,431 21,574 10,787 Loss (gain) on extinguishment of debt - 3,133 - (5,110) Other expense (income), net (69) (316) 37 (225) Impairment loss on intangible assets and goodwill 57,057 - 57,057 - Non-cash losses and impairment of property, equipment and software 31 76 101 216 Non-cash stock-based compensation expense 5,089 6,579 20,645 30,627 Revaluation of contingent consideration 565 195 5,251 (380) Revaluation of earnout liability (43) (7,413) (13,809) 15,388 Revaluation of private warrant liability (124) (2,692) (14,391) 17,521 Acquisition and related expense 175 1,958 1,284 4,648 Adjusted EBITDA (loss)$ (12,972) $
873
Adjusted EBITDA (loss) as a percentage
of revenue
(17) % 1 % (16) % (13) % Adjusted EBITDA (loss) for the three months endedSeptember 30, 2022 was$13 million , a$13.9 million decline from Adjusted EBITDA of$0.9 million for the same period in 2021. Adjusted EBITDA (loss) for the nine months endedSeptember 30, 2022 was$34.3 million , a$15.7 million decline from Adjusted EBITDA (loss) of$18.6 million for the same period in 2021. During 2022, the Company acquired RWS for an aggregate purchase price of$39.0 million . During 2021, the Company acquired a number of businesses with an aggregate purchase price of$346.3 million as disclosed in the Company's Annual Report on Form 10-K. These acquisitions included V12 Data (acquired inJanuary 2021 ), HOA (acquired inApril 2021 ), Rynoh (acquired inMay 2021 ), AHP (acquired inSeptember 2021 ) and Floify (acquired inOctober 2021 ). RWS and Floify were not owned by the Company during the three and nine months endedSeptember 30, 2021 and, therefore, no revenue and Adjusted EBITDA (loss) was recognized from this business during these periods. The decline in Adjusted EBITDA (loss) in 2022 is primarily driven by the macro housing environment affecting both segments, and higher volume of claims paid out by HOA in the second and third quarter of 2022, affecting the Insurance segment. Continued investments in sales and marketing and product and technology related to consumer experience, app build out, data platforms and investments in establishing and maintaining SOX and other internal controls across IT and accounting organizations further impacted Adjusted EBITDA (loss). This decline was partially offset by the impact of the 2022 and 2021 acquisitions. 56 Table of Contents
Liquidity and Capital Resources
Since inception, as a private company, the Company has financed its operations primarily from the sales of redeemable convertible preferred stock and convertible promissory notes, and proceeds from the senior secured term loans. OnDecember 23, 2020 , the Company received approximately$269.5 million of aggregate cash proceeds from recapitalization, net of transaction costs, as it began trading publicly.
During the nine months ended
combined, on HOA's line of credit and term loan facility. See Note 7.
During 2021, the Company completed a private offering of$425 million aggregate principal amounts of convertible debt maturing in 2026, and raised$126.7 million and$4.3 million from exercise of public warrants and stock options, respectively. As ofSeptember 30, 2022 , the Company had cash and cash equivalents of$260.2 million and$16.8 million of restricted cash, respectively. Restricted cash equivalents as ofSeptember 30, 2022 includes$5.1 million held by the Company's captive insurance company as a collateral for the benefit of HOA,$0.5 million held in certificates of deposits and money market mutual funds pledged to theDepartment of Insurance in certain states as a condition of its Certificate of Authority for the purpose of meeting obligations to policyholders and creditors,$8.3 million in funds held for the payment of possible warranty claims as required under regulatory guidelines in twenty five states, and$2.9 million related to acquisition indemnifications. The Company has incurred net losses since its inception, and has an accumulated deficit atSeptember 30, 2022 andDecember 31, 2021 totaling$542.7 million and$424.1 million , respectively. As ofSeptember 30, 2022 andDecember 31, 2021 , the Company had$440.5 million and$425.6 million aggregate principal amount outstanding in convertible notes, promissory notes, and line of credit and term loan facilities, respectively. Based on the Company's current operating and growth plan, management believes cash and cash equivalents atSeptember 30, 2022 , are sufficient to finance the Company's operations, planned capital expenditures, working capital requirements and debt service obligations for at least the next 12 months. As the Company's operations evolve and continue its growth strategy, including through acquisitions, the Company may elect or need to obtain alternative sources of capital, and it may finance additional liquidity needs in the future through one or more equity or debt financings. The Company may not be able to obtain equity or additional debt financing in the future when needed or, if available, the terms may not be satisfactory to the Company or could be dilutive to its stockholders.Porch Group, Inc. is a holding company that transacts a majority of its business through operating subsidiaries, including insurance subsidiaries. Consequently, the Company's ability to pay dividends and expenses is largely dependent on dividends or other distributions from its subsidiaries. The Company's insurance company subsidiaries are highly regulated and are restricted by statute as to the amount of dividends they may pay without the prior approval of their respective regulatory authorities. As ofSeptember 30, 2022 , cash and cash equivalents of$77.7 million and investments held by these companies was$62.6 million . The Company may, at any time and from time to time, seek to retire or purchase its outstanding debt or equity through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. 57
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The following table provides a summary of cash flow data for the nine months
ended
Nine Months Ended September 30, $ %
2022 2021 Change Change
Net cash used in operating activities $ (12,808) $ (41,717) $ 28,909 69 %
Net cash used in investing activities (46,444) (184,657) 138,213 75 %
Net cash (used) provided by financing
activities 11,454 434,752 (423,298) 97 %
Change in cash, cash equivalents and
restricted cash $ (47,798) $ 208,378 $ (256,176) NM
Operating Cash Flows
Net cash used in operating activities was$12.8 million for the nine months endedSeptember 30, 2022 . Net cash used in operating activities consists of net loss of$118.6 million , adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments include impairment loss on intangible assets and goodwill of$57.1 million , stock-based compensation expense of$20.6 million , depreciation and amortization of$21.6 million , non-cash interest expense of$2.3 million , fair value adjustments to contingent consideration of$5.3 million (loss), and fair value adjustments to earnout liability and private warrant liability of$13.8 million (gain) and$14.4 million (gain), respectively. Net changes in working capital were a source of cash of$23 million , primarily due to increases in deferred revenue, losses and loss adjustment expense reserves, and other insurance liabilities, offset by reinsurance balance due, accounts receivable and current liabilities. Net cash used in operating activities was$41.7 million for the nine months endedSeptember 30, 2021 . Net cash used in operating activities consists of net loss of$86.5 million , adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments include stock-based compensation expense of$29.4 million , depreciation and amortization of$10.8 million , gain on extinguishment of debt of$5.1 million , and fair value adjustments to earnout liability and private warrant liability of$15.4 million and$17.5 million , respectively. Net changes in working capital were a use of cash of$22.7 million , primarily due to increases in current liabilities and reinsurance balance due.
Investing Cash Flows
Net cash used in investing activities was$46.4 million for the nine months endedSeptember 30, 2022 . Net cash used in investing activities is primarily related to acquisitions, net of cash acquired of$37.0 million , purchases of investments of$19.4 million , investments in developing internal-use software of$5.8 million , and purchases of property and equipment of$2.0 million . This was offset by the cash inflows related to maturities and sales of investments of$17.8 million . Net cash used in investing activities was$184.7 million for the nine months endedSeptember 30, 2021 . Net cash used in investing activities is primarily related to purchases of investments of$19.1 million , investments to develop internal use software of$2.6 million , and acquisitions, net of cash acquired of$178.7 million . This was offset by the cash inflows related to maturities and sales of investments of$16.4 million .
Financing Cash Flows
Net cash provided by financing activities was$11.5 million for the nine months endedSeptember 30, 2022 . Net cash provided by financing activities is primarily related to proceeds from debt issuance, net of fees of$15.0 million and exercises of stock options of$1.1 million . This was partially offset by shares repurchased to pay income tax withholdings upon vesting of RSUs of$2.9 million , payments of acquisition-related contingent consideration of$1.6 million and debt repayments of$0.2 million . Net cash provided by financing activities was$434.8 million for the nine months endedSeptember 30, 2021 . Net cash provided by financing activities is primarily related to the issuance of the 2026 Notes of$413.5 million , financing of the capped call transactions of$42.9 million , and exercises of warrants and stock options of$130.3 million , partially 58
Table of Contents
offset by shares repurchased to pay income tax withholdings upon vesting of RSUs
of
Off-Balance Sheet Arrangements
Since the date of incorporation, the Company has not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of theSecurities and Exchange Commission (the "SEC").
Recent Accounting Pronouncements
See Note 1 in the notes to the unaudited condensed consolidated financial
statements included in Part I, Item 1 of this Quarterly Report for more
information about recent accounting pronouncements, the timing of their
adoption, and the assessment, to the extent one has been made, of their
potential impact on the Company's financial condition and results of operations.
Conifer Holdings Reports 2022 Third Quarter Financial Results
CONIFER HOLDINGS, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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