UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 2023
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-39142
Porch Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 83-2587663 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
411 1st Avenue S., Suite 501, Seattle, WA 98104
(Address of Principal Executive Offices) (Zip Code)
(855) 767-2400
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of Each Class | Trading symbol | Name of Exchange on which registered |
Common Stock, par value $0.0001 per share | PRCH | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | |
Large accelerated filer | ☐ | Accelerated filer | ☒ | | |
| | | | | |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of outstanding shares of the registrant’s common stock as of May 8,August 4, 2023, was 97,816,355.98,431,801.
Table of Contents
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 34 | |
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2
PART I —FINANCIAL INFORMATION
Item 1. Financial Statements
PORCH GROUP, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(all numbers in thousands, except share amounts)
| | | | | | |
|
| March 31, 2023 |
| December 31, 2022 | ||
Assets |
| | |
| |
|
Current assets |
| |
|
| |
|
Cash and cash equivalents | | $ | 179,357 | | $ | 215,060 |
Accounts receivable, net | |
| 23,600 | |
| 26,438 |
Short-term investments | | | 34,441 | | | 36,523 |
Reinsurance balance due | | | 292,775 | | | 299,060 |
Prepaid expenses and other current assets | |
| 30,834 | |
| 20,009 |
Restricted cash | | | 14,796 | | | 13,545 |
Total current assets | |
| 575,803 | |
| 610,635 |
Property, equipment, and software, net | |
| 13,727 | |
| 12,240 |
Operating lease right-of-use assets | | | 4,151 | | | 4,201 |
Goodwill | |
| 247,118 | |
| 244,697 |
Long-term investments | | | 58,678 | | | 55,118 |
Intangible assets, net | |
| 101,753 | |
| 108,255 |
Long-term insurance commissions receivable | | | 13,140 | | | 12,265 |
Other assets | |
| 2,346 | |
| 1,646 |
Total assets | | $ | 1,016,716 | | $ | 1,049,057 |
| |
|
| |
|
|
Liabilities and Stockholders’ Equity | |
|
| |
|
|
Current liabilities | |
|
| |
|
|
Accounts payable | | $ | 6,200 | | $ | 6,268 |
Accrued expenses and other current liabilities | |
| 38,856 | |
| 39,742 |
Deferred revenue | |
| 246,502 | |
| 270,690 |
Refundable customer deposits | |
| 20,984 | |
| 20,142 |
Current debt | |
| 10,392 | |
| 16,455 |
Losses and loss adjustment expense reserves | | | 115,527 | | | 100,632 |
Other insurance liabilities, current | | | 78,422 | | | 61,710 |
Total current liabilities | |
| 516,883 | |
| 515,639 |
Long-term debt | |
| 425,383 | |
| 425,310 |
Operating lease liabilities, non-current | | | 2,585 | | | 2,536 |
Earnout liability, at fair value | | | 44 | | | 44 |
Private warrant liability, at fair value | | | 362 | | | 707 |
Other liabilities (includes $24,198 and $24,546 at fair value, respectively) | |
| 26,183 | |
| 25,468 |
Total liabilities | |
| 971,440 | |
| 969,704 |
Commitments and contingencies (Note 12) | |
|
| |
|
|
Stockholders’ equity | |
|
| |
|
|
Common stock, $0.0001 par value: | |
| 10 | |
| 10 |
Authorized shares – 400,000,000 and 400,000,000, respectively | |
|
| |
|
|
Issued and outstanding shares – 97,018,032 and 98,455,838, respectively | | | | | | |
Additional paid-in capital | |
| 677,426 | |
| 670,537 |
Accumulated other comprehensive loss | | | (5,296) | | | (6,171) |
Accumulated deficit | |
| (626,864) | |
| (585,023) |
Total stockholders’ equity | |
| 45,276 | |
| 79,353 |
Total liabilities and stockholders’ equity | | $ | 1,016,716 | | $ | 1,049,057 |
| | | | | | |
|
| June 30, 2023 |
| December 31, 2022 | ||
Assets |
| | |
| |
|
Current assets |
| |
|
| |
|
Cash and cash equivalents | | $ | 265,573 | | $ | 215,060 |
Accounts receivable, net | |
| 24,715 | |
| 26,438 |
Short-term investments | | | 26,151 | | | 36,523 |
Reinsurance balance due | | | 272,467 | | | 299,060 |
Prepaid expenses and other current assets | |
| 29,665 | |
| 20,009 |
Restricted cash | | | 39,277 | | | 13,545 |
Total current assets | |
| 657,848 | |
| 610,635 |
Property, equipment, and software, net | |
| 14,768 | |
| 12,240 |
Operating lease right-of-use assets | | | 3,698 | | | 4,201 |
Goodwill | |
| 191,907 | |
| 244,697 |
Long-term investments | | | 66,579 | | | 55,118 |
Intangible assets, net | |
| 96,826 | |
| 108,255 |
Long-term insurance commissions receivable | | | 13,502 | | | 12,265 |
Other assets | |
| 2,015 | |
| 1,646 |
Total assets | | $ | 1,047,143 | | $ | 1,049,057 |
| |
|
| |
|
|
Liabilities and Stockholders’ Equity (Deficit) | |
|
| |
|
|
Current liabilities | |
|
| |
|
|
Accounts payable | | $ | 9,330 | | $ | 6,268 |
Accrued expenses and other current liabilities | |
| 33,873 | |
| 39,742 |
Deferred revenue | |
| 256,617 | |
| 270,690 |
Refundable customer deposits | |
| 19,929 | |
| 20,142 |
Current debt | |
| 5,439 | |
| 16,455 |
Losses and loss adjustment expense reserves | | | 165,709 | | | 100,632 |
Other insurance liabilities, current | | | 112,849 | | | 61,710 |
Total current liabilities | |
| 603,746 | |
| 515,639 |
Long-term debt | |
| 426,965 | |
| 425,310 |
Operating lease liabilities, non-current | | | 2,137 | | | 2,536 |
Earnout liability, at fair value | | | 44 | | | 44 |
Private warrant liability, at fair value | | | 347 | | | 707 |
Derivative liability, at fair value | | | 26,820 | | | — |
Other liabilities (includes $21,328 and $24,546 at fair value, respectively) | |
| 23,826 | |
| 25,468 |
Total liabilities | |
| 1,083,885 | |
| 969,704 |
Commitments and contingencies (Note 12) | |
|
| |
|
|
Stockholders’ equity (deficit) | |
|
| |
|
|
Common stock, $0.0001 par value: | |
| 10 | |
| 10 |
Authorized shares – 400,000,000 and 400,000,000, respectively | |
|
| |
|
|
Issued and outstanding shares – 98,168,956 and 98,455,838, respectively | | | | | | |
Additional paid-in capital | |
| 683,151 | |
| 670,537 |
Accumulated other comprehensive loss | | | (6,076) | | | (6,171) |
Accumulated deficit | |
| (713,827) | |
| (585,023) |
Total stockholders’ equity (deficit) | |
| (36,742) | |
| 79,353 |
Total liabilities and stockholders’ equity (deficit) | | $ | 1,047,143 | | $ | 1,049,057 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
PORCH GROUP, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(all numbers in thousands, except share amounts, unaudited)amounts)
| | | | | | |
|
| Three Months Ended March 31, | ||||
|
| 2023 |
| 2022 | ||
Revenue | | $ | 87,369 | | $ | 63,567 |
Operating expenses(1): | |
|
| |
|
|
Cost of revenue | |
| 51,275 | |
| 25,216 |
Selling and marketing | |
| 32,585 | |
| 26,077 |
Product and technology | |
| 13,950 | |
| 14,231 |
General and administrative | |
| 26,066 | |
| 26,699 |
Impairment loss on intangible assets and goodwill | | | 2,021 | | | — |
Total operating expenses | |
| 125,897 | |
| 92,223 |
Operating loss | |
| (38,528) | |
| (28,656) |
Other income (expense): | |
|
| |
|
|
Interest expense | |
| (2,188) | |
| (2,427) |
Change in fair value of earnout liability | | | — | | | 11,179 |
Change in fair value of private warrant liability | | | 345 | | | 10,189 |
Investment income and realized gains, net of investment expenses | | | 758 | | | 197 |
Other income, net | |
| 762 | |
| 56 |
Total other income (expense) | |
| (323) | |
| 19,194 |
Loss before income taxes | |
| (38,851) | |
| (9,462) |
Income tax benefit | |
| 111 | |
| 177 |
Net loss | | $ | (38,740) | | $ | (9,285) |
| | | | | | |
Loss per share - basic and diluted (Note 15) | | $ | (0.41) | | $ | (0.10) |
| |
|
| |
|
|
Shares used in computing basic and diluted loss per share | |
| 95,209,819 | |
| 96,074,527 |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Revenue | | $ | 98,765 | | $ | 70,915 | | $ | 186,134 | | $ | 134,482 | ||||||
Operating expenses: | |
|
| |
|
| |
|
| |
|
| ||||||
Cost of revenue |
| $ | — |
| $ | — | |
| 81,330 | |
| 29,251 | |
| 132,605 | |
| 54,467 |
Selling and marketing | |
| 1,045 | |
| 632 | |
| 34,637 | |
| 29,160 | |
| 67,222 | |
| 55,237 |
Product and technology | |
| 1,449 | |
| 1,137 | |
| 15,495 | |
| 15,777 | |
| 29,445 | |
| 30,009 |
General and administrative | |
| 4,400 | |
| 4,085 | |
| 22,779 | |
| 28,297 | |
| 48,608 | |
| 54,896 |
Provision for doubtful accounts | | | 48,718 | |
| 108 | |
| 48,955 | |
| 207 | ||||||
Impairment loss on intangible assets and goodwill | | | 55,211 | | | — | | | 57,232 | | | — | ||||||
Total operating expenses | |
| 258,170 | |
| 102,593 | |
| 384,067 | |
| 194,816 | ||||||
Operating loss | |
| (159,405) | |
| (31,678) | |
| (197,933) | |
| (60,334) | ||||||
Other income (expense): | |
|
| |
|
| |
|
| |
|
| ||||||
Interest expense | |
| (8,775) | |
| (1,925) | |
| (10,963) | |
| (4,352) | ||||||
Change in fair value of earnout liability | | | — | | | 2,587 | | | — | | | 13,766 | ||||||
Change in fair value of private warrant liability | | | 15 | | | 4,078 | | | 360 | | | 14,267 | ||||||
Change in fair value of derivatives | | | (2,950) | | | — | | | (2,950) | | | — | ||||||
Gain on extinguishment of debt | | | 81,354 | | | — | | | 81,354 | | | — | ||||||
Investment income and realized gains, net of investment expenses | | | 1,249 | | | 243 | | | 2,007 | | | 440 | ||||||
Other income (expense), net | |
| 1,578 | |
| (162) | |
| 2,340 | |
| (107) | ||||||
Total other income (expense) | |
| 72,471 | |
| 4,821 | |
| 72,148 | |
| 24,014 | ||||||
Loss before income taxes | |
| (86,934) | |
| (26,857) | |
| (125,785) | |
| (36,320) | ||||||
Income tax benefit (provision) | |
| (29) | |
| (468) | |
| 82 | |
| (290) | ||||||
Net loss | | $ | (86,963) | | $ | (27,325) | | $ | (125,703) | | $ | (36,610) | ||||||
| | $ | 6,894 | | $ | 5,854 | | | | | | | | | | | | |
Net loss per share - basic and diluted (Note 15) | | $ | (0.91) | | $ | (0.28) | | $ | (1.32) | | $ | (0.38) | ||||||
| |
|
| |
|
| |
|
| |
|
| ||||||
Shares used in computing basic and diluted net loss per share | |
| 95,731,850 | |
| 97,142,163 | |
| 95,472,277 | |
| 96,611,294 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
PORCH GROUP, INC.
Condensed Consolidated Statements of Comprehensive Loss
Loss(Unaudited)
(all numbers in thousands, unaudited)thousands)
| | | | | | |
|
| Three Months Ended March 31, | ||||
|
| 2023 |
| 2022 | ||
Net loss | | $ | (38,740) | | $ | (9,285) |
Other comprehensive income (loss): | |
| | |
| |
Current period change in net unrealized loss, net of tax | | | 875 | |
| (2,515) |
Comprehensive loss | | $ | (37,865) | | $ | (11,800) |
| | | | | | | | | | | | |
|
| Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Net loss | | $ | (86,963) | | $ | (27,325) | | $ | (125,703) | | $ | (36,610) |
Other comprehensive income (loss): | |
| | |
| | |
| | |
| |
Current period change in net unrealized loss, net of tax | | | (780) | |
| (1,785) | |
| 95 | |
| (4,300) |
Comprehensive loss | | $ | (87,743) | | $ | (29,110) | | $ | (125,608) | | $ | (40,910) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
PORCH GROUP, INC.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(Unaudited)
(all numbers in thousands, except share amounts, unaudited)amounts)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | ||
| | | | | | | Additional | | | | | Other | | Total | |||
| | Common Stock |
| Paid-in |
| Accumulated |
| Comprehensive |
| Stockholders’ | |||||||
| | Shares | | Amount |
| Capital | | Deficit | | Loss |
| Equity (Deficit) | |||||
Balances as of March 31, 2023 | | 97,018,032 | | $ | 10 | | $ | 677,426 | | $ | (626,864) | | $ | (5,296) | | $ | 45,276 |
Net loss | | — | | | — | | | — | | | (86,963) | | | — | | | (86,963) |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (780) | | | (780) |
Stock-based compensation | | — | | | — | | | 6,404 | | | — | | | — | | | 6,404 |
Vesting of restricted stock units | | 1,627,546 | | | — | | | — | | | — | | | — | | | — |
Income tax withholdings | | (476,622) | | | — | | | (679) | | | — | | | — | | | (679) |
Balances as of June 30, 2023 | | 98,168,956 | | $ | 10 | | $ | 683,151 | | $ | (713,827) | | $ | (6,076) | | $ | (36,742) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | ||
| | | | | | | Additional | | | | | Other | | Total | |||
| | Common Stock |
| Paid-in |
| Accumulated |
| Comprehensive |
| Stockholders’ | |||||||
|
| Shares | | Amount |
| Capital | | Deficit | | Loss |
| Equity | |||||
Balances as of March 31, 2022 | | 98,297,186 | | $ | 10 | | $ | 647,551 | | $ | (433,397) | | $ | (2,774) | | $ | 211,390 |
Net loss | | — | | | — | | | — | | | (27,325) | | | — | | | (27,325) |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (1,785) | | | (1,785) |
Stock-based compensation | | — | | | — | | | 9,702 | | | — | | | — | | | 9,702 |
Issuance of common stock for acquisitions | | 628,660 | | | — | | | 3,552 | | | — | | | — | | | 3,552 |
Vesting of restricted stock awards | | 563,406 | | | — | | | — | | | — | | | — | | | — |
Exercise of stock options | | 88,772 | | | — | | | 219 | | | — | | | — | | | 219 |
Income tax withholdings | | (137,496) | | | — | | | (1,210) | | | — | | | — | | | (1,210) |
Balances as of June 30, 2022 | | 99,440,528 | | $ | 10 | | $ | 659,814 | | $ | (460,722) | | $ | (4,559) | | $ | 194,543 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
PORCH GROUP, INC.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) – Continued
(Unaudited)
(all numbers in thousands, except share amounts)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | ||
| | | | | | | Additional | | | | | Other | | Total | |||
| | Common Stock |
| Paid-in |
| Accumulated |
| Comprehensive |
| Stockholders’ | |||||||
|
| Shares | | Amount |
| Capital | | Deficit | | Loss |
| Equity (Deficit) | |||||
Balances as of December 31, 2022 |
| 98,206,323 | | $ | 10 | | $ | 670,537 | | $ | (585,023) | | $ | (6,171) | | $ | 79,353 |
Net loss |
| — | |
| — | |
| — | |
| (125,703) | |
| — | |
| (125,703) |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 95 | | | 95 |
Stock-based compensation |
| — | |
| — | |
| 13,298 | |
| — | |
| — | |
| 13,298 |
Vesting of restricted stock awards |
| 1,922,960 | |
| — | |
| — | |
| — | |
| — | |
| — |
Exercise of stock options |
| 4,519 | |
| — | |
| 8 | |
| — | |
| — | |
| 8 |
Income tax withholdings | | (568,688) | |
| — | |
| (883) | |
| — | |
| — | | | (883) |
Repurchases of common stock | | (1,396,158) | | | — | | | — | | | (3,101) | | | — | | | (3,101) |
Proceeds from sale of common stock | | — | | | — | | | 191 | | | — | | | — | | | 191 |
Balances as of June 30, 2023 | | 98,168,956 | | $ | 10 | | $ | 683,151 | | $ | (713,827) | | $ | (6,076) | | $ | (36,742) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | ||
| | | | | | | Additional | | | | | Other | | Total | |||
| | Common Stock |
| Paid-in |
| Accumulated |
| Comprehensive |
| Stockholders’ | |||||||
|
| Shares | | Amount |
| Capital | | Deficit | | Loss |
| Equity | |||||
Balances as of December 31, 2021 |
| 97,961,597 | | $ | 10 | | $ | 641,406 | | $ | (424,112) | | $ | (259) | | $ | 217,045 |
Net loss |
| — | |
| — | |
| — | |
| (36,610) | |
| — | |
| (36,610) |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (4,300) | | | (4,300) |
Stock-based compensation |
| — | |
| — | |
| 15,556 | |
| — | |
| — | |
| 15,556 |
Issuance of common stock for acquisitions | | 628,660 | | | — | | | 3,552 | | | | | | | | | 3,552 |
Contingent consideration for acquisitions | | — | | | — | | | 530 | | | — | | | — | | | 530 |
Vesting of restricted stock awards |
| 809,261 | |
| — | |
| — | |
| — | |
| — | |
| — |
Exercise of stock options |
| 274,457 | |
| — | |
| 692 | |
| — | |
| — | |
| 692 |
Income tax withholdings | | (233,447) | | | — | | | (1,922) | | | — | | | — | | | (1,922) |
Balances as of June 30, 2022 | | 99,440,528 | | $ | 10 | | $ | 659,814 | | $ | (460,722) | | $ | (4,559) | | $ | 194,543 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
PORCH GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(all numbers in thousands)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | ||
| | | | | | | Additional | | | | | Other | | Total | |||
| | Common Stock |
| Paid-in |
| Accumulated |
| Comprehensive |
| Stockholders’ | |||||||
| | Shares | | Amount |
| Capital | | Deficit | | Loss |
| Equity | |||||
Balances as of December 31, 2022 |
| 98,206,323 | | $ | 10 | | $ | 670,537 | | $ | (585,023) | | $ | (6,171) | | $ | 79,353 |
Net loss | | — | | | — | | | — | | | (38,740) | | | — | | | (38,740) |
Other comprehensive income, net of tax |
| — | |
| — | |
| — | |
| — | |
| 875 | |
| 875 |
Stock-based compensation |
| — | |
| — | |
| 6,894 | |
| — | |
| — | |
| 6,894 |
Contingent consideration for acquisitions |
| — | |
| — | |
| — | | | — | |
| — | |
| — |
Vesting of restricted stock awards | | 295,414 | | | — | | | — | | | — | | | — | | | — |
Exercise of stock options |
| 4,519 | |
| — | |
| 8 | | | — | |
| — | |
| 8 |
Income tax withholdings |
| (92,066) | |
| — | |
| (204) | | | — | |
| — | |
| (204) |
Repurchases of common stock | | (1,396,158) | | | — | | | — | | | (3,101) | | | — | | | (3,101) |
Proceeds from sale of common stock | | — | | | — | | | 191 | | | — | | | — | | | 191 |
Balances as of March 31, 2023 | | 97,018,032 | | $ | 10 | | $ | 677,426 | | $ | (626,864) | | $ | (5,296) | | $ | 45,276 |
6
PORCH GROUP, INC.
Condensed Consolidated Statements of Stockholders’ Equity - Continued
(all numbers in thousands, except share amounts, unaudited)
| | | | | | |
| | Six Months Ended June 30, | ||||
|
| 2023 |
| 2022 | ||
Cash flows from operating activities: | | |
|
| |
|
Net loss | | $ | (125,703) | | $ | (36,610) |
Adjustments to reconcile net loss to net cash used in operating activities | |
| | |
|
|
Depreciation and amortization | |
| 12,229 | |
| 12,899 |
Provision for doubtful accounts | | | 48,955 | | | 207 |
Impairment loss on intangible assets and goodwill | | | 57,232 | | | — |
Gain on extinguishment of debt | | | (81,354) | | | — |
Gain on remeasurement of private warrant liability | |
| (360) | |
| (14,267) |
Loss (gain) on remeasurement of contingent consideration | |
| (2,810) | |
| 4,686 |
Loss (gain) on remeasurement of earnout liability and derivatives | | | 2,950 | | | (13,766) |
Stock-based compensation | |
| 13,298 | |
| 15,556 |
Interest expense (non-cash) | |
| 9,828 | |
| 2,339 |
Other | |
| 805 | |
| 1,916 |
Change in operating assets and liabilities, net of acquisitions and divestitures | |
| | |
|
|
Accounts receivable | |
| 1,030 | |
| (7,483) |
Reinsurance balance due | | | (21,651) | | | (40,835) |
Prepaid expenses and other current assets | |
| (9,656) | |
| (7,090) |
Accounts payable | |
| 2,929 | |
| (4,226) |
Accrued expenses and other current liabilities | |
| (10,906) | |
| 1,005 |
Losses and loss adjustment expense reserves | | | 65,077 | | | 26,945 |
Other insurance liabilities, current | | | 51,139 | | | 21,492 |
Deferred revenue | |
| (13,491) | |
| 38,167 |
Refundable customer deposits | |
| (8,061) | |
| (457) |
Long-term insurance commissions receivable | |
| (1,237) | |
| (2,940) |
Other | |
| 980 | |
| (1,694) |
Net cash used in operating activities | |
| (8,777) | |
| (4,156) |
Cash flows from investing activities: | |
|
| |
|
|
Purchases of property and equipment | |
| (672) | |
| (1,539) |
Capitalized internal use software development costs | |
| (4,735) | |
| (3,496) |
Purchases of short-term and long-term investments | |
| (23,602) | |
| (13,561) |
Maturities, sales of short-term and long-term investments | | | 23,033 | | | 12,241 |
Acquisitions, net of cash acquired | | | (1,974) | | | (32,049) |
Net cash used in investing activities | |
| (7,950) | |
| (38,404) |
Cash flows from financing activities: | |
|
| |
|
|
Proceeds from line of credit | | | — | | | 1,000 |
Proceeds from advance funding | | | 316 | | | 10,690 |
Repayments of advance funding | | | (2,683) | | | (8,840) |
Proceeds from issuance of debt | | | 116,667 | | | — |
Repayments of principal | |
| (10,150) | |
| (150) |
Cash paid for debt issuance costs | | | (4,610) | | | — |
Proceeds from exercises of stock options | | | 8 | | | 692 |
Income tax withholdings paid upon vesting of restricted stock units | | | (883) | | | (1,922) |
Proceeds from sale of common stock | | | 191 | | | — |
Payments of acquisition-related contingent consideration | | | (276) | | | (1,625) |
Repurchase of stock | | | (5,608) | | | — |
Net cash provided by (used in) financing activities | |
| 92,972 | |
| (155) |
Net change in cash, cash equivalents, and restricted cash | | $ | 76,245 | | $ | (42,715) |
Cash, cash equivalents, and restricted cash, beginning of period | | $ | 228,605 | | $ | 324,792 |
Cash, cash equivalents, and restricted cash end of period | | $ | 304,850 | | $ | 282,077 |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | ||
| | | | | | | Additional | | | | | Other | | Total | |||
| | Common Stock |
| Paid-in |
| Accumulated |
| Comprehensive |
| Stockholders’ | |||||||
|
| Shares | | Amount |
| Capital | | Deficit | | Loss |
| Equity | |||||
Balances as of December 31, 2021 |
| 97,961,597 | | $ | 10 | | $ | 641,406 | | $ | (424,112) | | $ | (259) | | $ | 217,045 |
Net loss |
| — | |
| — | |
| — | |
| (9,285) | |
| — | |
| (9,285) |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (2,515) | | | (2,515) |
Stock-based compensation |
| — | |
| — | |
| 5,854 | |
| — | |
| — | |
| 5,854 |
Contingent consideration for acquisitions | | — | | | — | | | 530 | | | — | | | — | | | 530 |
Vesting of restricted stock awards |
| 245,855 | |
| — | |
| — | |
| — | |
| — | |
| — |
Exercise of stock options |
| 185,685 | |
| — | |
| 473 | |
| — | |
| — | |
| 473 |
Income tax withholdings | | (95,951) | | | — | | | (712) | | | — | | | — | | | (712) |
Balances as of March 31, 2022 | | 98,297,186 | | $ | 10 | | $ | 647,551 | | $ | (433,397) | | $ | (2,774) | | $ | 211,390 |
| | | | | | |
Supplemental schedule of non-cash financing activities | | | | | | |
Non-cash reduction in advanced funding arrangement obligations | | $ | 7,848 | | $ | — |
Supplemental disclosures |
| |
|
| |
|
Cash paid for interest | | $ | 2,276 | | $ | 1,587 |
Income tax refunds received | | $ | 2,300 | | $ | — |
Non-cash consideration for acquisitions | | $ | — | | $ | 21,607 |
Cash payable for acquisition | | $ | — | | $ | 5,000 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
PORCH GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(all numbers in thousands, unaudited)
| | | | | | |
| | Three Months Ended March 31, | ||||
|
| 2023 |
| 2022 | ||
Cash flows from operating activities: | | |
|
| |
|
Net loss | | $ | (38,740) | | $ | (9,285) |
Adjustments to reconcile net loss to net cash used in operating activities | |
| | |
|
|
Depreciation and amortization | |
| 6,015 | |
| 6,483 |
Amortization of operating lease right-of-use assets | | | 475 | | | 582 |
Impairment loss on intangible assets and goodwill | | | 2,021 | | | — |
Loss on sale and impairment of property, equipment, and software | | | 4 | | | 70 |
Gain on remeasurement of private warrant liability | |
| (345) | |
| (10,189) |
Loss (gain) on remeasurement of contingent consideration | |
| (154) | |
| 3,205 |
Gain on remeasurement of earnout liability | | | — | | | (11,179) |
Stock-based compensation | |
| 6,894 | |
| 5,854 |
Amortization of investment premium/accretion of discount, net | | | (280) | | | 566 |
Net realized losses on investments | | | 67 | | | 68 |
Interest expense (non-cash) | |
| 1,534 | |
| 1,046 |
Other | |
| 242 | |
| 64 |
Change in operating assets and liabilities, net of acquisitions and divestitures | |
| | |
|
|
Accounts receivable | |
| 2,619 | |
| 1,312 |
Reinsurance balance due | | | 6,286 | | | (7,920) |
Prepaid expenses and other current assets | |
| (10,826) | |
| (6,415) |
Accounts payable | |
| (69) | |
| 1,051 |
Accrued expenses and other current liabilities | |
| 1,390 | |
| (4,033) |
Losses and loss adjustment expense reserves | | | 14,895 | | | 17,659 |
Other insurance liabilities, current | | | 16,712 | | | 3,025 |
Deferred revenue | |
| (24,100) | |
| (1,945) |
Refundable customer deposits | |
| (4,607) | |
| (2,949) |
Long-term insurance commissions receivable | |
| (875) | |
| (1,540) |
Operating lease liabilities, non-current | | | (489) | | | (235) |
Other | |
| (700) | |
| (696) |
Net cash used in operating activities | |
| (22,031) | |
| (15,401) |
Cash flows from investing activities: | |
|
| |
|
|
Purchases of property and equipment | |
| (356) | |
| (1,167) |
Capitalized internal use software development costs | |
| (2,427) | |
| (1,574) |
Purchases of short-term and long-term investments | |
| (5,410) | |
| (8,835) |
Maturities, sales of short-term and long-term investments | | | 5,020 | | | 8,449 |
Acquisitions, net of cash acquired | | | (1,974) | | | (4,950) |
Net cash used in investing activities | |
| (5,147) | |
| (8,077) |
Cash flows from financing activities: | |
|
| |
|
|
Proceeds from advance funding | | | 313 | | | 5,143 |
Repayments of advance funding | | | (1,281) | | | (3,033) |
Repayments of principal and related fees | |
| (499) | |
| (150) |
Proceeds from exercises of stock options | | | 8 | | | 473 |
Income tax withholdings paid upon vesting of restricted stock units | | | (204) | | | (712) |
Payments of acquisition-related contingent consideration | | | (194) | | | — |
Repurchase of stock | | | (5,608) | | | — |
Proceeds from sale of common stock | | | 191 | | | — |
Net cash provided by financing activities | |
| (7,274) | |
| 1,721 |
Net change in cash, cash equivalents, and restricted cash | | $ | (34,452) | | $ | (21,757) |
Cash, cash equivalents, and restricted cash, beginning of period | | $ | 228,605 | | $ | 324,792 |
Cash, cash equivalents, and restricted cash end of period | | $ | 194,153 | | $ | 303,035 |
8
PORCH GROUP, INC.
Condensed Consolidated Statements of Cash Flows - Continued
(all numbers in thousands, unaudited)
| | | | | | |
| | Three Months Ended March 31, | ||||
|
| 2023 |
| 2022 | ||
Supplemental disclosures |
| |
|
| |
|
Cash paid for interest | | $ | 1,796 | | $ | 1,587 |
Income tax refunds received | | $ | 2,380 | | $ | — |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)stated)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Porch Group, Inc. (“Porch Group,” “Porch” or“Porch,” the “Company”“Company,” “we,” “our,” “us”) is a vertical software platform for the home, providing software and services to approximately 30,60030,700 companies and small businesses. Porch isWe are a values-driven company whose mission is to simplify the home with insurance at the center. The Company’sOur Insurance segment, with approximately 376,000358,000 insurance and warranty policies in force, operates both as an insurance carrier underwriting home insurance policies and as an agent selling home and auto insurance for over 20 major and regional insurance companies. The Insurance Segmentsegment also includes Porch’s warranty service offerings and includes a captive reinsurance provider. The Vertical Software segment provides software and services to home services companies such as home inspectors, mortgage companies and loan officers, title companies, moving companies, real estate agencies, utility companies, and individuals.
Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements include the accounts of Porch Group, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, these unaudited condensed consolidated financial statements and notes should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 16, 2023. The information as of December 31, 2022, included in the unaudited condensed consolidated balance sheets was derived from the Company’sour audited consolidated financial statements.
The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q (this “Quarterly Report”) were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which are of a normal recurring nature) considered necessary to present fairly the Company’sour financial position, results of operations, comprehensive loss, stockholders’ equity (deficit), and cash flows for the periods and dates presented. The results of operations for the three and six months ended March 31,June 30, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023, or any other interim period or future year. Certain prior period amounts have been reclassified to conform to the current year's presentation.
Comprehensive Loss
Comprehensive loss consists of adjustments related to unrealized gains and losses on available-for-sale securities.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the amounts reported and disclosed in the unaudited condensed consolidated financial statements and accompanying notes. On an ongoing basis, these estimates, which include, but are not limited to, impairment losses on intangible assets and goodwill, estimated variable consideration for services performed, estimated lifetime value of insurance agency commission revenue, 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, are evaluated by management. Actual results could differ materially from those estimates, judgments, and assumptions.
109
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements -– Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)stated)
Concentrations
Financial instruments which potentially subject the Companyus to credit risk consist principally of cash, money market accounts on deposit with financial institutions, money market funds, certificates of deposit and fixed-maturity securities, as well as receivable balances in the course of collection.
The Company’sOur insurance carrier subsidiary has exposure and remains liable in the event of insolvency of its reinsurers. Management and its reinsurance intermediary regularly assess the credit quality and ratings of its reinsurer counterparties. One reinsurer represented more than 10%39% of the Company’s insurance subsidiary’sour total reinsurance balance due as of March 31,June 30, 2023.
Substantially all of the Company’sour insurance-related revenues in the Insurance segment are derived from customers in Texas (which represent approximately 60%62% of such revenues in the threesix months ended March 31,June 30, 2023), South Carolina (which represent approximately 10% of such revenues in the six months ended June 30, 2023), North Carolina, Georgia, Virginia, and Arizona, which could be adversely affected by economic conditions, an increase in competition, local weather events, or environmental impacts and changes.
No individual customer represented more than 10% of the Company’s total revenue for the three and six months ended March 31,June 30, 2023 or 2022. As of March 31,June 30, 2023, and December 31, 2022, no individual customer accounted for 10% or more of the Company’s total accounts receivable.
As of March 31,June 30, 2023, the Companywe held approximately $136.1$262.0 million of cash with threefour U.S. commercial banks.
Cash, Cash Equivalents and Restricted Cash
The Company considersWe consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. The Company maintainsWe maintain cash balances that may exceed the insured limits by the Federal Deposit Insurance Corporation.
Restricted cash equivalents as of March 31,June 30, 2023 includes $5.2$29.1 million held by the Company’sour captive reinsurance companybusiness as collateral for the benefit of Homeowners of America (“HOA”), $1.3 million held in certificates of deposits and money market mutual funds pledged to the Department of Insurance in certain states as a condition of itsour Certificate of Authority for the purpose of meeting obligations to policyholders and creditors, $6.0$6.5 million in funds held for the payment of possible warranty claims as required under regulatory guidelines in seventeen states, and $2.4 million related to acquisition indemnifications. Restricted cash equivalents as of December 31, 2022, includes $5.1 million held by the Company’sour captive reinsurance companybusiness as collateral for the benefit of HOA, $1.0 million held in money market mutual funds pledged to the Department of Insurance in certain states as a condition of its Certificate of Authority for the purpose of meeting obligations to policyholders and creditors, $5.0 million in funds held for the payment of possible warranty claims as required under regulatory guidelines in nineteen states, and $2.4 million related to acquisition indemnifications.
11
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
The reconciliation of cash and cash equivalents to amounts presented in the unaudited condensed consolidated statements of cash flows are as follows:
| | | | | | | | | | | | |
|
| March 31, 2023 |
| December 31, 2022 |
| June 30, 2023 |
| December 31, 2022 | ||||
| | | | | | | | | | | | |
Cash and cash equivalents | | $ | 179,357 | | $ | 215,060 | | $ | 265,573 | | $ | 215,060 |
Restricted cash and restricted cash equivalents - current | |
| 14,796 | |
| 13,545 | ||||||
Cash, cash equivalents and restricted cash | | $ | 194,153 | | $ | 228,605 | ||||||
Total restricted cash | |
| 39,277 | |
| 13,545 | ||||||
Cash, cash equivalents, and restricted cash | | $ | 304,850 | | $ | 228,605 |
10
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
Accounts Receivable and Long-term Insurance Commissions Receivable
Accounts receivable consist principally of amounts due from enterprise customers, and other corporate partnerships, and individual policyholders. The Company estimatesWe estimate allowances for uncollectible receivables based on the creditworthiness of itsour customers, historical trend analysis, and macro-economic conditions. Consequently, an adverse change in those factors could affect the Company’sour estimate of allowance for doubtful accounts. The allowance for uncollectible receivables at March 31,June 30, 2023, and December 31, 2022, was $0.6$0.8 million and $0.5 million, respectively.
Long-term insurance commissions receivable balance consists of the estimated commissions from policy renewals expected to be collected. The Company recordsWe record the amount of renewal insurance commissions expected to be collected in the next twelve months as current accounts receivable.
Goodwill
The Company testsWe test goodwill for impairment for each reporting unit on an annual basis or more frequently when events or changes in circumstances indicate the fair value of a reporting unit is below its carrying value. The Company hasWe have the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Companywe can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would not need to performthen a quantitative impairment test.test would not be necessary. If the Companywe cannot support such a conclusion or the Company doeswe do not elect to perform the qualitative assessment, the
Company performsthen we perform a quantitative assessment. If a quantitative goodwill impairment assessment is performed, the Company utilizeswe utilize a combination of market and income valuation approaches. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the reporting unit is less than its carrying value. The Company hasWe have selected October 1 as the date to perform its annual impairment test.testing.
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 of each reporting unit was estimated using a combination of income and market valuation approaches using publicly traded company multiples in similar businesses. Such fair value measurements are based predominately on Level 3 inputs. This analysis requires significant judgments including estimationan estimate 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 14%13% to 20%18%. See Note 6 for a discussion of the impairment analysis.
During the first quarter of 2023, 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 and insurance industries. The Company performed a valuation of both the Vertical Software and Insurance reporting units using a combination of market and income approaches based on peer performance and discounted cash flow or dividend discount model methodologies. The results of the quantitative impairment assessment indicated that the estimated fair values of the
12
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
reporting units exceeded their carrying values. As such, the Company determined that the goodwill allocated to its reporting units was not impaired as of March 31, 2023.
Impairment of Long-Lived Assets
The Company reviews itsWe review long-lived assets including property, equipment, software and amortizing intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully 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, 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 an income approach. An impairment charge is recognized for the amount by which the carrying value of the asset group exceeds its estimated fair value. Management identifies the asset group which includes the potentially impaired long-lived asset, at the lowest level at which there are separate, identifiable cash flows.
11
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
During the first quarterand second quarters of 2023, managementwe identified various qualitative factors that collectively indicated that the Company had triggertriggering 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 CompanyWe used an income approach to determine that the estimated fair value of a certain asset group was less than its carrying value, which resulted in impairment charges of $2.0 million, primarily related to acquired technology, trademarks and tradenames, and customer relationships for certain businesses within itsthe Vertical Software segment. Impairment charges are included in impairment loss on intangible assets and goodwill in the unaudited condensed consolidated statements of operations.operations for the six months ended June 30, 2023.
We estimate the fair value of an asset group using the income approach. Such fair value measurements are based predominately on Level 3 inputs. 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.
Deferred Policy Acquisition Costs
The Company capitalizesWe capitalize deferred policy acquisitions costs (“DAC”) which consist primarily of commissions, premium taxes and policy underwriting and production expenses that are directly related to the successful acquisition by the Company’sour insurance subsidiary of new or renewal insurance contracts. DAC are amortized 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. Future investment income is considered in determining the recoverability of DAC. As of March 31,June 30, 2023, and December 31, 2022, DAC of $17.7$17.9 million and $8.7 million is included in prepaid expenses and other current assets. Amortized deferred acquisition costs included in sales and marketing expense, amounted to $9.3 million and $3.0$4.2 million, for the three months ended March 31,June 30, 2023 and 2022, respectively, and $18.6 million and $7.2 million, for the six months ended June 30, 2023 and 2022, respectively.
Fair Value of Financial Instruments
Fair value principles require disclosures regarding the manner in which fair value is determined for assets and liabilities and establishes a three-tiered fair value hierarchy into which these assets and liabilities must be grouped, based upon significant levels of inputs as follows:
13
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
Level 1 | Observable inputs, such as quoted prices (unadjusted) in active markets for identical assets or liabilities at the measurement date; |
Level 2 | Observable inputs, other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. This may include active markets for similar assets and liabilities, quoted prices in markets that are not highly active, or other inputs that are observable or can be corroborated by observable market data; and |
Level 3 | Unobservable inputs that are arrived at by means other than current observable market activity. |
The level of the least observable significant input used in assessing the fair value determines the placement of the entire fair value measurement in the hierarchy. Management’s assessment of the significance of a particular input to the fair value measurement requires the use of judgment specific to the asset or liability.
12
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
Other Insurance Liabilities, Current
The following table details the components of other insurance liabilities, current, on the unaudited condensed consolidated balance sheets:
| | | | | | | | | | | | |
|
| As of March 31, 2023 |
| As of December 31, 2022 |
| As of June 30, 2023 |
| As of December 31, 2022 | ||||
Ceded reinsurance premiums payable | | $ | 39,162 | | $ | 29,204 | | $ | 77,051 | | $ | 29,204 |
Commissions payable, reinsurers and agents | | | 20,703 | | | 21,045 | | | 6,650 | | | 21,045 |
Advance premiums | |
| 15,537 | |
| 8,668 | |
| 10,383 | |
| 8,668 |
Funds held under reinsurance treaty | |
| 1,875 | |
| 1,851 | |
| 1,715 | |
| 1,851 |
General and accrued expenses payable | | | 1,145 | | | 942 | | | 17,050 | | | 942 |
Other insurance liabilities, current | | $ | 78,422 | | $ | 61,710 | | $ | 112,849 | | $ | 61,710 |
Income Taxes
Provisions for income taxes for the three months ended March 31,June 30, 2023, and 2022, were less than $0.1 million and $0.5 million, respectively, and the effective tax rates for these periods were less than 0.1% and 1.7%, respectively. The difference between our effective tax rates for the 2023 periods and the U.S. statutory rate of 21% was primarily due to a full valuation related to our net deferred tax assets and impact of acquisitions on our valuation allowance. Provisions for income taxes for the six months ended June 30, 2023 and 2022, were a $0.1 million benefit and a $0.2$0.3 million benefit,expense, respectively, and the effective tax rates for these periods were 0.3% benefit0.1% expense and 1.9%0.8% benefit, respectively. The difference between the Company’sour effective tax rates for the 2023 and 2022 periods and the U.S. statutory rate of 21% was primarily due to a full valuation allowance related to the Company’sour net deferred tax assets.
14
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
2. Revenue
Disaggregation of Revenue
Total revenues consisted of the following:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||||||
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | ||||||
Vertical Software segment | | | | | | | | | | | | | | | | | | |
Software and service subscriptions | | $ | 16,809 | | $ | 17,681 | | $ | 17,524 | | $ | 19,847 | | $ | 34,333 | | $ | 37,078 |
Move-related transactions | | | 7,769 | | | 12,193 | | | 12,246 | | | 17,458 | | | 20,015 | | | 29,586 |
Post-move transactions | | | 4,049 | | | 4,530 | | | 4,665 | | | 5,235 | | | 8,714 | | | 10,280 |
Total Vertical Software segment revenue | | | 28,627 | | | 34,404 | | | 34,435 | | | 42,540 | | | 63,062 | | | 76,944 |
| | | | | | | | | | | | | | | | | | |
Insurance segment | | | | | | | | | | | | | | | | | | |
Insurance and warranty premiums, commissions and policy fees | | | 58,742 | | | 29,163 | | | 64,330 | | | 28,375 | | | 123,072 | | | 57,538 |
Total Insurance segment revenue | | | 58,742 | | | 29,163 | | | 64,330 | | | 28,375 | | | 123,072 | | | 57,538 |
| | | | | | | | | | | | | | | | | | |
Total revenue(1) | | $ | 87,369 | | $ | 63,567 | | $ | 98,765 | | $ | 70,915 | | $ | 186,134 | | $ | 134,482 |
(1) | Revenue recognized during the three months ended June 30, 2023 and 2022, includes revenue of $54.8 million and $18.2 million, respectively, which is accounted for separately from the revenue from contracts with customers. Revenue accounted separately from the revenue from contracts with customers for the six months ended June 30, 2023 and 2022, was $105.0 million and $39.0 million, respectively. |
(1)13
Table of ContentsRevenue recognized during the three months ended March 31, 2023
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and 2022, includes revenue of $51.0 million and $20.8 million, respectively, which is accounted for separately from the revenue from contracts with customers.unless otherwise stated)
Disclosures Related to Contracts with Customers
Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to contracts with customers. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. To the extent a contract exists, as defined by ASC 606, these liabilities are classified as deferred revenue. To the extent that a contract does not exist, as defined by ASC 606, these liabilities are classified as refundable customer deposits. Refundable customer deposits related to contracts with customers were not material at March 31,June 30, 2023, and December 31, 2022.
Contract Assets - Insurance Commissions Receivable
A summary of the activity impacting the contract assets during the threesix months ended March 31,June 30, 2023, is presented below:
| | | | | | |
|
| Contract Assets |
| Contract Assets | ||
Balance at December 31, 2022 | | $ | 15,521 | | $ | 15,521 |
Estimated lifetime value of commissions on insurance policies sold by carriers | |
| 2,018 | |
| 3,792 |
Cash receipts | |
| (1,062) | |
| (2,285) |
Balance at March 31, 2023 | | $ | 16,477 | |||
Balance at June 30, 2023 | | $ | 17,028 |
As of March 31,June 30, 2023, $3.3$3.5 million of contract assets are expected to be collected within the next 12 months and therefore are included in current accounts receivable on the unaudited condensed consolidated balance sheets. The remaining $13.1$13.5 million of contract assets are expected to be collected in the following periods and are included in long-term insurance commissions receivable on the unaudited condensed consolidated balance sheets.
15
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
Deferred Revenue
A summary of the activity impacting deferred revenue balances during the threesix months ended March 31,June 30, 2023, is presented below:
| | | | | | |
| | Vertical Software | | Vertical Software | ||
|
| Deferred Revenue |
| Deferred Revenue | ||
Balance at December 31, 2022 | | $ | 3,874 | | $ | 3,874 |
Revenue recognized | | | (4,237) | | | (8,613) |
Additional amounts deferred | | | 4,693 | | | 8,695 |
Balance at March 31, 2023 | | $ | 4,330 | |||
Balance at June 30, 2023 | | $ | 3,956 |
Deferred revenue on ourthe unaudited condensed consolidated balance sheet as of March 31,June 30, 2023, and December 31, 2022, include $242.2$252.7 million and $266.8 million, respectively, of deferred revenue related to ourthe Insurance segment.
Remaining Performance Obligations
The amount of the transaction price allocated to performance obligations to be satisfied at a later date, which is not recorded in the unaudited condensed consolidated balance sheets, is immaterial as of March 31,June 30, 2023, and December 31, 2022.
The Company hasWe have applied the practical expedients provided for in the accounting standards, and does not present revenue related to unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts with variable consideration that is allocated entirely to unsatisfied performance obligations or to a wholly unsatisfied promise accounted for under the series guidance, and (iii) contracts for which the Company recognizeswe recognize revenue at the
14
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
amount which it has the right to invoice for services performed. Additionally, the Company excludeswe exclude amounts related to performance obligations that are billed and recognized as they are delivered.
Warranty Revenue and Related Balance Sheet Disclosures
Payments received in advance of warranty services provided are included in refundable customer deposits or deferred revenue based upon the cancellation and refund provisions within the respective agreement. At March 31,June 30, 2023, we had $20.8$19.6 million, $3.8$3.6 million and $2.5$3.0 million of refundable customer deposits, deferred revenue, and non-current deferred revenue, respectively. At December 31, 2022, we had $20.0 million, $4.4 million and $1.9 million of refundable customer deposits, deferred revenue and non-current deferred revenue, respectively.
For the three months ended March 31,June 30, 2023 and 2022, we incurred $1.2$1.3 million and $0.3 million, respectively, in expenses related to warranty claims.
16
PORCH GROUP, INC.
Notes For the six months ended June 30, 2023 and 2022, we incurred $2.5 million and $0.7 million, respectively, in expenses related to Condensed Consolidated Statements - Continuedwarranty claims.
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
3. Investments
The following table provides the Company’ssummarizes investment income and realized gains and losses on investments during the periods presented:presented.
| | | | | | |
| | Three Months Ended March 31, | ||||
| | 2023 |
| 2022 | ||
Investment income, net of investment expenses | | $ | 825 | | $ | 265 |
Realized gains on investments | | | 4 | | | 2 |
Realized losses on investments | | | (71) | | | (70) |
Investment income and realized gains (losses), net of investment expenses | | $ | 758 | | $ | 197 |
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
| | 2023 |
| 2022 | | 2023 |
| 2022 | ||||
Investment income, net of investment expenses | | $ | 1,278 | | $ | 313 | | $ | 2,103 | | $ | 578 |
Realized gains on investments | | | 7 | | | 4 | | | 11 | | | 6 |
Realized losses on investments | | | (36) | | | (74) | | | (107) | | | (144) |
Investment income and realized gains (losses), net of investment expenses | | $ | 1,249 | | $ | 243 | | $ | 2,007 | | $ | 440 |
The following table providessummarizes the amortized cost, fair value, and unrealized gains and (losses)losses of the Company’s investment securities:securities.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2023 | | As of June 30, 2023 | ||||||||||||||||||||
| | | | | Gross Unrealized | | | | | | | | Gross Unrealized | | | | ||||||||
|
| Amortized Cost |
| Gains |
| Losses |
| Fair Value |
| Amortized Cost |
| Gains |
| Losses |
| Fair Value | ||||||||
U.S. Treasuries | | $ | 34,637 | | $ | 12 | | $ | (226) | | $ | 34,423 | | $ | 28,407 | | $ | 1 | | $ | (361) | | $ | 28,047 |
Obligations of states, municipalities and political subdivisions | | | 11,304 | | | 13 | | | (1,054) | | | 10,263 | | | 11,846 | | | 4 | | | (1,178) | | | 10,672 |
Corporate bonds | |
| 34,549 | |
| 96 | |
| (2,610) | |
| 32,035 | |
| 35,236 | |
| 38 | |
| (2,879) | |
| 32,395 |
Residential and commercial mortgage-backed securities | | | 11,527 | | | 11 | | | (1,162) | | | 10,376 | | | 17,607 | | | 16 | | | (1,328) | | | 16,295 |
Other loan-backed and structured securities | | | 6,398 | | | 14 | | | (390) | | | 6,022 | | | 5,710 | | | 4 | | | (393) | | | 5,321 |
Total investment securities | | $ | 98,415 | | $ | 146 | | $ | (5,442) | | $ | 93,119 | | $ | 98,806 | | $ | 63 | | $ | (6,139) | | $ | 92,730 |
1715
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements -– Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)stated)
| | | | | | | | | | | | |
| | As of December 31, 2022 | ||||||||||
| | | | | Gross Unrealized | | | | ||||
|
| Amortized Cost |
| Gains |
| Losses |
| Fair Value | ||||
U.S. Treasuries | | $ | 35,637 | | $ | 5 | | $ | (320) | | $ | 35,322 |
Obligations of states, municipalities and political subdivisions | | | 11,549 | | | 2 | | | (1,326) | | | 10,225 |
Corporate bonds | |
| 31,032 | |
| 32 | |
| (2,837) | |
| 28,227 |
Residential and commercial mortgage-backed securities | | | 12,790 | | | 11 | | | (1,268) | | | 11,533 |
Other loan-backed and structured securities | | | 6,804 | | | 6 | | | (476) | | | 6,334 |
Total investment securities | | $ | 97,812 | | $ | 56 | | $ | (6,227) | | $ | 91,641 |
The amortized cost and fair value of securities at March 31,June 30, 2023, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | | | | | | | | | | |
| | As of March 31, 2023 | | As of June 30, 2023 | ||||||||
Remaining Time to Maturity |
| Amortized Cost |
| Fair Value |
| Amortized Cost |
| Fair Value | ||||
Due in one year or less | | $ | 33,719 | | $ | 33,640 | | $ | 25,920 | | $ | 25,802 |
Due after one year through five years | | | 18,734 | | | 17,303 | | | 19,481 | | | 17,895 |
Due after five years through ten years | | | 21,836 | | | 20,099 | | | 25,245 | | | 23,099 |
Due after ten years | |
| 6,201 | |
| 5,679 | |
| 4,843 | |
| 4,318 |
Residential and commercial mortgage-backed securities | | | 11,527 | | | 10,376 | | | 17,607 | | | 16,295 |
Other loan-backed and structured securities | | | 6,398 | | | 6,022 | | | 5,710 | | | 5,321 |
Total | | $ | 98,415 | | $ | 93,119 | | $ | 98,806 | | $ | 92,730 |
Other-than-temporaryOther-Than-Temporary Impairment
The CompanyWe regularly reviews itsreview our individual investment securities for other-than-temporary impairment. The Company considersWe consider various factors in determining whether each individual security is other-than-temporarily impaired, including:
- | the financial condition and near-term prospects of the issuer, including any specific events that may affect its operations or earnings; |
- | the extent to which the market value of the security has been below its cost or amortized cost; |
- | general market conditions and industry or sector-specific factors; |
- | nonpayment by the issuer of its contractually obligated interest and principal payments; and |
- |
1816
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements -– Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)stated)
Securities with gross unrealized loss position, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than Twelve Months | | Twelve Months or Greater | | Total | | Less Than Twelve Months | | Twelve Months or Greater | | Total | ||||||||||||||||||||||||
| | Gross | | | | Gross | | | | Gross | | | | Gross | | | | Gross | | | | Gross | | | ||||||||||||
| | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | ||||||||||||
At March 31, 2023 | | Loss | | Value |
| Loss | | Value |
| Loss | | Value | ||||||||||||||||||||||||
As of June 30, 2023 | | Loss | | Value |
| Loss | | Value |
| Loss | | Value | ||||||||||||||||||||||||
U.S. Treasuries | | $ | (66) | | $ | 16,320 | | $ | (160) | | $ | 2,251 | | $ | (226) | | $ | 18,571 | | $ | (182) | | $ | 25,500 | | $ | (179) | | $ | 2,232 | | $ | (361) | | $ | 27,732 |
Obligations of states, municipalities and political subdivisions | | | (48) | | | 1,936 | | | (1,006) | | | 7,852 | | | (1,054) | | | 9,788 | | | (79) | | | 2,060 | | | (1,099) | | | 8,145 | | | (1,178) | | | 10,205 |
Corporate bonds | | | (617) | | | 12,375 | | | (1,993) | | | 15,615 | | | (2,610) | | | 27,990 | | | (530) | | | 12,546 | | | (2,349) | | | 18,045 | | | (2,879) | | | 30,591 |
Residential and commercial mortgage-backed securities | | | (260) | | | 3,190 | | | (902) | | | 7,149 | | | (1,162) | | | 10,339 | | | (292) | | | 8,365 | | | (1,036) | | | 7,319 | | | (1,328) | | | 15,684 |
Other loan-backed and structured securities | | | (149) | | | 1,712 | | | (241) | | | 3,696 | | | (390) | | | 5,408 | | | (109) | | | 1,039 | | | (284) | | | 3,677 | | | (393) | | | 4,716 |
Total securities | | $ | (1,140) | | $ | 35,533 | | $ | (4,302) | | $ | 36,563 | | $ | (5,442) | | $ | 72,096 | | $ | (1,192) | | $ | 49,510 | | $ | (4,947) | | $ | 39,418 | | $ | (6,139) | | $ | 88,928 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than Twelve Months | | Twelve Months or Greater | | Total | | Less Than Twelve Months | | Twelve Months or Greater | | Total | ||||||||||||||||||||||||
| | Gross | | | | Gross | | | | Gross | | | | Gross | | | | Gross | | | | Gross | | | ||||||||||||
| | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | ||||||||||||
At December 31, 2022 | | Loss | | Value |
| Loss | | Value |
| Loss | | Value | ||||||||||||||||||||||||
As of December 31, 2022 | | Loss | | Value |
| Loss | | Value |
| Loss | | Value | ||||||||||||||||||||||||
U.S. Treasuries | | $ | (127) | | $ | 10,748 | | $ | (193) | | $ | 9,824 | | $ | (320) | | $ | 20,572 | | $ | (127) | | $ | 10,748 | | $ | (193) | | $ | 9,824 | | $ | (320) | | $ | 20,572 |
Obligations of states, municipalities and political subdivisions | | | (929) | | | 6,258 | | | (397) | | | 3,504 | | | (1,326) | | | 9,762 | | | (929) | | | 6,258 | | | (397) | | | 3,504 | | | (1,326) | | | 9,762 |
Corporate bonds | | | (1,623) | | | 16,531 | | | (1,214) | | | 10,328 | | | (2,837) | | | 26,859 | | | (1,623) | | | 16,531 | | | (1,214) | | | 10,328 | | | (2,837) | | | 26,859 |
Residential and commercial mortgage-backed securities | | | (687) | | | 6,565 | | | (581) | | | 4,952 | | | (1,268) | | | 11,517 | | | (687) | | | 6,565 | | | (581) | | | 4,952 | | | (1,268) | | | 11,517 |
Other loan-backed and structured securities | | | (359) | | | 4,633 | | | (117) | | | 1,094 | | | (476) | | | 5,727 | | | (359) | | | 4,633 | | | (117) | | | 1,094 | | | (476) | | | 5,727 |
Total securities | | $ | (3,725) | | $ | 44,735 | | $ | (2,502) | | $ | 29,702 | | $ | (6,227) | | $ | 74,437 | | $ | (3,725) | | $ | 44,735 | | $ | (2,502) | | $ | 29,702 | | $ | (6,227) | | $ | 74,437 |
At March 31,June 30, 2023, and December 31, 2022, there were 452470 and 483 securities, respectively, in an unrealized loss position. Of these securities, 363380 had been in an unrealized loss position for 12 months or longer as of March 31,June 30, 2023.
The Company believesWe believe there were no fundamental issues such as credit losses or other factors with respect to any of itsour available-for-sale securities. The unrealized losses on investments in fixed-maturity securities were caused primarily by interest rate changes. It is expected that the securities would not be settled at a price less than par value of the investments. Because the declines in fair value are attributable to changes in interest rates or market conditions and not credit quality, and because the Company haswe have the ability and intent to hold itsour available-for-sale investments until a market price recovery or maturity, the Company doeswe do not consider any of itsour investments to be other-than-temporarily impaired at March 31,June 30, 2023.
1917
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements -– Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)stated)
4. Fair Value
The following table detailssummarizes the fair value measurements of assets and liabilities that are measured at fair value on a recurring basis:basis.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurement as of March 31, 2023 | | Fair Value Measurement as of June 30, 2023 | ||||||||||||||||||||
| | | | | | | | | | | Total | | | | | | | | | | | Total | ||
| | Level 1 | | Level 2 |
| Level 3 |
| Fair Value | | Level 1 | | Level 2 |
| Level 3 |
| Fair Value | ||||||||
Assets | | | | | | | | | | | | | | | | | | | | | | | | |
Money market mutual funds | | $ | 33,443 | | $ | — | | $ | — | | $ | 33,443 | | $ | 74,073 | | $ | — | | $ | — | | $ | 74,073 |
Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasuries | | | 34,423 | | | — | | | — | | | 34,423 | | | 28,047 | | | — | | | — | | | 28,047 |
Obligations of states and municipalities | | | — | | | 10,263 | | | — | | | 10,263 | | | — | | | 10,672 | | | — | | | 10,672 |
Corporate bonds | | | — | | | 32,035 | | | — | | | 32,035 | | | — | | | 32,395 | | | — | | | 32,395 |
Residential and commercial mortgage-backed securities | | | — | | | 10,376 | | | — | | | 10,376 | | | — | | | 16,295 | | | — | | | 16,295 |
Other loan-backed and structured securities | | | — | | | 6,022 | | | — | | | 6,022 | | | — | | | 5,321 | | | — | | | 5,321 |
| | $ | 67,866 | | $ | 58,696 | | $ | — | | $ | 126,562 | | $ | 102,120 | | $ | 64,683 | | $ | — | | $ | 166,803 |
Liabilities | | | | | | | | | | | | | ||||||||||||
Liabilities, Noncurrent | | | | | | | | | | | | | ||||||||||||
Contingent consideration - business combinations | | $ | — | | $ | — | | $ | 24,198 |
| $ | 24,198 | | $ | — | | $ | — | | $ | 21,328 |
| $ | 21,328 |
Contingent consideration - earnout | |
| — | |
| — | |
| 44 |
| | 44 | |
| — | |
| — | |
| 44 |
| | 44 |
Private warrant liability | | | — | |
| — | | | 362 | | | 362 | | | — | |
| — | | | 347 | | | 347 |
Embedded derivatives | | | — | | | — | | | 26,820 | | | 26,820 | ||||||||||||
| | $ | — | | $ | — | | $ | 24,604 | | $ | 24,604 | | $ | — | | $ | — | | $ | 48,539 | | $ | 48,539 |
| | | | | | | | | | | | |
| | Fair Value Measurement as of December 31, 2022 | ||||||||||
| | | | | | | | | | | Total | |
| | Level 1 |
| Level 2 |
| Level 3 |
| Fair Value | ||||
Assets | | | | | | | | | | | | |
Money market mutual funds | | $ | 6,619 | | $ | — | | $ | — | | $ | 6,619 |
Debt securities: | | | | | | | | | | | | |
U.S. Treasuries | | | 35,322 | | | — | | | — | | | 35,322 |
Obligations of states and municipalities | | | — | | | 10,225 | | | — | | | 10,225 |
Corporate bonds | | | — | | | 28,227 | | | — | | | 28,227 |
Residential and commercial mortgage-backed securities | | | — | | | 11,533 | | | — | | | 11,533 |
Other loan-backed and structured securities | | | — | | | 6,334 | | | — | | | 6,334 |
| | $ | 41,941 | | $ | 56,319 | | $ | — | | $ | 98,260 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Contingent consideration - business combinations | | $ | — | | $ | — | | $ | 24,546 | | $ | 24,546 |
Contingent consideration - earnout | |
| — | |
| — | |
| 44 | |
| 44 |
Private warrant liability | | | — | |
| — | | | 707 | | | 707 |
| | $ | — | | $ | — | | $ | 25,297 | | $ | 25,297 |
Financial Assets
Money market mutual funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. As the funds are generally maintained at a net asset value which does not fluctuate, cost approximates fair value. These are included as a Level 1 measurement in the table above. The fair values for available-for-sale fixed-maturityfixed-
18
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
maturity securities are based upon prices provided by an independent pricing service. The Company hasWe have reviewed these prices for reasonableness and hashave not adjusted any prices received from the independent provider. Level 2 securities represent assets whose fair value is determined using observable market information such as previous day trade prices,
20
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
quotes from less active markets or quoted prices of securities with similar characteristics. There were no transfers between Level 1 and Level 2.
Contingent Consideration – Business Combinations
The CompanyWe estimated the fair value of the business combination contingent consideration triggered by stock price milestones, related to the Floify acquisition in October 2021 and triggered by stock price milestones using the Monte Carlo simulation method. The fair value is based on the simulated stockmarket price of the Companyour common stock over the maturity date of the contingent consideration. As of March 31,June 30, 2023, the key inputs used to determine the fair value of $15.1 million included the stock price of $1.43,$1.38, strike price of $36.00, discount rate of 14.4% and volatility of 100%. As of December 31, 2022, the key inputs used in the determination of the fair value of $15.5 million included the stock price of $1.88, strike price of $36.00, discount rate of 10.3% and volatility of 95%.
The CompanyWe estimated the fair value of the business combination contingent consideration based on specific metrics related to the acquisition of Residential Warranty Services (“RWS”) in April 2022, using the discounted cash flow method. The fair value is based on a percentage of revenue over the maturity date of the contingent consideration. As of March 31,June 30, 2023, the key inputs used to determine the fair value of $9.0 million were management’s cash flow estimates and the discount rate of 16%. As of December 31, 2022, the key inputs used to determine the fair value of $9.0 million were management’s cash flow estimates and the discount rate of 17%.
Contingent Consideration - – Earnout
The CompanyWe estimated the fair value of the earnout contingent consideration using the Monte Carlo simulation method. The fair value of $0.1 million is based on the simulated market price of the Company overour common stock until the maturity date of the contingent consideration and increased by certain employee forfeitures. As of March 31,June 30, 2023, the key inputs used to determine the fair value included exercise price of $22.00, volatility of 100%, forfeiture rate of 15%, and stock price of $1.43.$1.38 As of December 31, 2022, the key inputs used in the determination of the fair value included exercise price of $22.00, volatility of 100%, forfeiture rate of 15% and stock price of $1.88.
Private Warrants
The CompanyWe estimated the fair value of the private warrants using the Black-Scholes-Merton option pricing model. As of March 31,June 30, 2023, the key inputs used to determine the fair value included exercise price of $11.50, expected volatility of 90%95%, remaining contractual term of 2.732.48 years, and stock price of $1.43.$1.38. As of December 31, 2022, the key inputs used to determine the fair value included exercise price of $11.50, expected volatility of 90%, remaining contractual term of 2.98 years, and stock price of $1.88.
Level 3 RollforwardEmbedded Derivatives
Fair value measurements categorized within Level 3In connection with the issuance of senior secured convertible notes in April 2023 (see Note 7) and in accordance with Accounting Standards Codification 815-15, Derivatives and Hedging – Embedded Derivatives, certain features of the senior secured convertible notes were bifurcated and accounted for separately from the notes. The following features are sensitive to changes in the assumptions or methodology used to determine fair value, and such changes could result in a significant increase or decrease in the fair value.recorded as derivatives.
● | Repurchase option. If more than $30 million principal remains outstanding on June 14, 2026, holders have the right to require us to repurchase for cash on June 15, 2026, all or any portion of the notes at a |
2119
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements -– Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)stated)
The changes for Level 3 items measured at fair value on a recurring basis using significant unobservable inputs are as follows:
| | | | | | | | | |
| | | | Contingent | | | |||
| | Contingent | | Consideration - | | Private | |||
| | Consideration - | | Business | | Warrant | |||
|
| Earnout |
| Combinations |
| Liability | |||
Fair value as of December 31, 2022 | | $ | 44 | | $ | 24,546 | | $ | 707 |
Additions | | | — | | | — | | | — |
Settlements | | | — | | | (194) | | | — |
Change in fair value, loss (gain) included in net loss(1) | | | — | | | (154) | | | (345) |
Fair value as of March 31, 2023 | | $ | 44 | | $ | 24,198 | | $ | 362 |
| | | | | | | | | |
| | | | Contingent | | | |||
| | Contingent | | Consideration - | | Private | |||
| | Consideration - | | Business | | Warrant | |||
|
| Earnout |
| Combinations |
| Liability | |||
Fair value as of December 31, 2021 | | $ | 13,866 | | $ | 9,617 | | $ | 15,193 |
Additions | | | — | |
| — | | | — |
Settlements | | | — | | | — | | | — |
Change in fair value, loss (gain) included in net loss(1) | | | (11,179) | | | 3,205 | | | (10,189) |
Fair value as of March 31, 2022 | | $ | 2,687 | | $ | 12,822 | | $ | 5,004 |
Fair Value Disclosure
As of March 31, 2023, and December 31, 2022, the fair value of the convertible senior notes is $234.0 million and $238.6 million, respectively. The decrease of $4.6 million is primarily due to the decline in the stock price at March 31, 2023, as compared to December 31, 2022. The fair value of the line of credit, advance funding arrangement and other notes approximates the unpaid principal balance. All debt, other than the 2026 Notes which is Level 2, is considered a Level 3 measurement. See Note 7.
5. Property, Equipment, and Software
Property, equipment, and software net, consists of the following:
| | | | | | |
|
| March 31, | | December 31, | ||
| | 2023 |
| 2022 | ||
Software and computer equipment | | $ | 8,680 | | $ | 8,326 |
Furniture, office equipment, and other | |
| 2,115 | |
| 2,118 |
Internally developed software | |
| 19,400 | |
| 17,128 |
Leasehold improvements | |
| 1,178 | |
| 1,178 |
| |
| 31,373 | |
| 28,750 |
Less: Accumulated depreciation and amortization | |
| (17,646) | |
| (16,510) |
Property, equipment, and software, net | | $ | 13,727 | | $ | 12,240 |
22
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
Depreciation and amortization expense related to property, equipment, and software was $1.2 million and $1.0 million for the three months ended March 31, 2023 and 2022, respectively.
repurchase price equal to 106.5% of the principal amount of the notes to be repurchased, plus accrued interest. |
● | Fundamental change option. If we undergo a fundamental change, as defined in the indenture and subject to certain conditions, holders have the right to require us to repurchase for cash all or any portion of the notes at a repurchase price equal to 105.25% of the principal amount of the notes to be repurchased, plus accrued interest. A fundamental change includes events such as a change in control, recapitalization, liquidation, dissolution, or delisting. |
● | Asset sale repurchase option. If we sell assets, we must offer to repurchase for cash a portion of the notes equal to 50% of the aggregate net cash sales proceeds in excess of $20 million at a repurchase price equal to 100% of the principal, plus accrued interest. |
6. Intangible Assets and Goodwill
Intangible Assets
Intangible assets are stated at cost or acquisition-dateThe inputs for determining fair value less accumulated amortization and impairment, and consist of the following,embedded derivatives are classified as Level 3 inputs. Level 3 fair value is based on unobservable inputs based on the best information available. These inputs include the probabilities of March 31, 2023:a repurchase, a fundamentalchange, and qualifyingasset sales, ranging from 1% to 35%.
| | | | | | | | | | | |
| | Weighted |
| | | | Accumulated | | | | |
| | Average | | Intangible | | Amortization | | Intangible | |||
| | Useful Life | | Assets, | | And | | Assets, | |||
|
| (in years) |
| gross |
| Impairment |
| Net | |||
Customer relationships |
| 9.0 | | $ | 69,505 | | $ | (17,164) | | $ | 52,341 |
Acquired technology |
| 5.0 | |
| 36,041 | | | (17,486) | |
| 18,555 |
Trademarks and tradenames |
| 10.0 | |
| 23,443 | | | (5,038) | |
| 18,405 |
Non-compete agreements | | 3.0 | | | 616 | | | (419) | | | 197 |
Value of business acquired | | 1.0 | | | 400 | | | (400) | | | — |
Renewal rights | | 6.0 | | | 9,734 | | | (2,439) | | | 7,295 |
Insurance licenses | | Indefinite | | | 4,960 | | | — | | | 4,960 |
Total intangible assets |
| | | $ | 144,699 | | $ | (42,946) | | $ | 101,753 |
Level 3 Rollforward
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value, and such changes could result in a significant increase or decrease in the fair value.
The changes for Level 3 items measured at fair value on a recurring basis using significant unobservable inputs are as follows:
| | | | | | | | | | | | |
| | | | Contingent | | | | | ||||
| | Contingent | | Consideration - | | | | Private | ||||
| | Consideration - | | Business | | Embedded | | Warrant | ||||
|
| Earnout |
| Combinations | | Derivatives |
| Liability | ||||
Fair value as of December 31, 2022 | | $ | 44 | | $ | 24,546 | | $ | — | | $ | 707 |
Additions | | | — | | | — | | | 23,870 | | | — |
Settlements | | | — | | | (408) | | | — | | | — |
Change in fair value, loss (gain) included in net loss(1) | | | — | ��� | | (2,810) | | | 2,950 | | | (360) |
Fair value as of June 30, 2023 | | $ | 44 | | $ | 21,328 | | $ | 26,820 | | $ | 347 |
Intangible assets consist of the following as of December 31, 2022:
| | | | | | | | | | | |
| | Weighted |
| | |
| | |
| | |
| | Average | | Intangible | | | | | Intangible | ||
| | Useful Life | | Assets, | | Accumulated | | Assets, | |||
|
| (in years) |
| gross |
| Amortization |
| Net | |||
Customer relationships |
| 9.0 | | $ | 69,730 | | $ | (15,079) | | $ | 54,651 |
Acquired technology |
| 5.0 | |
| 37,932 | | | (16,468) | |
| 21,464 |
Trademarks and tradenames |
| 10.0 | |
| 25,071 | | | (5,724) | |
| 19,347 |
Non-compete agreements | | 3.0 | | | 619 | | | (407) | | | 212 |
Value of business acquired | | 1.0 | | | 400 | | | (400) | | | — |
Renewal rights | | 6.0 | | | 9,734 | | | (2,113) | | | 7,621 |
Insurance licenses | | Indefinite | | | 4,960 | | | — | | | 4,960 |
Total intangible assets |
| | | $ | 148,446 | | $ | (40,191) | | $ | 108,255 |
| | | | | | | | | |
| | | | Contingent | | | |||
| | Contingent | | Consideration - | | Private | |||
| | Consideration - | | Business | | Warrant | |||
|
| Earnout |
| Combinations |
| Liability | |||
Fair value as of December 31, 2021 | | $ | 13,866 | | $ | 9,617 | | $ | 15,193 |
Additions | | | — | |
| 15,555 | | | — |
Settlements | | | — | | | — | | | — |
Change in fair value, loss (gain) included in net loss(1) | | | (13,766) | | | 4,686 | | | (14,267) |
Fair value as of June 30, 2022 | | $ | 100 | | $ | 29,858 | | $ | 926 |
The aggregate amortization expense related to intangibles was $4.9 million and $5.5 million for the three months ended March 31, 2023 and 2022, respectively.
During the first quarter of 2023, the Company recorded impairment charges of $2.0 million, primarily related to acquired technology, trademarks and tradenames, and customer relationships for an asset group within its Vertical Software segment. Impairment charges are included in impairment loss on intangible assets and goodwill in the consolidated statements of operations and comprehensive loss.
(1) | Changes in fair value of contingent consideration related to business combinations are included in general and administrative expenses in the unaudited condensed consolidated statements of operations. Changes in fair value of the earnout contingent consideration and private warrant liabilityare disclosed separately in the unaudited condensed consolidated statements of operations. Changes in the fair value of the embedded derivatives are included in change in fair value of derivatives in the unaudited condensed consolidated statements of operations. |
2320
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements -– Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)stated)
GoodwillFair Value Disclosure
The following tables summarize the changes in the carrying amountAs of goodwill for the three months ended March 31, 2023:
| | | |
|
| Goodwill | |
Balance as of December 31, 2022 | | $ | 244,697 |
Acquisitions | |
| 2,421 |
Balance as of March 31, 2023 | | $ | 247,118 |
7. Debt
At March 31, 2023, debt comprised of the following:
| | | | | | | | | | | | |
|
| | |
| | |
| Debt |
| | | |
| | | |
| Unaccreted |
| Issuance |
| Carrying | |||
| | Principal | | Discount |
| Costs | | Value | ||||
Convertible senior notes, due 2026 | | $ | 425,000 | | $ | — | | $ | (7,947) | | $ | 417,053 |
Advance funding arrangement | | | 9,255 | | | (408) | | | — | | | 8,847 |
Term loan facility, due 2029 | | | 9,651 | | | — | | | — | | | 9,651 |
Other notes | |
| 300 | |
| (76) | |
| — | |
| 224 |
| | $ | 444,206 | | $ | (484) | | $ | (7,947) | | $ | 435,775 |
Convertible Senior Notes
Interest expense recognized related to the 0.75% Convertible Senior Notes due 2026 (the “2026 Notes”) was approximately $1.4 million for each of the three months ended March 31,June 30, 2023, and December 31, 2022, and comprised of contractual interest expense and amortization of debt issuance costs.
In April 2023, the Company issued $333 million aggregate principal amount of 6.75% Senior Secured Convertible Notes due in 2028 (the “2028 Notes”) in a private placement transaction. Porch used a portion of the net proceeds from the 2028 Notes offering to repurchase $200 millionfair value of the 2026 Notes and to fund the repayment of $9.7 million outstanding under HOA’s term loan facility, in each case plus accrued and unpaid interest thereon and related fees and expenses. See(see Note 16 for additional information.
Advance Funding Arrangement
For certain home warranty contracts, the Company participates in a financing arrangement with third-party financers that provide the Company with contract premium upfront, less a financing fee. Third-party financers collect installment payments from the warranty contract customer which satisfy the Company’s repayment obligation over a portion of the contract term. We remain obligated to repay the third-party financer if a customer cancels its warranty contract prior to full repayment of the advance funding amount received by the Company. As part of the arrangement, the Company pays financing fees, which are collected by the third-party financers upfront, and are initially recognized as a debt discount. Financing fees are amortized as interest expense under the effective interest method. The implied interest rate varies per contract and7) is generally approximately 14% of total funding received. Interest expense recognized related to advance funding arrangement was $0.5$72.0 million and $1.0$238.6 million, forrespectively. The decrease of $166.6 million is primarily due to the three months ended Marchdecline in the stock price at June 30, 2023, as compared to December 31, 2023 and 2022, respectively.
24
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
Term Loan Facility
2022. As of March 31,June 30, 2023, the Company has borrowed $9.7 million on the HOA term loan facility. In April 2023, the term loan facility was repaid in full by using a portionfair value of the 2028 Notes offering proceeds. See(see Note 16 for additional information.
7) was $216.7 million. The fair values of the line of credit, advance funding arrangement and other notes approximate the unpaid principal balance. All debt, other than the convertible notes which are Level 2, is considered a Level 3 measurement.
8. Equity5. Property, Equipment, and WarrantsSoftware
Common Shares OutstandingProperty, equipment, and Common Stock Equivalents
The following table summarizessoftware, net, consists of the Company’s fully diluted capital structure:following:
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
| | | | | | |
|
| June 30, | | December 31, | ||
| | 2023 |
| 2022 | ||
Software and computer equipment | | $ | 8,266 | | $ | 8,326 |
Furniture, office equipment, and other | |
| 1,708 | |
| 2,118 |
Internally developed software | |
| 20,017 | |
| 17,128 |
Leasehold improvements | |
| 1,178 | |
| 1,178 |
| |
| 31,169 | |
| 28,750 |
Less: Accumulated depreciation and amortization | |
| (16,401) | |
| (16,510) |
Property, equipment, and software, net | | $ | 14,768 | | $ | 12,240 |
The table above excludes common stock contingently issuable in connection with prior acquisitions. Such common stock is issuable to the extent specified operational milestones are achieved, or market conditions are met in the future.
Repurchases of Common Shares
In October 2022, the Company’s board of directors approved a share repurchase program authorizing management to repurchase up to $15 million in the Company’s common stock and/or convertible notes. Repurchases under this program may be made from time to time on the open market between November 10, 2022Depreciation and June 30, 2023, at prevailing market prices, in privately negotiated transactions, in block trades, and/or through other permissible means.
During the first quarter of 2023, the Company repurchased and canceled 1,396,158 shares with the total cost of $3.1 million (including commissions). The cost paid to repurchase shares in excess of the par value is charged to accumulated deficit in the unaudited condensed consolidated balance sheet as of March 31, 2023.
25
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
The Company’s repurchase of $200 million of the 2026 Notes as described in Note 7 was done under separate authorization and not part of $15 million share repurchase program.
Warrants
There was no activityamortization expense related to publicproperty, equipment, and private warrants during the three months ended March 31, 2023.
| | | | | |
| | | | | Number of |
| | | Number of |
| Common |
| | | Warrants |
| Shares Issued |
Balances as of December 31, 2022 |
|
| 1,795,700 | | 11,521,412 |
Exercised |
|
| — | | — |
Canceled | | | — | | — |
Balances as of March 31, 2023 |
|
| 1,795,700 | | 11,521,412 |
9. Stock-Based Compensation
Under the Company’s 2020 Stock Incentive Plan, which replaced the Company’s 2012 Equity Incentive Plan in December 2020, the employees, directorssoftware was $1.2 million and consultants of the Company are eligible for grants of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards (“RSA”), restricted stock units (“RSU”), performance awards (“PRSU”), and other stock awards, collectively referred to as “Awards”.
Stock-based compensation expense$1.0 million for the three months ended March 31,June 30, 2023 and 2022, is $6.9respectively, and $5.9$2.4 million respectively.
Detail related to stock option, RSU and PRSU activity$2.0 million for the threesix months ended March 31,June 30, 2023 is as follows:
| | | | | | |
|
| |
| | | Number of |
| | | | Number of | | Performance |
|
| Number of |
| Restricted | | Restricted |
|
| Options |
| Stock Units | | Stock Awards |
Balances as of December 31, 2022 |
| 3,862,918 |
| 5,309,241 | | 920,924 |
Granted |
| — |
| 123,292 | | 301,598 |
Vested |
| — |
| (295,414) | | — |
Exercised | | (4,519) | | — | | — |
Forfeited, canceled or expired |
| (123,265) |
| (143,132) | | — |
Balances as of March 31, 2023 |
| 3,735,134 |
| 4,993,987 | | 1,222,522 |
10. Reinsurance
2023 Program:
The Company’s third-party quota share reinsurance program is split into three separate placements to maximize coverage and cost efficiency. The 2023 Coastal Program covers the Company’s business in certain Texas coastal regions and the Houston metropolitan area and is placed at 42.05% of subject property and casualty losses (“P&C losses”), as well as all business in South Carolina which is placed at 7.3% of P&C losses. The 2023 Core Program, which covers the portion of the Company’s business not in the Coastal Program, is placed at 49.5% of P&C losses of the Company’s remaining business in Texas and 48.0% of P&C losses of the Company’s business in other states. In addition, the Combined Program covers all the Company’s business and is placed at 5% of P&C losses. All programs are effective for2022, respectively.
26
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
the period January 1, 2023 through December 31, 20236. Intangible Assets and Goodwill
Intangible Assets
Intangible assets are stated at cost or March 31, 2024,acquisition-date fair value less accumulated amortization and are subject to certain limits and exclusions, which vary by participating reinsurer.
Property catastrophe excessimpairment. The following table summarizes intangible assets as of loss treaties which were in effect through March 31, 2023, developed over five layers and limited the Company’s net retention to $4 million per occurrence and provided coverage up to a net loss of $440 million. The Company also places reinstatement premium protection to cover any reinstatement premiums due on the first three layers.
The effects of reinsurance on premiums written and earned for the three months ended March 31, 2023, and 2022 were as follows:
| | | | | | | | | | | | |
| | Three Months Ended March 31, | ||||||||||
| | 2023 | | 2022 | ||||||||
| | Written | | Earned | | Written | | Earned | ||||
Direct premiums | | $ | 96,873 | | $ | 114,824 | | $ | 87,123 | | $ | 84,318 |
Ceded premiums | |
| 2,266 | |
| (74,674) | |
| (60,636) | |
| (71,727) |
Net premiums | | $ | 99,139 | | $ | 40,150 | | $ | 26,487 | | $ | 12,591 |
The Company’s 2023 third-party quota share program was placed at a reduced ceding percentage as compared to the 2022 program, which resulted in a portfolio transfer and less ceded written premiums in the three months ended March 31,June 30, 2023.
The effects of reinsurance on incurred losses and loss adjustment expense (“LAE”) for the three months ended March 31, 2023, and 2022 were as follows:
| | | | | | |
| | Three Months Ended March 31, | ||||
| | 2023 | | 2022 | ||
Direct losses and LAE | | $ | 90,015 | | $ | 68,221 |
Ceded losses and LAE | | | (47,156) | | | (54,946) |
Net losses and LAE | | $ | 42,859 | | $ | 13,275 |
The detail of reinsurance balances due is as follows:
| | | | | | |
| | March 31, 2023 | | December 31, 2022 | ||
Ceded unearned premium | | $ | 169,360 | | $ | 203,157 |
Losses and LAE reserve | | | 74,043 | | | 76,999 |
Reinsurance recoverable | | | 49,281 | | | 18,765 |
Other | | | 91 | | | 139 |
Reinsurance balance due | | $ | 292,775 | | $ | 299,060 |
| | | | | | | | | | | |
| | Weighted |
| | | | Accumulated | | | | |
| | Average | | Intangible | | Amortization | | Intangible | |||
| | Useful Life | | Assets, | | And | | Assets, | |||
|
| (in years) |
| gross |
| Impairment |
| Net | |||
Customer relationships |
| 9.0 | | $ | 69,505 | | $ | (19,494) | | $ | 50,011 |
Acquired technology |
| 5.0 | |
| 36,041 | | | (19,175) | |
| 16,866 |
Trademarks and tradenames |
| 10.0 | |
| 23,443 | | | (5,609) | |
| 17,834 |
Non-compete agreements | | 3.0 | | | 616 | | | (431) | | | 185 |
Value of business acquired | | 1.0 | | | 400 | | | (400) | | | — |
Renewal rights | | 6.0 | | | 9,734 | | | (2,764) | | | 6,970 |
Insurance licenses | | Indefinite | | | 4,960 | | | — | | | 4,960 |
Total intangible assets |
| | | $ | 144,699 | | $ | (47,873) | | $ | 96,826 |
2721
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements -– Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
11. Unpaid Losses and Loss Adjustment Reserve
The following table provides the roll forward of the beginning and ending reserve balances for unpaid losses and LAE, gross of reinsurance for the three months ended March 31, 2023:
| | | |
|
| 2023 | |
Reserve for unpaid losses and LAE, at December 31, 2022 | | $ | 100,632 |
Reinsurance recoverables on losses and LAE | |
| (76,999) |
Reserve for unpaid losses and LAE reserve, net of reinsurance recoverables at December 31, 2022 | | | 23,633 |
Add provisions (reductions) for losses and LAE occurring in: | | | |
Current year | | | 43,464 |
Prior years | | | (605) |
Net incurred losses and LAE during the current year | | | 42,859 |
Deduct payments for losses and LAE occurring in: | | | |
Current year | | | (14,015) |
Prior years | | | (10,993) |
Net claim and LAE payments during the current year | | | (25,008) |
Reserve for losses and LAE, net of reinsurance recoverables, at end of period | | | 41,484 |
Reinsurance recoverables on losses and LAE | | | 74,043 |
Reserve for unpaid losses and LAE at March 31, 2023 | | | 115,527 |
As a result of additional information on claims occurring in prior years becoming available to management, changes in estimates of provisions of losses and loss adjustment expenses were made resulting in a decrease of $0.6 million for the three months ended March 31, 2023.
12. Commitments and Contingencies
Litigation
From time to time the Company is or may become subject to various legal proceedings arising in the ordinary course of business, including proceedings initiated by users, other entities, or regulatory bodies. Estimated liabilities are recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In many instances, the Company is unable to determine whether a loss is probable or to reasonably estimate the amount of such a loss and, therefore, the potential future losses arising from a matter may differ from the amount of estimated liabilities the Company has recorded in the financial statements covering these matters. The Company reviews its estimates periodically and makes adjustments to reflect negotiations, estimated settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter.
Cases under Telephone Consumer Protection Act
Porch and/or an acquired entity, GoSmith.com, are party to twelve legal proceedings alleging violations of the automated calling and/or Do Not Call restrictions of the Telephone Consumer Protection Act of 1991. Some of these actions allege related state law claims. The proceedings were commenced as mass tort actions by a single plaintiffs’ law firm in December 2019 and April/May 2020 in federal district courts throughout the United States. One of the actions was dismissed with prejudice and was appealed to the Ninth Circuit Court of Appeals. On October 12, 2022, in a split decision, the Ninth Circuit Court of Appeals reversed. The remaining cases were consolidated in the United States District Court for the Western District of Washington, where Porch resides. Plaintiffs filed a motion for leave to file a second amended complaint, which is currently pending. Once this motion is resolved, the court is expected to set a brief schedule on Defendants’ forthcoming motion to dismiss. The case is otherwise stayed pending resolution of Defendants’
28
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
motion. Plaintiffs seek actual, statutory, and/or treble damages, injunctive relief, and reasonable attorneys’ fees and costs.
These actions are at an early stage in the litigation process. It is not possible to determine the likelihood of an unfavorable outcome of these disputes, although it is reasonably possible that the outcome of these actions may be unfavorable. Further, it is not possible to estimate the range or amount of potential loss (if the outcome should be unfavorable). Porch intends to contest these cases vigorously.
Kandela, LLC v Porch.com, Inc.
In May 2020, the former owners of Kandela, LLC filed complaints against Porch in the Superior Court of the State of California, alleging a breach of contract related to the terms and achievement of an earnout agreement related to the acquisition of the Kandela business and related fraudulent inducement claims. Claimants sought to recover compensatory damages based on an asset purchase agreement entered into with Porch and related employment agreements. Claimants also sought punitive damages, attorney’s fees and costs. Certain claimants settled their claims, and this settlement is within the range of the estimated accrual. Arbitration of the remaining claims occurred in March 2022. In July 2022, the Arbitrator issued his Final Award finding no merit to any of the claims asserted by claimant Kandela, LLC and determined Porch to be the prevailing party on all counts. The Arbitrator also awarded Porch and its insurers legal fees and costs in the amount of $1.4 million as the prevailing party and, if recovered in full, a significant portion of which would be expected to be allocable to its corporate insurance providers. On October 12, 2022, the Los Angeles Superior Court confirmed the Arbitration Award and entered Judgment in Porch’s favor. Kandela has failed to pay the judgment in Porch’s favor. Kandela filed a Notice of Appeal as to the Judgment on December 9, 2022. On January 18, 2023, Porch filed a Fraudulent Conveyance Action against Kandela and its members for wrongfully distributing assets that could have satisfied the judgement. On March 1, 2023, Kandela filed for protection under Chapter 7 of the Bankruptcy Code. As a result, Kandela’s appellate action was automatically stayed. At this time, Porch’s Fraudulent Conveyance Action has also been stayed as to all defendants. Porch intends to take all necessary steps so that the Fraudulent Conveyance Action can proceed against the Kandela members who Porch believes received the fraudulently transferred assets that could be used to satisfy the Judgment.
Putative Wage and Hours Class Action Proceeding
A former employee of HireAHelper™ filed a complaint in San Diego County Superior Court in November 2020, asserting putative class action claims for failure to pay overtime, failure to pay compensation at the time of separation and unfair business practices in violation of California law. HireAHelper™ was served with the complaint in December 2020 and on January 28, 2021, defendants removed the case to the United States District Court for the Southern District of California. The plaintiff seeks to represent all current and former non-exempt employees of HireAHelper™ and Porch (prior to the December 23, 2020 merger) and Porch’s other affiliated companies in the State of California during the relevant time period. Plaintiffs sought damages for unpaid wages, liquidated damages, penalties, attorneys’ fees and costs. The parties recently attended mediation, which was successful, and a deal was reached. The parties have executed the long form settlement agreement and obtained final approval of the settlement from the court on August 11, 2022. Porch paid the individual settlement in September 2022, and Plaintiff’s individual claims were dismissed and released. Porch also funded the class action settlement in September 2022 and the settlement payments to the class were distributed in October 2022. The settlement is final, and the settlement checks expired in March 2023. The final step in the process will be distribution of the funds from the uncashed settlement checks and Court approval of same.
Other
In addition, in the ordinary course of business, Porch Group and its subsidiaries are (or may become) parties to litigation involving property, personal injury, contract, intellectual property and other claims, as well as stockholder derivative actions, class action lawsuits and other matters. The amounts that may be recovered in such matters may be subject to insurance coverage. Although the results of legal proceedings and claims cannot be predicted with certainty,
29
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
neither Porch Group nor any of its subsidiaries is currently a party to any legal proceedings the outcome of which, the Company believes, if determined adversely to the Company, would individually or in the aggregate have a material adverse effect on the business, financial condition or results of operations.
13. Business Combinations
March 17, 2023 Acquisitions of the Florida and California Operations of Residential Warranty Services (“RWS”)
On April 1, 2022, the Company entered into a stock and membership interest purchase agreement with Residential Warranty Services (“RWS”) to acquire its home warranty and inspection software and services businesses. On that date, the Company completed the acquisition of substantially all of RWS’ operations except for those in Florida and California, which were subject to certain regulatory and other approvals.
The acquisitions of the Florida and California operations were closed on March 17, 2023. The Company paid approximately $2.1 million in cash to acquire $0.2 million of cash and current assets, and $0.2 million of customer relationships with an estimated useful life of 3 years. The estimated value of the customer relationships intangible asset was calculated using the income approach.
The aggregate transaction costs of $0.1 million primarily comprised of legal and due diligence fees, and are included in general and administrative expenses on the condensed consolidated statements of operations. The results of operations for each acquisition are included in the Company’s consolidated financial statements from the date of acquisition onwards.
14. Segment Information
The Company has two reportable segments that are also our operating segments: Vertical Software and Insurance. Our reportable segments have been identified based on how our chief operating decision-maker (“CODM”) manages our business, makes operating decisions and evaluates operating and financial performance. The chief executive officer acts as the CODM and reviews financial and operational information for our two reportable segments. Operating segments are components of an enterprise for which separate discrete financial information is available and operational results are regularly evaluated by the CODM for the purposes of making decisions regarding resource allocation and assessing performance.
Our Vertical Software segment primarily consists of a vertical software platform for the home, providing software and services to home services companies, such as home inspectors, moving companies, utility companies, title companies and others, and includes software subscription and service fees from companies, and non-insurance revenue.
Our Insurance segment offers various forms of homeowner insurance policies through its own insurance carrier and certain homeowner and auto insurance policies through its licensed insurance agency. The Insurance segment also includes home warranty service revenue.
30
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)stated)
The following table provides the Company’s revenue by segment:summarizes intangible assets as of December 31, 2022.
| | | | | | |
|
| Three Months Ended March 31, | ||||
|
| 2023 |
| 2022 | ||
Segment revenues: | | | | | | |
Vertical Software | | $ | 28,627 | | $ | 34,404 |
Insurance | | | 58,742 | | | 29,163 |
Total segment revenue | | $ | 87,369 | | $ | 63,567 |
| | | | | | | | | | | |
| | Weighted |
| | |
| | |
| | |
| | Average | | Intangible | | | | | Intangible | ||
| | Useful Life | | Assets, | | Accumulated | | Assets, | |||
|
| (in years) |
| gross |
| Amortization |
| Net | |||
Customer relationships |
| 9.0 | | $ | 69,730 | | $ | (15,079) | | $ | 54,651 |
Acquired technology |
| 5.0 | |
| 37,932 | | | (16,468) | |
| 21,464 |
Trademarks and tradenames |
| 10.0 | |
| 25,071 | | | (5,724) | |
| 19,347 |
Non-compete agreements | | 3.0 | | | 619 | | | (407) | | | 212 |
Value of business acquired | | 1.0 | | | 400 | | | (400) | | | — |
Renewal rights | | 6.0 | | | 9,734 | | | (2,113) | | | 7,621 |
Insurance licenses | | Indefinite | | | 4,960 | | | — | | | 4,960 |
Total intangible assets |
| | | $ | 148,446 | | $ | (40,191) | | $ | 108,255 |
The Company’s segment operatingaggregate amortization expense related to intangibles was $4.9 million and financial performance measure is segment Adjusted EBITDA (loss). Segment Adjusted EBITDA (loss) is defined as revenue less$5.4 million for the following expenses associated with these segments: costthree months ended June 30, 2023 and 2022, respectively, and $9.8 million and $10.9 million for the six months ended June 30, 2023 and 2022, respectively.
During the six months ended June 30, 2023, we recorded impairment charges of revenue, sales$2.0 million, primarily related to acquired technology, trademarks and marketing, producttradenames, and technology, and general and administrative expenses. Segment Adjusted EBITDA (loss) also excludes non-cash items or items that management does not consider are reflective of ongoing core operations.
Currently,customer relationships for an asset group within the Company does not allocate any shared expenses to the reportable segments. These expensesVertical Software segment. Impairment charges are included in Corporateimpairment loss on intangible assets and Other. Corporate and Other includes shared expenses such as sales and marketing, certain product and technology, accounting, human resources, legal and general and administrative, and other income, expenses, gains and losses that are not allocatedgoodwill in assessing segment performance due to their function. Such transactions are excluded from the reportable segments results but included in reportedunaudited condensed consolidated results.statements of operations.
The reconciliation of segment Adjusted EBITDA (loss) to consolidated loss from operations below includes the effects of corporate and other items that the CODM does not consider in assessing segment performance.Goodwill
The following tables provide financial informationtable summarizes the changes in the carrying amount of goodwill for the two reportable segmentssix months ended June 30, 2023.
| | | |
|
| Goodwill | |
Balance as of December 31, 2022, net of accumulated impairment of $43.8 million | | $ | 244,697 |
Acquisition | | | 2,421 |
Impairment loss | | | (55,211) |
Balance as of June 30, 2023, net of accumulated impairment of $99.0 million | | $ | 191,907 |
During the first and reconciliationssecond quarters of 2023, management identified various qualitative factors that collectively indicated triggering events, including a sustained decrease in stock price, increased costs due to consolidated financialinflationary pressures, hardening of the reinsurance markets, volatile weather, and a deterioration of the macroeconomic environment in the housing and real estate and insurance industries. We performed a valuation of the Vertical Software and Insurance reporting units using a combination of market and income approaches based on peer performance and discounted cash flow or dividend discount model methodologies. The goodwill impairment analysis required significant judgments to calculate the fair value of the reporting units, including internal forecasts and determination of weighted average cost of capital. Management considers historical experience and all available information forat the periods presented:time the fair values are estimated. Assumptions are subject to a high degree of judgment and complexity.
| | | | | | |
|
| Three Months Ended March 31, | ||||
|
| 2023 |
| 2022 | ||
Segment adjusted EBITDA (loss): | | | | | | |
Vertical Software | | $ | (396) | | $ | 2,884 |
Insurance | |
| (7,185) | |
| 216 |
Corporate and Other | |
| (14,301) | |
| (13,527) |
Total segment adjusted EBITDA (loss) | |
| (21,882) | |
| (10,427) |
Reconciling items: | | | | | | |
Depreciation and amortization | | | (6,015) | | | (6,483) |
Non-cash stock-based compensation expense | | | (6,894) | | | (5,854) |
Acquisition and other transaction costs | | | (1,112) | | | (895) |
Impairment loss on intangible assets and goodwill | | | (2,021) | | | — |
Non-cash losses and impairment of property, equipment and software | | | — | | | (69) |
Revaluation of contingent consideration | | | 154 | | | (3,205) |
Investment income and realized gains | | | (758) | | | (197) |
Non-cash bonus expense | | | — | | | (1,526) |
Operating loss | | $ | (38,528) | | $ | (28,656) |
The CODM does not review assets on a segment basis.results of the quantitative impairment assessment as of March 31, 2023, indicated that the fair value of our Vertical Software reporting unit exceeded its carrying value by less than 5%, and the fair value of our Insurance reporting unit exceeded its carrying value by less than 10%.
The results of the quantitative impairment assessment as of June 30, 2023, indicated that the carrying value of the Insurance reporting unit exceeded its estimated fair value. As such, we determined that the goodwill allocated to the
3122
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements -– Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)stated)
AllInsurance reporting unit was impaired as of June 30, 2023. Impairment charges are included in impairment loss on intangible assets and goodwill in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2023.
The results of the Company’s revenuequantitative impairment assessment as of June 30, 2023, indicated that the fair value of our Vertical Software reporting unit exceeded its carrying value by less than 10%. As a result, our remaining goodwill balance is generatedat risk of future impairment. We monitor our reporting units at risk of impairment for interim impairment indicators and believe that the estimates and assumptions used in the United States, except for an immaterial amount. Ascalculations are reasonable as of March 31, 2023, and December 31, 2022,June 30, 2023. We also reconcile the Company did not have material assets located outsidefair value of our reporting units to our market capitalization. Should the fair value of any of our reporting units fall below its carrying amount because of reduced operating performance, market declines including a deterioration of the United States.
macroeconomic environment in the housing and real estate or insurance industries, changes in the discount rate, or other adverse conditions, goodwill impairment charges may be necessary in future periods.
15. Basic and Diluted Net Loss Per Share7. Debt
Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities.
Under the two-class method, basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period.
Diluted earnings per share attributable to common stockholders adjusts basic earnings per share for the potentially dilutive impact of stock options, RSUs, PRSUs, RSAs, convertible notes, earnout shares and warrants. As the Company has reported losses for all periods presented, all potentially dilutive securities are antidilutive and accordingly, basic net loss per share equals diluted net loss per share.
The following table sets forthtables summarize outstanding debt as of June 30, 2023, and December 31, 2022.
| | | | | | | | | | | | |
|
| | |
| | |
| Debt |
| | | |
| | | |
| Unaccreted |
| Issuance |
| Carrying | |||
| | Principal | | Discount |
| Costs | | Value | ||||
Convertible senior notes, due 2026 | | $ | 225,000 | | $ | — | | $ | (3,909) | | $ | 221,091 |
Convertible senior notes, due 2028 | | | 333,334 | | | (122,877) | | | (4,707) | | | 205,750 |
Advance funding arrangement | | | 5,321 | | | (32) | | | — | | | 5,289 |
Other notes | |
| 300 | |
| (26) | |
| — | |
| 274 |
Balance as of June 30, 2023 | | $ | 563,955 | | $ | (122,935) | | $ | (8,616) | | $ | 432,404 |
| | | | | | | | | | | | |
|
| | |
| | |
| Debt |
| | | |
| | | |
| Unaccreted |
| Issuance |
| Carrying | |||
| | Principal | | Discount |
| Costs | | Value | ||||
Convertible senior notes, due 2026 | | $ | 425,000 | | $ | — | | $ | (8,508) | | $ | 416,492 |
Advance funding arrangement | |
| 15,670 | | | (760) | | | — | | | 14,910 |
Term loan facility, due 2029 | | | 10,000 | | | — | | | — | | | 10,000 |
Other notes | | | 450 | |
| (87) | |
| — | |
| 363 |
Balance as of December 31, 2022 | | $ | 451,120 | | $ | (847) | | $ | (8,508) | | $ | 441,765 |
Convertible Senior Notes
Interest expense recognized related to the computation of the Company’s basic0.75% Convertible Senior Notes due 2026 (the “2026 Notes”) was approximately $0.9 million and diluted net loss attributable per share to common stockholders$1.4 million for the three months ended March 31,June 30, 2023 and 2022:
| | | | | | |
| | Three Months Ended March 31, | ||||
|
| 2023 |
| 2022 | ||
Numerator: |
| |
|
| |
|
Net loss used to compute net loss per share - basic and diluted: | | $ | (38,740) | | $ | (9,285) |
| | | | | | |
Denominator: | |
|
| |
|
|
Weighted average shares outstanding used to compute loss per share - basic and diluted: | |
| 95,209,819 | |
| 96,074,527 |
| | | | | | |
Loss per share - basic and diluted | | $ | (0.41) | | $ | (0.10) |
2022, respectively, and $2.2 million and $2.7 million for the six months ended June 30, 2023 and 2022, respectively, including contractual interest expense and amortization of debt issuance costs. The following table discloses securities that could potentially dilute basic net loss per share in the future that were not included in the computation of diluted net loss per share because to do so would have been antidilutiveeffective interest rate for all periods presented:
| | | | |
|
| Three Months Ended March 31, | ||
| | 2023 |
| 2022 |
Stock options |
| 3,735,134 |
| 4,569,743 |
Restricted stock units and awards | | 4,993,987 | | 4,188,802 |
Performance restricted stock units | | 1,222,522 | | 37,184 |
Public and private warrants |
| 1,795,700 |
| 1,795,700 |
Earnout shares | | 2,050,000 | | 2,050,000 |
Convertible debt(1) | | 16,998,130 | | 16,998,130 |
Contingently issuable shares in connection with acquisitions(2) | | 13,957,569 | | 2,792,457 |
(1) In connection with the September 16, 2021 issuance of the 2026 Notes the Company used a portion of the proceeds to pay for the capped call transactions, which are expected to generally reduce the potential dilution to the Company’s common stock. The capped call transactions impact the number of shares that may be issued by effectively increasing the conversion price for the Company from $25 per share to approximately $37.74 per share, which would result in 11,261,261 potentially dilutive shares instead of the shares reported in this table as of March 31, 2023.
32
Table of Contentsis 1.3%.
PORCH GROUP, INC.
Notes to Condensed Consolidated Statements - Continued
(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)
(2) In connection with the acquisitions of Floify and HOA, the Company provided an obligation to issue a certain amount of common stock to the extent specified market conditions are met in the future. Contingently issuable shares are calculated in accordance with the purchase agreement, assuming they would be issuable if the end of the reporting periods were the end of the contingency period.
16. Subsequent Events
On April 20, 2023, the Companywe issued $333 million aggregate principal amount of 6.75% Senior Secured Convertible Notes due in 2028 (the “2028 Notes”) in a private placement transaction. PorchWe used a portion of the net proceeds from the 2028 Notes offering to repurchase $200 million of itsthe 2026 Notes and to fund the repayment of $9.7 million outstanding under HOA’sthe term loan facility, in each case plus accrued and unpaid interest thereon and related fees and expenses. In connection with the partial repurchase of the 2026 Notes, we recognized an $81.4 million gain on extinguishment of debt, calculated as the difference between the reacquisition price and the net carrying amount of the portion of the 2026 Notes that was extinguished.
23
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
The 2028 Notes are convertible into cash, shares of common stock, of the Company, or a combination of cash and shares of common stock at Porch’sour election at an initial conversion rate of 39.9956 shares of common stock per $1,000 principal amount of the 2028 Notes, which is equivalent to an initial conversion price of approximately $25.00 per share.
The 2028 Notes are senior secured obligations, of the Company, accrue interest at a rate of 6.75%, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2023, and were initially issued at 95% of par value. The 2028 Notes will mature on October 1, 2028, unless earlier repurchased, redeemed or converted. Prior to the close of business on the business day immediately preceding July 1, 2028, the 2028 Notes will be convertible at the option of the holders only upon the satisfaction of certain conditions and during certain periods. Thereafter, until the close of business on the second scheduled trading day immediately preceding the maturity date, the 2028 Notes will be convertible at the option of the holders at any time regardless of these conditions.
Currently, an estimateInterest expense recognized related to the 2028 Notes was approximately $7.3 million in the three and six months ended June 30, 2023, including $4.4 million contractual interest expense and $2.9 million amortization of debt issuance costs and discount. The effective interest rate for the 2028 Notes is 17.9%.
Advance Funding Arrangement
For certain home warranty contracts, we participate in financing arrangements with third-party financers that provide us with the contract premium upfront, less a financing fee. Third-party financers collect installment payments from the warranty contract customer which satisfy our repayment obligation over a portion of the contract term. We remain obligated to repay the third-party financer if a customer cancels its warranty contract prior to full repayment of the advance funding amount we received. As part of the arrangement, we pay financing fees, which are collected by the third-party financers upfront and are initially recognized as a debt discount. Financing fees are amortized as interest expense under the effective interest method. The implied interest rate varies per contract and is generally approximately 14% of total funding received. Interest expense recognized related to advance funding arrangement was $0.4 million and $0.5 million for the three months ended June 30, 2023 and 2022, respectively, and $0.9 million and $1.6 million for the six months ended June 30, 2023 and 2022, respectively.
Term Loan Facility
In April 2023, the term loan facility was repaid in full by using a portion of the proceeds received from the 2028 Notes.
24
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
8. Equity and Warrants
Common Shares Outstanding and Common Stock Equivalents
The following table summarizes our fully diluted capital structure.
| | | | |
| | June 30, | | December 31, |
| | 2023 | | 2022 |
Issued and outstanding common shares |
| 96,118,956 |
| 96,405,838 |
Earnout shares |
| 2,050,000 |
| 2,050,000 |
Total common shares issued and outstanding | | 98,168,956 | | 98,455,838 |
Common shares reserved for future issuance: | | | | |
Private warrants | | 1,795,700 | | 1,795,700 |
Stock options (Note 9) |
| 3,717,192 |
| 3,862,918 |
Restricted and performance stock units and awards (Note 9) |
| 13,244,675 |
| 6,230,165 |
2020 Equity Plan pool reserved for future issuance (Note 9) |
| 8,045,331 |
| 11,189,745 |
Convertible senior notes, due 2026(1) | | 8,999,010 | | 16,998,130 |
Convertible senior notes, due 2028 | | 13,331,893 | | — |
Contingently issuable shares in connection with acquisitions(2) | | 13,969,860 | | 10,631,558 |
Total shares of common stock outstanding and reserved for future issuance |
| 161,272,617 |
| 149,164,054 |
(1) | In connection with the September 16, 2021, issuance of the 2026 Notes, we used a portion of the proceeds to pay for the capped call transactions, which are expected to generally reduce the potential dilution to our common stock. The capped call transactions allow us to purchase shares of our common stock at a strike price of $25 per share, which is equal to the conversion price of the 2026 Notes and 2028 Notes. The capped call transactions are designed to limit the amount of dilution of our common stock upon conversion of the notes. The maximum number of shares purchasable by us under the capped call transactions is 16,998,130. The options that underly the capped call transactions expire on September 15, 2026. |
(2) | In connection with the acquisitions of Floify and HOA, we provided an obligation to issue a certain amount of common stock to the extent specified market conditions are met in the future. Contingently issuable shares are calculated in accordance with the purchase agreement, assuming they would be issuable if the end of the reporting periods were the end of the contingency period. |
Repurchases of Common Shares
In October 2022, our board of directors approved a share repurchase program authorizing management to repurchase up to $15 million of our common stock and/or convertible notes. Repurchases under this program were permitted from time to time on the open market between November 10, 2022, and June 30, 2023, at prevailing market prices, in privately negotiated transactions, in block trades, and/or through other permissible means.
During the six months ended June 30, 2023, we repurchased and canceled 1,396,158 shares with a total cost of $3.1 million (including commissions). The cost paid to repurchase shares in excess of the par value is charged to accumulated deficit in the unaudited condensed consolidated balance sheet as of June 30, 2023.
The repurchase of $200 million of the 2026 Notes as described in Note 7 was done under separate authorization and was not part of the $15 million share repurchase program.
25
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
Warrants
There was no activity related to public and private warrants during the six months ended June 30, 2023.
| | | | | |
| | | | | Number of |
| | | Number of |
| Common |
| | | Warrants |
| Shares Issued |
Balances as of December 31, 2022 |
|
| 1,795,700 | | 11,521,412 |
Exercised |
|
| — | | — |
Canceled | | | — | | — |
Balances as of June 30, 2023 |
|
| 1,795,700 | | 11,521,412 |
9. Stock-Based Compensation
The following table summarizes the classification of stock-based compensation expense in the unaudited condensed consolidated statements of operations.
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Selling and marketing | | $ | 896 | | $ | 1,270 |
| $ | 1,941 | | $ | 1,902 |
Product and technology | |
| 1,254 | |
| 1,840 |
|
| 2,703 | |
| 2,977 |
General and administrative | |
| 4,254 | |
| 6,592 |
|
| 8,654 | |
| 10,677 |
Total stock-based compensation expense | | $ | 6,404 | | $ | 9,702 |
| $ | 13,298 | | $ | 15,556 |
Under our 2020 Stock Incentive Plan, which replaced the 2012 Equity Incentive Plan in December 2020, employees, directors and consultants are eligible for grants of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance restricted stock units (“PRSUs”), and other stock awards, collectively referred to as “Awards.”
The following table summarizes Award activity for the six months ended June 30, 2023:
| | | | | | |
|
| |
| | | Number of |
| | | | Number of | | Performance |
|
| Number of |
| Restricted | | Restricted |
|
| Options |
| Stock Units | | Stock Units |
Balances as of December 31, 2022 |
| 3,862,918 |
| 5,309,241 | | 920,924 |
Granted |
| — |
| 5,591,534 | | 3,135,073 |
Vested |
| |
| (1,164,592) | | — |
Exercised | | (4,519) | | — | | — |
Forfeited, canceled or expired |
| (141,207) | | (547,505) | | — |
Balances as of June 30, 2023 |
| 3,717,192 |
| 9,188,678 | | 4,055,997 |
10. Reinsurance
2023 Program
Our third-party quota share reinsurance program is split into three separate placements to maximize coverage and cost efficiency. The 2023 Coastal Program covers our business in certain Texas coastal regions and the Houston metropolitan area and is placed at 42% of subject property and casualty losses (“P&C losses”), as well as all business in South Carolina which is placed at 7% of P&C losses. The 2023 Core Program, which covers the portion of our business not in the Coastal Program, is placed at 49.5% of P&C losses of our remaining business in Texas and 48% of P&C
26
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
losses of our business in other states. In addition, the Combined Program covers all of our business and is placed at 5% of P&C losses. All programs are effective for the period January 1, 2023, through December 31, 2023, or March 31, 2024, and are subject to certain limits and exclusions, which vary by participating reinsurer.
Property catastrophe excess of loss treaties were placed on April 1, 2023, and limited our net retention to $8 million per occurrence. The five layers provide coverage up to a net loss of $440 million. We also place reinstatement premium protection to cover any reinstatement premiums due on the first four layers.
The effects of reinsurance on premiums written and earned for the three and six months ended June 30, 2023 and 2022, were as follows:
| | | | | | | | | | | | |
| | Three Months Ended June 30, | ||||||||||
| | 2023 | | 2022 | ||||||||
| | Written | | Earned | | Written | | Earned | ||||
Direct premiums | | $ | 121,540 | | $ | 116,397 | | $ | 124,914 | | $ | 93,082 |
Ceded premiums | |
| (67,387) | |
| (72,166) | |
| (117,926) | |
| (83,095) |
Net premiums | | $ | 54,153 | | $ | 44,231 | | $ | 6,988 | | $ | 9,987 |
| | | | | | | | | | | | |
| | Six Months Ended June 30, | ||||||||||
| | 2023 | | 2022 | ||||||||
| | Written | | Earned | | Written | | Earned | ||||
Direct premiums | | $ | 218,413 | | $ | 231,221 | | $ | 212,037 | | $ | 177,400 |
Ceded premiums | |
| (65,121) | |
| (146,840) | |
| (178,562) | |
| (154,822) |
Net premiums | | $ | 153,292 | | $ | 84,381 | | $ | 33,475 | | $ | 22,578 |
Our 2023 third-party quota share program was placed at a reduced ceding percentage as compared to the 2022 program, which resulted in a portfolio transfer and lower ceded written premiums in the six months ended June 30, 2023.
The effects of reinsurance on incurred losses and loss adjustment expense (“LAE”) for the three and six months ended June 30, 2023 and 2022, were as follows:
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
| | 2023 | | 2022 | | 2023 | | 2022 | ||||
Direct losses and LAE | | $ | 137,591 | | $ | 74,617 | | $ | 227,606 | | $ | 142,838 |
Ceded losses and LAE | | | (66,442) | | | (60,133) | | | (113,598) | | | (119,106) |
Net losses and LAE | | $ | 71,149 | | $ | 14,484 | | $ | 114,008 | | $ | 23,732 |
The detail of reinsurance balances due is as follows:
| | | | | | |
| | June 30, 2023 | | December 31, 2022 | ||
Ceded unearned premium | | $ | 147,297 | | $ | 203,157 |
Losses and LAE reserve | | | 89,296 | | | 76,999 |
Reinsurance recoverable | | | 29,260 | | | 18,765 |
Other | | | 6,614 | | | 139 |
Reinsurance balance due | | $ | 272,467 | | $ | 299,060 |
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PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
11. Unpaid Losses and Loss Adjustment Reserve
The following table summarizes the changes in the reserve balances for unpaid losses and LAE, gross of reinsurance for the six months ended June 30, 2023:
| | | |
Reserve for unpaid losses and LAE, at December 31, 2022 | | $ | 100,632 |
Reinsurance recoverables on losses and LAE | |
| (76,999) |
Reserve for unpaid losses and LAE reserve, net of reinsurance recoverables at December 31, 2022 | | | 23,633 |
Add provisions (reductions) for losses and LAE occurring in: | | | |
Current year | | | 110,624 |
Prior years | | | 3,384 |
Net incurred losses and LAE during the current year | | | 114,008 |
Deduct payments for losses and LAE occurring in: | | | |
Current year | | | (44,510) |
Prior years | | | (16,718) |
Net claim and LAE payments during the current year | | | (61,228) |
Reserve for losses and LAE, net of reinsurance recoverables, at end of period | | | 76,413 |
Reinsurance recoverables on losses and LAE | | | 89,296 |
Reserve for unpaid losses and LAE at June 30, 2023 | | $ | 165,709 |
As a result of additional information on claims occurring in prior years becoming available to management, changes in estimates of provisions of losses and loss adjustment expenses were made resulting in an increase of $3.4 million for the six months ended June 30, 2023.
12. Commitments and Contingencies
From time to time we are or may become subject to various legal proceedings arising in the ordinary course of business, including proceedings initiated by users, other entities, or regulatory bodies. Estimated liabilities are recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In many instances, we are unable to determine whether a loss is probable or to reasonably estimate the amount of such a loss and, therefore, the potential future losses arising from a matter may differ from the amount of estimated liabilities we have recorded in the financial statements covering these matters. We review our estimates periodically and make adjustments to reflect negotiations, estimated settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter.
Cases under Telephone Consumer Protection Act
Porch and/or an acquired entity, GoSmith.com, are party to twelve legal proceedings alleging violations of the automated calling and/or internal and National Do Not Call restrictions of the Telephone Consumer Protection Act of 1991 and a related Washington state law claim. The proceedings were commenced as mass tort actions by a single plaintiffs’ law firm in December 2019 and April/May 2020 in federal district courts throughout the United States. One of the actions was dismissed with prejudice and was appealed to the Ninth Circuit Court of Appeals. On October 12, 2022, in a split decision, the Ninth Circuit Court of Appeals reversed. The remaining cases were consolidated in the United States District Court for the Western District of Washington, where Porch resides. Plaintiffs filed a motion for leave to file a second amended complaint, which was granted in part and is due to be filed July 2023. Defendants’ motion to dismiss is due September 2023. The case is otherwise stayed pending resolution of the defendants’ forthcoming motion. Plaintiffs seek actual, statutory, and/or treble damages, injunctive relief, and reasonable attorneys’ fees and costs.
28
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
These actions are at an early stage in the litigation process. It is not possible to determine the likelihood of an unfavorable outcome of these disputes, although it is reasonably possible that the outcome of these actions may be unfavorable. Further, it is not possible to estimate the range or amount of potential loss (if the outcome should be unfavorable). We intend to contest these cases vigorously.
Other
In addition, in the ordinary course of business, Porch Group and its subsidiaries are (or may become) parties to litigation involving property, personal injury, contract, intellectual property and other claims, as well as stockholder derivative actions, class action lawsuits and other matters. The amounts that may be recovered in such matters may be subject to insurance coverage. Although the results of legal proceedings and claims cannot be predicted with certainty, neither Porch Group nor any of its subsidiaries is currently a party to any legal proceedings the outcome of which, we believe, if determined adversely to us, would individually or in the aggregate have a material adverse effect on the business, financial condition or results of operations.
13. Business Combinations
On April 1, 2022, we entered into a stock and membership interest purchase agreement with Residential Warranty Services (“RWS”) to acquire its home warranty and inspection software and services businesses. On that date, we completed the acquisition of substantially all of the operations of RWS except for those in Florida and California, which were subject to certain regulatory and other approvals.
The acquisitions of the Florida and California operations were closed on March 17, 2023. We paid approximately $2.1 million in cash to acquire $0.2 million of cash and current assets and $0.2 million of customer relationships with an estimated useful life of three years. The estimated value of the customer relationships intangible asset was calculated using the income approach.
The aggregate transaction costs of $0.1 million are primarily comprised of legal and due diligence fees and are included in general and administrative expenses on the unaudited condensed consolidated statements of operations. The results of operations for each acquisition are included in our consolidated financial statements from the date of acquisition onwards.
14. Segment Information
We have two reportable segments that are also operating segments: Vertical Software and Insurance. Reportable segments were identified based on how the chief operating decision-maker (“CODM”) manages the business, makes operating decisions, and evaluates operating and financial performance. Our chief executive officer acts as the CODM and reviews financial and operational information for the two reportable segments. Operating segments are components of an enterprise for which separate discrete financial information is available and operational results are regularly evaluated by the CODM for the purposes of making decisions regarding resource allocation and assessing performance.
The Vertical Software segment primarily consists of a vertical software platform for the home that provides software and services to home services companies such as home inspectors, mortgage companies and loan officers, title companies, moving companies, real estate agents, utility companies, and individuals.
The Insurance segment operates both as an insurance carrier underwriting home insurance policies and as an agent selling home and auto insurance. The Insurance segment also includes warranty service offerings and a captive reinsurance provider.
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PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
The following table summarizes revenue by segment.
| | | | | | | | | | | | |
|
| Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Vertical Software | | $ | 34,435 | | $ | 42,540 | | $ | 63,062 | | $ | 76,944 |
Insurance | | | 64,330 | | | 28,375 | | | 123,072 | | | 57,538 |
Total revenue | | $ | 98,765 | | $ | 70,915 | | $ | 186,134 | | $ | 134,482 |
Our segment operating and financial performance measure is Segment Adjusted EBITDA (Loss). Segment Adjusted EBITDA (Loss) is defined as revenue less the following expenses associated with each segment: cost of revenue, sales and marketing, product and technology, general and administrative expenses, and provision for doubtful accounts. Segment Adjusted EBITDA (Loss) also excludes non-cash items or items that management does not consider reflective of ongoing core operations.
We do not allocate shared expenses to the reportable segments. These expenses are included in the “Corporate and other” row in the following reconciliation. “Corporate and other” includes shared expenses such as sales and marketing; certain product and technology; accounting; human resources; legal; general and administrative; and other income, expenses, gains and losses that are not allocated in assessing segment performance due to their function. Such transactions are excluded from the reportable segments’ results but are included in consolidated results.
The reconciliation of Segment Adjusted EBITDA (Loss) to consolidated loss from operations below includes the effects of corporate and other items that the CODM does not consider in assessing segment performance.
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PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
The following table provides financial information for the two reportable segments and a reconciliation to consolidated financial information for the periods presented.
| | | | | | | | | | | | |
|
| Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Segment Adjusted EBITDA (Loss): | | | | | | | | | | | | |
Vertical Software | | $ | 1,816 | | $ | 5,652 | | $ | 1,420 | | $ | 8,536 |
Insurance | |
| (31,181) | |
| (5,609) | |
| (38,366) | |
| (5,394) |
Subtotal | |
| (29,365) | |
| 43 | |
| (36,946) | |
| 3,142 |
Reconciling items: | | | | | | | | | | | | |
Corporate and other | |
| (13,769) | |
| (15,048) | |
| (28,070) | |
| (28,503) |
Depreciation and amortization | | | (6,214) | | | (6,416) | | | (12,229) | | | (12,899) |
Non-cash stock-based compensation expense | | | (6,404) | | | (9,702) | | | (13,298) | | | (15,556) |
Restructuring costs | | | (1,093) | | | — | | | (2,077) | | | — |
Acquisition and other transaction costs | | | (258) | | | (357) | | | (386) | | | (1,322) |
Impairment loss on intangible assets and goodwill | | | (55,211) | | | — | | | (57,232) | | | — |
Loss on reinsurance contract (1) | | | (48,244) | | | — | | | (48,244) | | | — |
Non-cash losses and impairment of property, equipment and software | | | (254) | | | — | | | (254) | | | (70) |
Revaluation of contingent consideration | | | 2,656 | | | (1,481) | | | 2,810 | | | (4,686) |
Investment income and realized gains | | | (1,249) | | | (243) | | | (2,007) | | | (440) |
Non-cash bonus expense | | | — | | | 1,526 | | | — | | | — |
Operating loss | | $ | (159,405) | | $ | (31,678) | | $ | (197,933) | | $ | (60,334) |
(1) See Note 16.
The CODM does not review assets on a segment basis.
All of our revenue is generated in the United States except for an immaterial amount. As of June 30, 2023, and December 31, 2022, we did not have material assets located outside of the United States.
15. Net Loss Per Share
Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities.
Under the two-class method, basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period.
Diluted earnings per share attributable to common stockholders adjusts basic earnings per share for the potentially dilutive impact of stock options, RSUs, PRSUs, RSAs, convertible notes, earnout shares and warrants. As we have reported losses for all periods presented, all potentially dilutive securities are antidilutive and, accordingly, basic net loss per share equals diluted net loss per share.
31
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
The following table summarizes the computation of basic and diluted net loss attributable per share to common stockholders for the three and six months ended June 30, 2023 and 2022:
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Numerator: |
| |
|
| |
| | |
|
| |
|
Net loss used to compute net loss per share - basic and diluted: | | $ | (86,963) | | $ | (27,325) | | $ | (125,703) | | $ | (36,610) |
| | | | | | | | | | | | |
Denominator: | |
|
| |
|
| |
|
| |
|
|
Weighted average shares outstanding used to compute loss per share - basic and diluted: | |
| 95,731,850 | |
| 97,142,163 | |
| 95,472,277 | |
| 96,611,294 |
| | | | | | | | | | | | |
Loss per share - basic and diluted | | $ | (0.91) | | $ | (0.28) | | $ | (1.32) | | $ | (0.38) |
The following table discloses securities that were not included in the computation of diluted net loss per share because to do so would have been antidilutive for the periods presented:
| | | | | | | | |
|
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||
| | 2023 |
| 2022 | | 2023 |
| 2022 |
Stock options |
| 3,717,192 |
| 4,429,426 | | 3,717,192 |
| 4,429,426 |
Restricted stock units and awards | | 9,188,678 | | 5,331,673 | | 9,188,678 | | 5,331,673 |
Performance restricted stock units | | 4,055,997 | | 1,825,719 | | 4,055,997 | | 1,825,719 |
Public and private warrants |
| 1,795,700 |
| 1,795,700 | | 1,795,700 |
| 1,795,700 |
Earnout shares | | 2,050,000 | | 2,050,000 | | 2,050,000 | | 2,050,000 |
Convertible debt(1) | | 22,330,903 | | 16,998,130 | | 22,330,903 | | 16,998,130 |
Contingently issuable shares in connection with acquisitions(2) | | 13,969,860 | | 2,792,457 | | 13,969,860 | | 2,792,457 |
(1) In connection with the September 16, 2021, issuance of the 2026 Notes, we used a portion of the proceeds to pay for the capped call transactions, which are expected to generally reduce the potential dilution to our common stock. The capped call transactions allow us to purchase shares of our common stock at a strike price of $25 per share, which is equal to the conversion price of the 2026 Notes and 2028 Notes. The capped call transactions are designed to limit the amount of dilution of our common stock upon conversion of the notes. The maximum number of shares purchasable by us under the capped call transactions is 16,998,130. The options that underly the capped call transactions expire on September 15, 2026.
(2) In connection with the acquisitions of Floify and HOA, we provided an obligation to issue a certain amount of common stock to the extent specified market conditions are met in the future. Contingently issuable shares are calculated in accordance with the purchase agreement, assuming they would be issuable if the end of the reporting periods were the end of the contingency period.
16. Subsequent Events
In the third quarter of 2023, HOA, a subsidiary of Porch Group, discovered that Vesttoo Ltd (“Vesttoo”), which arranged capital for one of our reinsurance contracts, faced allegations of fraudulent activity in connection with collateral it provided to HOA and certain other third parties. We immediately began investigating the rapidly evolving situation and have been moving quickly to analyze the impact on our business. Additionally, we have communicated and met with
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PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements – Continued
(Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
regulators and other key stakeholders regarding the evolving situation. This reinsurance agreement provided partial quota share coverage as well as up to approximately $175 million in a catastrophic event.
As a result of its findings, and in accordance with the terms of the reinsurance agreement, HOA terminated its reinsurance contract with the reinsurer on August 4, 2023, with an effective date of July 1, 2023. Had the contract not been terminated, the contract would have expired on December 31, 2023. Following the effective date of the termination, HOA seized available liquid collateral in the amount of approximately $47.6 million from a reinsurance trust, of which HOA was the beneficiary. In addition, HOA is evaluating and intends to pursue all available legal claims and remedies to enforce its rights under the letter of credit required by the reinsurance agreement in the amount of $300 million as additional collateral, and to seek recovery of all losses and damages incurred as a result of terminating the reinsurance agreement due to allegations of fraudulent activity by third parties.
We concluded this transactionsubsequent event provides additional evidence about conditions that existed at the balance sheet date and accounted for it as a recognized subsequent event. Since the Company’s request to draw on the letter of credit was not fulfilled and advisors to the issuing bank have alleged the letter of credit is invalid, we recognized a charge of $48.2 million in provision for doubtful accounts in the unaudited condensed consolidated balance sheets and statements of operations, cannot be made.calculated as the net asset due under the reinsurance contract (as we have the legal right of offset) of $95.8 million as of June 30, 2023, before adjustment, less the $47.6 million collateral received from a trust in July 2023. Following the provision for doubtful accounts recognized for the three months ended June 30, 2023, the net assets on the unaudited condensed consolidated balance sheet at June 30, 2023, is equal to the $47.6 million collected from the trust in July 2023.
HOA has already secured supplemental reinsurance coverage in the amount of approximately $42 million and is currently seeking additional supplemental reinsurance coverage (whether from Porch Group’s captive reinsurer, third parties or a combination thereof) in order to maintain adequate coverage in future periods against potential excess losses in the event of a severe weather event, and to satisfy regulatory and rating agency requirements.
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PART II —OTHER INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report and the documents incorporated herein by reference contain forward- lookingforward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. 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, assumptions, and assumptions.other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. 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”“anticipates,” “intends,” or similar expressions.
These forward-looking statements are based upon estimates and assumptions that, while considered reasonable by the Company and its management at the time they are made, are inherently uncertain. Factors that may cause actual results to differ materially from current expectations include, but are not limited to: (1) our expansion plans and opportunities, and managing our growth, to build a consumer brand; (2) the incidence, frequency, and severity of weather events, extensive wildfires, and other catastrophe;catastrophes; (3) economic conditions, especially those affecting the housing, insurance, and financial markets; (4) our expectations regarding our revenue, cost of revenue, operating expenses, and ourthe ability to achieve and maintain future profitability; (5) existing and developing federal and state laws and regulations, including with respect to insurance, warranty, privacy, information security, data protection, and taxation, and ourmanagement’s interpretation of and compliance with such laws and regulations; (6) ourthe Company’s reinsurance program, which includes the use of a captive reinsurer, the success of which is dependent on a number of factors outside ourmanagement’s control, along with our reliance on reinsurance to protect us against loss; (7)the Company’s ability to obtain supplemental reinsurance coverage (whether from Porch Group, third parties, or a combination thereof) in order to maintain adequate coverage against excess losses and to satisfy regulatory or rating agency requirements, following the termination of its reinsurance contract with one of its external reinsurers due to allegations of fraudulent activity committed by such reinsurer, and uncertainty of the extent and significance of any effects on HOA and the Company due to such termination; (8) uncertainties related to regulatory approval of insurance rates, policy forms, insurance products, license applications, acquisitions of businesses, or strategic initiatives, including the reciprocal restructuring, and other matters within the purview of insurance regulators; (8) our(9) reliance on strategic, proprietary relationships to provide usthe Company with access to personal data and product information, and ourthe ability to use such data and information to increase our transaction volume and attract and retain customers; (9) our(10) the ability to develop new, or enhance existing, products, services, and features and bring them to market in a timely manner; (10)(11) changes in capital requirements, and ourthe ability to access capital when needed to provide statutory surplus; (11)(12) the increased costs and initiatives required to address new legal and regulatory requirements arising from developments related to cybersecurity, privacy, and data governance and the increased costs and initiatives to protect against data breaches, cyber-attacks, virus or malware attacks, or other infiltrations or incidents affecting system integrity, availability, and performance; (12)(13) retaining and attracting skilled and experienced employees; (13)(14) costs related to being a public company; and (14)(15) other risks and uncertainties discussed in ourPart I, Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K (“Annual Report”) for the year ended December 31, 2022, and in Part I,II, Item 1A, “Risk Factors,” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, as well as those discussed elsewhere in this report.report, including in Part II, Item 1A, “Risk Factors,” and in subsequent reports filed with the Securities and Exchange Commission (“SEC”), all of which are available on the SEC’s website at www.sec.gov.
Nothing in this Quarterly Report or the documents incorporated herein by reference should be regarded as a representation by any person that the forward-looking statements set forth herein will be achieved or that any of the contemplated results of such forward-looking statements will be achieved. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report. 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 Quarterly Report. The Company does not undertake any duty to update these forward-looking statements, whether as a result of changed circumstances, new information, future events or otherwise, except as may be required by law.
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The information included in this management’s discussion and analysis of financial condition and results of operations should be read in conjunction with ourthe unaudited condensed consolidated financial statements and therelated notes included in this Quarterly Report, and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in ourthe Company’s Annual Report for the year ended December 31, 2022.
Additionally, the unaudited condensed consolidated interim financial statements for the three and six months ended March 31,June 30, 2022 have been revised to correct prior period errors as discussed in Note 20 “Quarterly Financial Data (Unaudited) Restatement of Previously Issued Financial Statements” to the consolidated financial statements included in Part II, Item 8, of the Company’s Annual Report for the year ended December 31, 2022. Accordingly, this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects the effects of the revisions.
Business Overview
Porch Group, Inc. (“Porch Group”, “Porch” or the “Company”“Company,” “we,” “our,” “us”), the vertical software platform, is a values-driven company whose mission is to simplify the home with insurance at the center. Porch Group providesWe provide software and
34
services to approximately 30,60030,700 home service providers including home inspectors, mortgage brokers, title companies and moving companies. Porch Group simplifiesWe simplify the home closing process and the move by providing high-value services including homeowners insurance, and warranty,warranties, and ongoing support with our app which saves consumers time and helps them make better decisions. To achieve this, Porch Group hireswe hire and retainsretain great people, investsinvest in the right opportunities, and leveragesleverage our unique capabilities such as early and privileged access to homebuyers and deep insight into properties.
Porch Group makesWe make the moving process easier for homebuyers by helping them save time and make better decisions about critical services, including insurance, warranty, moving, security, TV/Internet, home repair and improvement. The Company providesWe provide home and personal property insurance policies through itsour own underwriting operations in 2221 states and across the U.S. with its wholly-ownedour wholly owned insurance agency.
Our multi-faceted value proposition resonates with a broad customer demographic, regardless of home price, income level, geographic location or age. We acquire our customers through a variety of channels, including at the time of a real estate transaction through third parties, direct-to-consumer (“DTC”), and leads from other Porch Group businesses.
Porch Group hasWe have two reportable segments: the Vertical Software segment and the Insurance segment.
Porch Group’sOur Vertical Software segment provides software and services to home services companies. Through these relationships, Porch earnswe earn fees, and gainsgain a competitive advantage through unique and early access to homebuyers and homeowners. This early access allows Porchus to assist homebuyers and homeowners with critical moving services. In turn, Porch’sour platform drives demand for other services. The Vertical Software segment has three types of customers: (1) home services companies, such as home inspectors, mortgage companies and loan officers, and title companies, for whom Porch provideswe provide software and services to help them make their businesses run more efficiently and grow; (2) consumers, such as homebuyers and homeowners, whom Porch assistswe assist with the comparison and provision of various home services, such as moving, security, TV/Internet, and home repair and improvement; and (3) service providers, such as moving companies, security companies, title companies, mortgage companies and TV/Internet providers, who pay Porchus for new customer sign-ups.
Porch Group’sOur Insurance segment offers various property-related insurance policies through our risk-bearing carrier, independent agency, and risk-bearing home warranty companies. We earn insurance policy premiums collected from insured homeowners for our insurance products, policy fees when policies are sold and renewed, and commissions when we cede premiums to reinsurance companies. Additionally, when we sell a homeowner an insurance policy through a carrier other than our own, these third-party insurance companies pay new business and renewal commissions to Porch’sour insurance agency. The Insurance segment also includes home warranty, from which Porch receiveswe receive premiums paid by homeowners for Porch’sour home warranty products.
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Key Performance Measures and Operating Metrics
In the management of these businesses, the Company identifies, measureswe identify, measure and evaluatesevaluate various operating metrics. The key performance measures and operating metrics used in managing the businesses are set forthdiscussed below. These key performance measures and operating metrics are not prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), and may not be comparable to or calculated in the same way as other similarly titled measures and metrics used by other companies.
The following table summarizes operating metrics for each of the quarterly periods indicated.
| | | | | | | | | | |
|
| Three Months Ended June 30, | | |||||||
| | 2023 | | 2022 | | Change | | |||
Gross Written Premium (in millions) |
| $ | 143.0 |
| $ | 145.0 | | | (1) | % |
Policies in Force (in thousands) | | | 358 | | | 379 | | | (6) | % |
Annualized Revenue per Policy (unrounded) | | $ | 517 | | $ | 286 | | | 81 | % |
Premium Retention Rate | | | 104 | % | | 102 | % | | | |
Gross Loss Ratio | | | 120 | % | | 81 | % | | | |
Average Companies in Quarter (unrounded) | | | 30,691 | | | 28,773 | | | 7 | % |
Average Revenue per Account per Month in Quarter (unrounded) | | $ | 1,073 | | $ | 822 | | | 31 | % |
Monetized Services in Quarter (unrounded) | | | 244,605 | | | 333,596 | | | (27) | % |
Average Revenue per Monetized Service in Quarter (unrounded) | | | 331 | | | 158 | | | 109 | % |
● | Gross Written Premium —We define Gross Written Premium as the total premium written by our licensed insurance carrier(s) (before deductions for reinsurance); premiums from our home warranty offerings (for the face value of one year’s premium); and premiums of policies placed with third-party insurance companies for which we earn a commission. |
● | Policies in Force—We define Policies in Force as the number of in-force policies at the end of the period for the Insurance segment, including policies and warranties written by us and policies and warranties written by third parties for which we earn a commission. |
● | Annualized Revenue per Policy —We define Annualized Revenue per Policy as quarterly revenue for the Insurance segment, divided by the number of Policies in Force in the Insurance segment, multiplied by four. |
● | Premium Retention Rate —We define Premium Retention Rate as the ratio of our insurance carrier’s renewed premiums over the last four quarters to base premiums, which is the sum of the preceding year’s premiums that either renewed or expired. |
● | Gross Loss Ratio —We define Gross Loss Ratio as ourinsurance carrier’s gross losses divided by the gross earned premium for the respective period. |
● | Average Companies in Quarter — |
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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 |
● | Average Revenue per Account per Month in Quarter — |
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accounts in a quarterly period. Average Revenue per Account per Month in Quarter is derived from all customers and total revenue. |
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 |
| 2023 | |||||
| | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | |||||
Average Companies in Quarter |
| | 25,545 |
| | 28,773 | | | 30,951 | | | 30,860 |
| | 30,618 |
Average Revenue per Account per Month in Quarter | | $ | 829 | | $ | 822 | | $ | 833 | | $ | 693 | | $ | 951 |
● | Monetized Services in Quarter — |
● | Average Revenue per Monetized Service in Quarter — |
The following table summarizes our monetized services and average revenue per monetized service for each of the quarterly periods indicated:
| | | | | | | | | | | | | | | |
|
| 2022 |
| 2022 |
| 2022 |
| 2022 |
| 2023 | |||||
| | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | |||||
Monetized Services in Quarter |
| | 263,183 |
| | 333,596 |
| | 318,452 |
| | 212,992 |
| | 214,097 |
Average Revenue per Monetized Service in Quarter | | $ | 175 | | $ | 158 | | $ | 185 | | $ | 219 | | $ | 328 |
In the second quarter of 2022, the Company completed the acquisition of RWS.
Recent Developments
Share Repurchases
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In October 2022, the Company’sour Board of Directors approved a share repurchase program authorizing management to repurchase up to $15 million in the Company’sof our common stock and/or convertible notes. Repurchases under this program may be madewere permitted from time to time on the open market between November 10, 2022, and June 30, 2023, at prevailing market prices. During the first quarter of 2023, the Companywe repurchased 1,396,158 shares with thea total cost of $3.1 million (including commissions). We did not repurchase any shares in the second quarter of 2023 prior to the termination of the repurchase program.
Reciprocal Exchange
On March 20, 2023, Homeowners of Americawe filed an application to form and license a Texas reciprocal exchange (the “Reciprocal”) with the Texas Department of Insurance (“TDI”). If approved by the TDI, theour insurance underwriting business of Porch will be conducted through the Reciprocal. A Porch subsidiary would serve as the operator (or “attorney-in-fact”) for the Reciprocal. In that role it would perform underwriting, claims, and management services for the Reciprocal and receive a management fee calculated as a percentage of its premiums. EIG and HOA’s managing general agentPorch subsidiaries would act as general agents for the Reciprocal and HOAICHomeowners of America Insurance Company (“HOAIC”) and would receive fees and commissions. There can be no assurance that the Reciprocal will receive regulatory approval, and if obtained, that the approval would be based on terms as proposed or subject to additional requirements that may not be acceptable to us. If the Company.application is approved, we will launch Porch Insurance, a new brand and product to be offered by the Reciprocal, including unique benefits for consumers such as a free 90-day warranty and proprietary discounts to customers within the Porch ecosystem.
Convertible Notes Financing
In April 2023, we issued $333 million of 6.75% Senior Secured Convertible Notes due in 2028 (the “2028 Notes”) in a private placement transaction. We used a portion of the net proceeds from the 2028 Notes to repurchase $200
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million of the 2026 Notes and to fund the repayment of $9.7 million outstanding under a term loan facility. The transaction delivered additional liquidity while minimizing dilution.
Weather Events
The second quarter is often the worst and riskiest weather quarter of the year for us. The second quarter 2023 was on track until extreme weather events occurred, including wind, thunderstorm, and hail events in Texas toward the end of the second quarter, which resulted in an estimated $5.0 billion in combined industry-wide claims. These extreme weather events compared to historic trends negatively impacted our operating results in the second quarter within the Insurance Segment by approximately $18 million, net of third-party reinsurance.
Subsequent Event
In the third quarter of 2023, Homeowners of America (“HOA”), a subsidiary of Porch Group, discovered that Vesttoo Ltd (“Vesttoo”), which arranged capital for one of our reinsurance contracts, faced allegations of fraudulent activity in connection with collateral it provided to HOA and certain other third parties. We immediately began investigating the rapidly evolving situation and have been moving quickly to analyze the impact on our business. Additionally, we have communicated and met with regulators and other key stakeholders regarding the evolving situation. The agreement with this reinsurer provided partial quota share coverage as well as up to approximately $175 million in a catastrophic event.
As a result of its findings, and in accordance with the terms of the reinsurance agreement, HOA terminated its reinsurance contract with the reinsurer on August 4, 2023, with an effective date of July 1, 2023. Had the contract not been terminated, the contract would have expired on December 31, 2023. Following the effective date of the termination, HOA seized available liquid collateral in the amount of approximately $47.6 million from a reinsurance trust, of which HOA was the beneficiary. We recognized in the second quarter a charge of $48.2 million in provision for doubtful accounts in the unaudited condensed consolidated statements of operations to reduce the net recorded balance receivable from the reinsurance contract as of June 30, 2023, to equal the $47.6 million collateral we subsequently collected from the trust in the third quarter. In addition, HOA is evaluating and intends to pursue all available legal claims and remedies to enforce its rights with respect to the letter of credit required by the reinsurance contract in the amount of $300 million as additional collateral, and to seek recovery of all losses and damages incurred as a result of terminating the reinsurance agreement due to allegations of fraudulent activity by third parties.
Although advisors to the issuing bank have alleged the letter of credit is invalid, HOA received the original letter of credit documents from one of the bank’s branches and believed its partners had performed appropriate due diligence on the bank and the letter of credit. HOA is currently seeking to understand its rights under the letter of credit.
HOA has already secured supplemental reinsurance coverage in the amount of approximately $42 million and is currently seeking additional supplemental reinsurance coverage (whether from Porch Group’s captive reinsurer, third parties or a combination thereof) in order to maintain adequate coverage in future periods against potential excess losses in the event of a severe weather event, and to satisfy regulatory and rating agency requirements. There can be no guarantee or assurance that HOA will be successful in obtaining sufficient supplemental coverage. Regardless of whether additional supplemental coverage is obtained, HOA will continue to remain responsible and committed with respect to all claims and claim settlement expenses under its policies, including claims incurred but not yet reported for prior periods and claims and expenses that are no longer subject to the reimbursement rights in favor of HOA under the terminated reinsurance contract.
Please see Note 16 in the Notes to Condensed Consolidated Financial Statements for additional details regarding the financial impacts related to the termination of this reinsurance contract. Please also see Part II, Item 1A. “Risk Factors” for specific risks related to the termination of this reinsurance contract.
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Key Factors Affecting Operating Results
The Company hasWe have been implementing itsour strategy as a vertical software platform for the home by providing software and services to approximately 30,60030,700 pre-and-post move home service providers including inspectors, real estate, title, and mortgage companies. The Company’sOur Insurance segment continues to grow in scale through both policy count,premium growth and geographic expansion. The following are key factors affecting the Company’saffected our operating results in the three and six months ended March 31,June 30, 2023:
● | The U.S. housing market continues to see impacts from higher interest rates, existing home inventory tightening, and affordability challenges that are impacting the Vertical Software segment. For the quarter ended |
● | During the second quarter of 2023, a series of uncommon and extreme weather events resulted in a negative impact of approximately $18 million on Adjusted EBITDA (Loss) in our Insurance segment. |
● | In March 2023, |
● | In March 2023, |
● |
● | In February 2023, |
● |
● | We continue to develop |
● | Our moving business launched a ‘Fixed Price’ product which makes the moving journey simpler for moving companies and consumers. |
● |
● | We are now approved in 11 states to use our unique data to improve risk accuracy in pricing policies for our customers. This means we can charge a lower price for policies which are low-risk and more accurately price higher risk policies. |
● | We are expanding our distribution channels by partnering with third-party insurance agencies and sharing commissions. We send them customer leads, enabling them to access Porch’s unique and valuable customer ecosystem to grow their businesses and enabling us to expand our insurance distribution capacity. |
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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 operatesWe operate 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 hasWe have determined that itsour Chief Executive Officer is the CODM.
Components of Results of Operations
Total Revenue
The Company generatesWe generate revenue in the following ways:
● | Insurance revenue in the form of insurance and warranty premiums, policy fees, commissions from reinsurers and other insurance-related fees generated through its owned insurance carrier, as well as commissions from third-party insurance carriers where |
● | Software and service subscription revenue generated from fees paid by companies for access to |
● | Move and post-moved related transaction revenue – Move-related 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 post-move related revenue in the form of fees earned from introducing homeowners to home service professionals including handymen, plumbers, electricians, roofers, etc. |
The Insurance segment includes revenue generated from various property-related insurance policies through itsour own risk-bearing carrier and independent agency as well as risk-bearing home warranty companies. We collect policy fees from policyholders of our own underwritten homeowners insurance products, reinsurers pay the Companyus ceding commissions when premiums are ceded from owned insurance products, revenues are earned in the form of policy premiums collected from insureds from owned insurance products, and third-party insurance companies pay our agency upfront and renewal commissions for selling their policies. The Insurance segment also includes home warranty revenue which mainly consists of premiums paid by warranty customers for the Company’sour home warranty products.
The Vertical Software segment includes revenue from software and services subscription revenue, move-related transactions revenue and post-move-related transaction revenue. Software and service subscription revenue primarily relates to subscriptions to the Company’sour software offerings across a number of verticals. The Company’sOur 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’sOur standard subscription contracts are monthly contracts in which pricing is based on a price per user or seat, or a specified price per inspection completed through the software. The CompanyWe also sellssell marketing software and services to companies who want to advertise to movers. Marketing software and service fees 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 to which the Company iswe are entitled to for providing access to the subscription software during the monthly contract term.
Move-related transactions revenue is generated when the Company connectswe connect consumers with service providers including movers, TV/Internet, and security monitoring companies. The Company earnsWe earn revenue when consumers purchase services from these third-party providers. For select moving jobs, the Companywe will select the mover, set the price, and manage the job end-to-end; here, the Company generateswe generate revenue based on the full job value.
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Post-move-related transaction revenue includes monthly fees paid by home service contractors as well as fees earned from introducing consumers to home service providers, either on a per lead, per appointment, or per job basis.
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Revenue generated from service providers is recognized at a point in time upon the connection of a homeowner to the service provider.
Total Costs and Expenses
Operating expenses
Operating expenses are categorized into five categories:
● | Cost of revenue; |
● | Selling and marketing; |
● | Product and technology; |
● | General and administrative; and |
● | Impairment loss on intangible assets and goodwill. |
The categories of operating expenses, exceptother than impairment loss on intangible assets and goodwill, 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 fromof property, equipment, and software and amortization of intangible assets.
Cost of revenue primarily consists of insurance losses and loss adjustment expenses, claims personnel costs, warranty claims, third-party providers for executing moving labor and handyman services when the Company iswe are managing the job, data costs related to marketing campaigns, certain call center costs, credit card processing, and merchant fees.
Selling and marketing expenses primarily consist of payroll, employee benefits, and stock-based compensation, expense, and other headcount relatedheadcount-related costs associated with sales efforts directed toward companies and consumers, and amortization of 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.
Selling and marketing costs are classified as either fixed or variable. Fixed selling and marketing costs primarily consist of compensation of sales management, professional fees, and software costs that do not vary with sales volumes. Variable selling and marketing costs consist of DAC amortized to expense reduced by ceding commissions paid by reinsurance companies, third-party leads, affiliates and partner leads, paid search engine optimization and marketing, advertising costs, and compensation for individuals in certain sales and marketing departments that vary with sales volumes.
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 relatedheadcount-related costs, rent for office space, legal and professional fees, taxes, licenses and regulatory fees, merger and acquisition transaction costs, and other administrative costs.
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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 section of Critical Accounting Policies and Estimates for the description of methods used to determine these impairment losses.
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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.
At least quarterly, the Company evaluateswe evaluate estimates and assumptions and makesmake changes accordingly. For information on the Company’sour significant accounting policies, see Note 1 (Description of Business and Summary of Significant Accounting Policies) in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report.
During the three and six months ended March 31,June 30, 2023, we identified various qualitative factors with respect to long-lived assets and goodwill in the Company’sour reporting units that collectively indicated that the Company hadthere were 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 and insurance industries.
Impairment of Long-Lived Assets
DuringIn the first quarter of 2023, management identified various qualitative factors that collectively indicated that the Company had trigger 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 used an income approach to determine that the estimated fair value of a certain asset group was less than its carrying value, which resulted inwe recorded impairment charges of $2.0 million, primarily related to acquired technology, trademarks and tradenames, and customer relationships for certain businesses within itsour Vertical Software segment. We used an income approach to determine that the estimated fair value of the asset group was less than its carrying value. Impairment charges are included in impairment loss on intangible assets and goodwill in the unaudited condensed consolidated statements of operations.
Impairment of Goodwill
During the first quarterand second quarters of 2023, 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 and insurance industries. The Companywe performed a valuation of both the Vertical Software and Insurance reporting units using a combination of market and income approaches based on peer performance and discounted cash flow or dividend discount model methodologies.
The results of the quantitative impairment assessment indicated that the estimated fair values of the reporting units exceeded their carrying values. As such, the Company determined that the goodwill allocated to its reporting units was not impaired as of March 31, 2023.
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 of each reporting unit was estimated using a combination of income and market valuation approaches using publicly traded company multiples in similar businesses. Such fair value measurements are based predominately on Level 3 inputs. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on
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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 14% to 20%.
As of March 31, 2023, indicated that the fair value of our Vertical Software reporting unit exceeded its carrying value by less than 5%, and the fair value of our Insurance reporting unit exceeded its carrying value by less than 10%.
The results of the quantitative impairment assessment as of June 30, 2023, indicated that the carrying value of the Insurance reporting unit exceeded its estimated fair value. As such, we determined that the goodwill allocated to the Insurance reporting unit was impaired as of June 30, 2023. Impairment charges of $55.2 million are included in impairment loss on intangible assets and goodwill in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2023. See Note 6 for a discussion of the impairment analysis.
The results of the quantitative impairment assessment as of June 30, 2023, indicated that the fair value of our Vertical Software reporting unit exceeded its carrying value by less than 10%. As a result, the Company’sour remaining goodwill balance is at risk of future impairment. The Company monitors itsWe monitor our reporting units at risk of impairment for interim impairment indicators and believesbelieve that the estimates and assumptions used in the calculations are reasonable as of March 31,June 30, 2023. The CompanyWe also reconcilesreconcile the fair value of itsour reporting units to the Company’sour market capitalization. Should the fair value of any of the Company’sour reporting units fall below its carrying amount because of reduced operating performance, market declines including a deterioration of the macroeconomic environment in the housing and real estate or insurance industries, changes in the discount rate, or other adverse conditions, goodwill impairment charges may be necessary in future periods.
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There were no other changes to the critical accounting policies and estimates discussed in the Company’sour Annual Report on Form 10-K.
Results of Operations
The following table sets forth the Company’s historicalsummarizes our consolidated operating results for the periods indicated:indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | $ | | % | | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||||||||||||||||||||
| 2023 |
| 2022 |
| Change | | Change | | 2023 |
| 2022 | | $ Change | | % Change | | 2023 |
| 2022 |
| $ Change | | % Change | ||||||||||||
| (dollar amounts in thousands) | | (dollar amounts in thousands) | | (dollar amounts in thousands) | ||||||||||||||||||||||||||||||
Revenue | $ | 87,369 | | $ | 63,567 | | $ | 23,802 | | 37 | % | | $ | 98,765 | | $ | 70,915 | | $ | 27,850 | | 39 | % | | $ | 186,134 | | $ | 134,482 | | $ | 51,652 | | 38 | % |
Operating expenses: |
| | |
|
| |
|
| |
| | |
| | |
| | | | | | | | |
| | |
|
| |
|
| | | |
Cost of revenue |
| 51,275 | |
| 25,216 | |
| 26,059 | | 103 | % | |
| 81,330 | |
| 29,251 | | | 52,079 | | 178 | % | |
| 132,605 | |
| 54,467 | |
| 78,138 | | 143 | % |
Selling and marketing |
| 32,585 | |
| 26,077 | |
| 6,508 | | 25 | % | |
| 34,637 | |
| 29,160 | | | 5,477 | | 19 | % | |
| 67,222 | |
| 55,237 | |
| 11,985 | | 22 | % |
Product and technology |
| 13,950 | |
| 14,231 | |
| (281) | | (2) | % | |
| 15,495 | |
| 15,777 | | | (282) | | (2) | % | |
| 29,445 | |
| 30,009 | |
| (564) | | (2) | % |
General and administrative |
| 26,066 | |
| 26,699 | |
| (633) | | (2) | % | |
| 22,779 | |
| 28,297 | | | (5,518) | | (20) | % | |
| 48,608 | |
| 54,896 | |
| (6,288) | | (11) | % |
Provision for doubtful accounts | | | 48,718 | | | 108 | | | 48,610 | | 45,009 | % | | | 48,955 | | | 207 | | | 48,748 | | 23,550 | % | |||||||||||
Impairment loss on intangible assets and goodwill | | 2,021 | | | — | | | 2,021 | | NM | | | | 55,211 | | | — | | | 55,211 | | — | % | | | 57,232 | | | — | | | 57,232 | | — | % |
Total operating expenses |
| 125,897 | |
| 92,223 | |
| 33,674 | | 37 | % | | | 258,170 | | | 102,593 | | | 155,577 | | 152 | % | |
| 384,067 | |
| 194,816 | |
| 189,251 | | 97 | % |
Operating loss |
| (38,528) | |
| (28,656) | |
| (9,872) | | 34 | % | |
| (159,405) | |
| (31,678) | | | (127,727) | | 403 | % | |
| (197,933) | |
| (60,334) | |
| (137,599) | | 228 | % |
Other income (expense): |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | |
|
| |
|
| |
|
| | | |
Interest expense |
| (2,188) | |
| (2,427) | |
| 239 | | (10) | % | | | (8,775) | | | (1,925) | | | (6,850) | | 356 | % | |
| (10,963) | |
| (4,352) | |
| (6,611) | | 152 | % |
Change in fair value of earnout liability | | — | | | 11,179 | | | (11,179) | | NM | | | | — | | | 2,587 | | | (2,587) | | (100) | % | | | — | | | 13,766 | | | (13,766) | | (100) | % |
Change in fair value of private warrant liability | | 345 | | | 10,189 | | | (9,844) | | NM | | | | 15 | | | 4,078 | | | (4,063) | | (100) | % | | | 360 | | | 14,267 | | | (13,907) | | (97) | % |
Change in fair value of derivatives | | | (2,950) | | | — | | | (2,950) | | — | % | | | (2,950) | | | — | | | (2,950) | | — | % | |||||||||||
Gain on extinguishment of debt | | | 81,354 | | | — | | | 81,354 | | — | % | | | 81,354 | | | — | | | 81,354 | | — | % | |||||||||||
Investment income and realized gains, net of investment expenses | | 758 | | | 197 | | | 561 | | 285 | % | | | 1,249 | | | 243 | | | 1,006 | | 414 | % | | | 2,007 | | | 440 | | | 1,567 | | 356 | % |
Other income (expense), net |
| 762 | |
| 56 | |
| 706 | | 1,261 | % | | | 1,578 | | | (162) | | | 1,740 | | (1,074) | % | |
| 2,340 | |
| (107) | |
| 2,447 | | (2,287) | % |
Total other income (expense) |
| (323) | |
| 19,194 | |
| (19,517) | | NM | | | | 72,471 | | | 4,821 | | | 67,650 | | 1,403 | % | |
| 72,148 | |
| 24,014 | |
| 48,134 | | 200 | % |
Loss before income taxes |
| (38,851) | |
| (9,462) | |
| (29,389) | | 311 | % | | | (86,934) | | | (26,857) | | | (60,077) | | 224 | % | |
| (125,785) | |
| (36,320) | |
| (89,465) | | 246 | % |
Income tax benefit |
| 111 | |
| 177 | |
| (66) | | NM | | ||||||||||||||||||||||||
Income tax benefit (provision) | | | (29) | | | (468) | | | 439 | | (94) | % | |
| 82 | |
| (290) | |
| 372 | | (128) | % | |||||||||||
Net loss | $ | (38,740) | | $ | (9,285) | | $ | (29,455) | | 317 | % | | $ | (86,963) | | $ | (27,325) | | $ | (59,638) | | 218 | % | | $ | (125,703) | | $ | (36,610) | | $ | (89,093) | | 243 | % |
NM = Not MeaningfulRevenue
Revenue
Three months ended March 31,June 30, 2023, compared to three months ended March 31, 2022:June 30, 2022
Total revenue increased by $23.8$28 million, or 37%39%, from $63.6$70.9 million in the three months ended March 31,June 30, 2022, to $87.4$98.8 million in the same period in 2023. Revenue2023, driven by revenue in the Company’sour Insurance segment grew by $29.6 million, driven by higher warranty sales and insurance renewals, andas a result of increases in per-policy premiums and lower reinsurance ceding. This increase was partially offset by a 19%, or $8.1 million, decrease in revenue in our Vertical Software segment due to a 21% reduction in year-over-year industry home sales which adversely affected our moving business.
Six months ended June 30, 2023, compared to six months ended June 30, 2022
The overall 38% increase in year-to-date revenue compared to the same period last year was primarily driven by the 114%, or $65.6 million, increase in revenue in our Insurance segment as a result of higher warranty sales and renewals
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as well as increases in per-policy premiums and lower reinsurance ceding. This increase was partially offset by loweran 18%, or $13.9 million, decrease in revenue in our Vertical Software segment due to a 26%23% reduction in year-over-year industry home sales.sales which adversely affected our moving business.
Cost of Revenue
Three months ended March 31,June 30, 2023, compared to three months ended March 31, 2022:June 30, 2022
Cost of revenue increased by $26.1$52.1 million, or 103%178%, from $25.2$29.3 million in the three months ended March 31,June 30, 2022, to $51.3$81.3 million in the same period in 2023. The 178% increase in thequarter-to-date cost of revenue was primarily attributable tothe result of increased insurance claims costs due to the strategicextreme weather toward the end of the second quarter of 2023, the reduction in reinsurance ceding, and the 2022 acquisition of the RWS warranty business, bothall in the Insurance Segment. As a percentage of revenue, cost of revenue represented 59%82% of revenue in the three months ended March 31,June 30, 2023, compared with 40%41% in the same period in 2022.
Six months ended June 30, 2023, compared to six months ended June 30, 2022
The 143% increase in year-to-date cost of revenue was primarily result of increased insurance claims costs due to catastrophic weather events toward the end of the second quarter of 2023 and the strategic reduction in reinsurance ceding in the Insurance Segment. The RWS warranty business acquired in 2022 resulted in $1.0 million additional cost of revenue in the current year-to-date period when compared to prior year. As a percentage of revenue, cost of revenue represented 71% of revenue in the three months ended June 30, 2023, compared with 41% in the same period of 2022.
Selling and marketingMarketing
Three months ended March 31,June 30, 2023, compared to three months ended March 31, 2022:June 30, 2022
Selling and marketing expenses increased by $6.5$5.5 million, or 25%19%, from $26.1$29.2 million in the three months ended March 31,June 30, 2022, to $32.6$34.6 million in the same period in 2023. An increase in the Insurance segment’s variable policy acquisition and marketing expenses was partially offset by a decrease in Vertical Software segment costs that were consistent with the decrease in revenue in that segment. As a percentage of revenue, selling and marketing expenses represented 35% of revenue in the three months ended June 30, 2023 compared with 41% in the same period in 2022.
Six months ended June 30, 2023, compared to six months ended June 30, 2022
The 22% increase in year-to-date selling and marketing expenses compared to prior year is due to higher costs in the Insurance segment’s variable selling and marketing costs, primarily policy acquisition and marketing expenses. As a percentage of revenue, selling and marketing expenses represented 37%36% of revenue in the three months ended March 31, 2023current year-to-date period compared withto 41% of revenue in the same period in 2022.last year.
Product and technologyTechnology
Three months ended March 31,June 30, 2023, compared to three months ended March 31, 2022:June 30, 2022
Product and technology expenses decreased by $0.3 million, or 2%, from $14.2$15.8 million in the three months ended March 31,June 30, 2022, to $14.0$15.5 million in the same period in 2023. The decrease is mainly due to lower depreciation and amortization expense in the three months ended March 31, 2023. As a percentage of revenue, product and technology expenses represented 16% of revenue in the three months ended March 31,June 30, 2023, compared with 22% in the same period in 2022.
General The decrease is mainly due to lower depreciation and administrativeamortization expense.
ThreeSix months ended March 31,June 30, 2023, compared to threesix months ended March 31, 2022:June 30, 2022
GeneralProduct and administrativetechnology expenses decreased by $0.6 million, or 2%, from $26.7$30.0 million in the six months ended June 30, 2022, to $29.4 million in the same period in 2023. As a percentage of revenue, product and technology
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expenses represented 16% of revenue in the six months ended June 30, 2023, compared with 22% in the same period in 2022. The decrease is mainly due to lower depreciation and amortization expense.
General and Administrative
Three months ended June 30, 2023, compared to three months ended June 30, 2022
General and administrative expenses decreased by $5.5 million, or 20%, from $28.3 million in three months ended March 31,June 30, 2022, to $26.1$22.8 million in the same period in 2023, primarily due to a $2.7 million non-cash gain on revaluation of contingent consideration during the three months ended March 31,June 30, 2023, as opposedcompared to a $1.4 million non-cash loss on revaluation in the same period in 2022, which contributed $3.4$4.1 million to the overall decrease. Successful expense control efforts drove the remaining decrease.
As a percentage of revenue, general and administrative expenses represented 23% of revenue in the three months ended June 30, 2023, compared with 40% in the same period in 2022.
Six months ended June 30, 2023, compared to six months ended June 30, 2022
General administrative expenses for the six months ended June 30, 2023, decreased by $6.2 million, or 11%, compared to the same period last year. The decrease was primarily due to a $2.8 million non-cash gain on revaluation of contingent consideration during the current year compared to a $4.7 million non-cash loss on revaluation in the same period in 2022, which contributed $7.5 million to the overall decrease. This decrease was partially offset by higher professional fees and additional investment in corporate resources and systems.
As a percentage of revenue, general and administrative expenses represented 30% of revenuesystems in the threefirst quarter of 2023.
Provision for Doubtful Accounts
Three and six months ended March 31,June 30, 2023, compared with 42%to three and six months ended June 30, 2022
In the second quarter of 2023, we wrote off approximately $48.2 million of reinsurance balance due from a reinsurer as described in Note 16 of the notes to the unaudited condensed consolidated financial statements. There was no significant write-off of reinsurance balance due in the same period in 2022.last year.
Impairment lossLoss on intangible assetsIntangible Assets and goodwillGoodwill
Three months ended March 31,June 30, 2023, compared to three months ended March 31, 2022:June 30, 2022
In the three months ended March 31,June 30, 2023, the Companywe recorded a goodwill impairment losses on intangible assets relatedcharge of $55.2 million in our Insurance segment. This impairment follows a sustained decrease in stock price, increased costs due to a $2.0 million intangible asset impairment at its Vertical Software segment. These impairment charges reflect recent continued inflationary pressures, and a deteriorationhardening of the macroeconomic environment in the housingreinsurance markets, and real estate industry.volatile weather. There were no impairment losses on intangible assets and goodwill in the same period in 2022.
Six months ended June 30, 2023, compared to six months ended June 30, 2022
In the second quarter of 2023, we recorded a goodwill impairment charge of $55.2 million in our Insurance segment. In the first quarter of 2023, we recorded a $2.0 million impairment charge on intangible assets in our Vertical Software segment. These impairments follow a sustained decrease in stock price, increased costs due to inflationary pressures, hardening of the reinsurance markets, volatile weather, and a deterioration of the macroeconomic environment in the housing and real estate and insurance industries. There were no impairment charges in the corresponding period last year.
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Interest expense, netExpense
Three months ended March 31,June 30, 2023, compared to three months ended March 31, 2022:June 30, 2022
Interest expense decreasedincreased by $0.2$6.9 million, or 10%356%, from $2.4$1.9 million in the three months ended March 31,June 30, 2022, to $2.2$8.8 million in the same period in 2023. The decreaseincrease is mainly due to lower interest relatedat a higher weighted average rate on a higher aggregate debt balance after issuance of the 2028 Notes in April 2023. The non-cash amortization of debt discount and issuance costs also contributed to advance funding arrangement during the threeincrease.
Six months ended March 31,June 30, 2023, compared to six months ended June 30, 2022
Year-to-date interest expense, increased by $6.6 million, or 152%, from $4.4 million in the same period in 2022. The increase is mainly due to interest at a higher weighted average rate on a higher aggregate debt balance after issuance of the 2028 Notes in April 2023. The non-cash amortization of debt discount and issuance costs also contributed to the increase.
Change in fair valueFair Value of earnout liabilityEarnout Liability
Three months ended March 31,June 30, 2023, compared to three months ended March 31, 2022:June 30, 2022
Changes inThe fair value of the earnout liability were less than $0.1 million (gain) and $11.2 million (gain)changed more in the three months ended March 31, 2023 andsecond quarter of 2022 respectively.than in the same quarter this year. The decrease in fair valueour common stock price drove the change and was primarily due tomore pronounced during the declinesecond quarter of 2022 than in the stock price at March 31,second quarter of 2023.
Six months ended June 30, 2023, as compared to March 31, 2022.six months ended June 30, 2022
Change inThe fair value of private warrantthe earnout liability changed more in the six months ended June 30, 2022, than in the same period this year. The decrease in our common stock price drove the change and was more pronounced in 2022 than in 2023.
Change in Fair Value of Private Warrant Liability
Three months ended March 31,June 30, 2023, compared to three months ended March 31, 2022:June 30, 2022
Changes inThe fair value of the private warrant liability were $0.3 million (gain) and $10.2 million (gain)changed more in the three months ended March 31, 2023 andsecond quarter of 2022 respectively.than in the same quarter this year. The decrease in our common stock price drove the change and was more pronounced during the second quarter of 2022 than in the second quarter of 2023.
Six months ended June 30, 2023, compared to six months ended June 30, 2022:
The fair value was primarily due toof the declineprivate warrant liability changed more in the six months ended June 30, 2022, than in the same period this year. The decrease in our common stock price at March 31,drove the change and was more pronounced in 2022 than in 2023.
Change in Fair Value of Derivatives
Three and six months ended June 30, 2023, as compared to March 31, 2022.three and six months ended June 30, 2022
Investment incomeIn connection with the issuance of the 2028 Notes in April 2023 and realized gains,in accordance with GAAP, certain features of the notes were bifurcated and accounted for separately from the notes. These features are recorded as derivatives, and changes in their fair value are recognized in net loss each period. There were no corresponding derivatives in prior year.
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Gain on Extinguishment of Debt
Three months ended March 31,June 30, 2023, compared to three months ended March 31,June 30, 2022
In connection with the partial repurchase of the 2026 Notes, we recognized an $81.4 million gain on extinguishment of debt. See Note 7 in the notes to the unaudited condensed consolidated financial statements.
Six months ended June 30, 2023, compared to six months ended June 30, 2022:
In connection with the partial repurchase of the 2026 Notes, we recognized an $81.4 million gain on extinguishment of debt. See Note 7 in the notes to the unaudited condensed consolidated financial statements.
Investment Income and Realized Gains, Net of Investment Expenses
Three months ended June 30, 2023, compared to three months ended June 30, 2022
Investment income and realized gains, net of investment expenses, was $0.8were $1.2 million and $0.2 million in the three months ended March 31,June 30, 2023 and 2022, respectively. Total investments balance was $93.1$92.7 million at March 31,June 30, 2023, and $65.3$64.4 million at March 31, 2022 and thisJune 30, 2022. A higher investment balance was the primary reason for the increased investment income.
Six months ended June 30, 2023, compared to six months ended June 30, 2022
Investment income and realized gains, net of investment expenses, were $2.0 million and $0.4 million in the six months ended June 30, 2023 and 2022, respectively. Total investments balance was $92.7 million at June 30, 2023, and $64.4 million at June 30, 2022. A higher investment balance was the primary reason for the increased investment income.
Income tax benefitTax Benefit
Three months ended March 31,June 30, 2023, compared to three months ended March 31, 2022:June 30, 2022
Income tax benefitprovision of less than $0.1 million and $0.2$0.5 million was recognized for the three months ended March 31,June 30, 2023 and 2022, respectively. The difference between the Company’s effective tax rates for the 2022 and 2023 periods and the U.S. statutory rate of 21% was primarily due to a full valuation allowance related to the Company’sour net deferred tax assets.
Six months ended June 30, 2023, compared to six months ended June 30, 2022
Income tax benefit of $0.1 million and income tax provision of $0.3 million was recognized for the six months ended June 30, 2023 and 2022, respectively. The difference between the effective tax rates for the 2022 and 2023 periods and the U.S. statutory rate of 21% was primarily due to a full valuation allowance related to our net deferred tax assets.
Segment Results of Operations
The Company operatesWe operate the business as two reportable segments that are also operating segments: Vertical Software and Insurance. For additional information about these segments, see Note 14 (Segment Information) in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report.
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Segment Revenue
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2023 | | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | ||||||||||||||||
| | Vertical Software Segment | | Insurance Segment | | | Total | | Vertical Software Segment | | Insurance Segment | | Vertical Software Segment | | Insurance Segment | ||||||
Revenue: | | | | | | | | | | | | | | | | | | | | | |
Software and service subscriptions | | $ | 16,809 | | $ | — | | $ | 16,809 | | $ | 17,524 | | $ | — | | $ | 34,333 | | $ | — |
Move-related transactions (excluding insurance) | | | 7,769 | | | — | | | 7,769 | ||||||||||||
Move-related transactions | | | 12,246 | | | — | | | 20,015 | | | — | |||||||||
Post-move transactions | | | 4,049 | | | — | | | 4,049 | | | 4,665 | | | — | | | 8,714 | | | — |
Insurance | | | — | | | 58,742 | | | 58,742 | | | — | | | 64,330 | | | — | | | 123,072 |
Total revenue | | $ | 28,627 | | $ | 58,742 | | $ | 87,369 | | $ | 34,435 | | $ | 64,330 | | $ | 63,062 | | $ | 123,072 |
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 | | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | ||||||||||||||||
| | Vertical Software Segment | | Insurance Segment | | | Total | | Vertical Software Segment | | Insurance Segment | | Vertical Software Segment | | Insurance Segment | ||||||
Revenue: | | | | | | | | | | | | | | | | | | | | | |
Software and service subscriptions | | $ | 17,681 | | $ | — | | $ | 17,681 | | $ | 19,847 | | $ | — | | $ | 37,078 | | $ | — |
Move-related transactions | | | 12,193 | | | — | | | 12,193 | | | 17,458 | | | — | | | 29,586 | | | — |
Post-move transactions | | | 4,530 | | | — | | | 4,530 | | | 5,235 | | | — | | | 10,280 | | | — |
Insurance | | | — | | | 29,163 | | | 29,163 | | | — | | | 28,375 | | | — | | | 57,538 |
Total revenue | | $ | 34,404 | | $ | 29,163 | | $ | 63,567 | | $ | 42,540 | | $ | 28,375 | | $ | 76,944 | | $ | 57,538 |
Three months ended March 31,June 30, 2023, compared to three months ended March 31, 2022:June 30, 2022
For the three months ended March 31,June 30, 2023, Vertical Software segment revenue was $28.6 million or 33% of total revenue for the same period. For the three months ended March 31, 2022, Vertical Software segment revenue was $34.4 million or 54%35% of total revenue. For the three months ended June 30, 2022, Vertical Software segment revenue for the same period.was $42.5 million or 60% of total revenue. The decrease in revenue in 2023 is primarily driven by a 26%21% reduction in year-over-year industry home sales.sales which adversely affected our moving business.
Insurance segment revenue was $58.7$64.3 million or 67.2%65% of total revenue for the three months ended March 31,June 30, 2023. Insurance segment revenue was $29.2$28.4 million or 46.0%40% of total revenue for the three months ended March 31,June 30, 2022. The revenue increase of $29.6 million or 101% is mainly driven by higher warranty sales and insurance renewals as well as increases in per-policy premiums and lower reinsurance ceding.
Six months ended June 30, 2023, compared to six months ended June 30, 2022
For the six months ended June 30, 2023, Vertical Software segment revenue was $63.0 million or 34% of total revenue. For the six months ended June 30, 2022, Vertical Software segment revenue was $76.9 million or 57% of total revenue. The decrease in revenue is mainly driven by a 23% reduction in year-over-year industry home sales which adversely affected our moving business.
Insurance segment revenue was $123.1 million or 66% of total revenue for the six months ended June 30, 2023. Insurance segment revenue was $57.5 million or 43% of total revenue for the six months ended June 30, 2022. The increase is mainly driven by higher warranty sales and renewals as well as increases in per-policy premiums and lower reinsurance ceding.
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Segment Adjusted EBITDA (Loss)
Segment Adjusted EBITDA (Loss)
Segment Adjusted EBITDA (loss) is defined as revenue less operatingthe following expenses associated with the segments.each segment: cost of revenue, sales and marketing, product and technology, general and administrative expenses, and provision for doubtful accounts. Segment Adjusted EBITDA (loss)(Loss) also excludes non-cash items certain transactionsor items that aremanagement does not indicative of ongoing segment operating and financial performance and are notconsider reflective of the Company’songoing core operations. See Note 14 (Segment Information) in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report for reconciliations to GAAP consolidated financial information for the periods presented.
| | | | | | |
| | Three Months Ended March 31, | ||||
| | | 2023 | | | 2022 |
Segment adjusted EBITDA (loss): | | | | | | |
Vertical Software | | $ | (396) | | $ | 2,884 |
Insurance | | | (7,185) | | | 216 |
Corporate and Other(1) | | | (14,301) | | | (13,527) |
Total segment adjusted EBITDA (loss)(2) | | $ | (21,882) | | $ | (10,427) |
(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.
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| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
| | | 2023 | | | 2022 | | | 2023 | | | 2022 |
Segment Adjusted EBITDA (Loss): | | | | | | | | | | | | |
Vertical Software | | $ | 1,816 | | $ | 5,652 | | $ | 1,420 | | $ | 8,536 |
Insurance | | | (31,181) | | | (5,609) | | | (38,366) | | | (5,394) |
Subtotal | | | (29,365) | | | 43 | | | (36,946) | | | 3,142 |
Corporate and other | | | (13,769) | | | (15,048) | | | (28,070) | | | (28,503) |
Adjusted EBITDA (Loss) | | $ | (43,134) | | $ | (15,005) | | $ | (65,016) | | $ | (25,361) |
Our Insurance segment had a Segment Adjusted EBITDA (Loss) of $(31.2) million in the second quarter of 2023, representing 72% of Adjusted EBITDA (Loss) for the same period. Our Insurance segment had a Segment Adjusted EBITDA (Loss) of $(38.4) million in the six months ended June 30, 2023, compared to $(5.4) million in the same period last year. This was a significantly larger loss than the same period last year due to extreme weather events toward the end of the second quarter of 2023 and hardened reinsurance markets. Our insurance carrier continues to focus on underwriting performance, including future premium per policy increases, increasing deductibles, and expanding the number of states where we are approved to use our unique data to better price risk.
Vertical Software Segment Adjusted EBITDA (Loss) was $1.8 million in the second quarter of 2023 and $1.4 million in the six months ended June 30, 2023, impacted by the soft housing market and inflationary pressures in fixed costs.
Corporate expenses were $13.8 million in the second quarter of 2023, a $1.3 million decrease from the same period in the prior year due to strong expense control, and $28.1 million in the current year-to-date period, which is consistent with the same period in the prior year. Corporate expenses decreased to 14% of total revenue for the three-month period ended June 30, 2023, from 21% in the same period in the prior year.
Non-GAAP Financial Measures
This Quarterly Report includes non-GAAP financial measures, such as Adjusted EBITDA (loss),(Loss) and Adjusted EBITDA (loss)(Loss) as a percent of revenue, average revenue per monetized service and revenue less cost of revenue.
The Company definesWe define Adjusted EBITDA (loss)(Loss) as net income (loss) adjusted for interest expense, net,expense; income taxes, other expenses, net,taxes; depreciation and amortization, impairmentamortization; gain or loss on extinguishment of debt; other expense (income), net; impairments of intangible assets and goodwill, non-cash losses and impairmentgoodwill; provision for doubtful accounts related to reinsurance, or related recoveries; impairments of property, equipment, and software,software; stock-based compensation expense and acquisition-related impacts, amortization of intangible assets,expense; mark-to-market gains (losses)or losses recognized on changes in the value of contingent consideration arrangements, gain or loss on divesturesearnouts, warrants, and certainderivatives; restructuring costs; acquisition and other transaction costs.costs; and non-cash bonus expense. Adjusted EBITDA (loss)(Loss) as a percent of revenue is defined as Adjusted EBITDA (loss)(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.
CompanyOur management uses these non-GAAP financial measures as supplemental measures of the Company’sour 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 believesWe believe that the use of these non-GAAP financial measures provides investors with useful information to evaluate the Company’sour operating and financial performance and trends and in comparing Porch’sour 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’sour definitions and methodology in
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calculating these non-GAAP measures may not be comparable to those used by other companies. In addition, the Companywe 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’sour consolidated financial statements. The CompanyWe 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.
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Revenue Less Cost of Revenue
The following table reconciles revenue less cost of revenue to operating loss for the three months ended March 31, 2023 and 2022, respectively (dollar amounts in thousands):
| | | | | | | |
|
| Three Months Ended March 31, | | ||||
|
| 2023 |
| 2022 | | ||
Revenue | | $ | 87,369 | | $ | 63,567 | |
Less: Cost of revenue | |
| (51,275) | |
| (25,216) | |
Revenue less cost of revenue | |
| 36,094 | |
| 38,351 | |
Less: Selling and marketing costs | | | 32,585 | | | 26,077 | |
Less: Product and technology costs | | | 13,950 | | | 14,231 | |
Less: General and administrative costs | | | 26,066 | | | 26,699 | |
Less: Impairment loss on intangible assets and goodwill | | | 2,021 | | | — | |
Total operating expenses | | $ | 125,897 | | $ | 92,223 | |
Operating loss | | $ | (38,528) | | $ | (28,656) | |
Three months ended March 31, 2023 compared to three months ended March 31, 2022:
Revenue less cost of revenue decreased by $2.3 million, or 5.9% from $38.4 million in the three months ended March 31, 2022 to $36.1 million in the three months ended March 31, 2023. The decreased revenue less cost of revenue in 2023 is primarily driven by higher claims costs in our Insurance segment.
Adjusted EBITDA (loss)(Loss)
The following table reconciles net loss to Adjusted EBITDA (loss)(Loss) for the three and six months ended March 31,June 30, 2023 and 2022 (dollar amounts in thousands):.
| | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended March 31, | |
| Three Months Ended June 30, | | | Six Months Ended June 30, | | ||||||||||||
|
| 2023 |
| 2022 | |
| 2023 |
| 2022 | | | 2023 |
| 2022 |
| ||||||
Net loss | | $ | (38,740) | | $ | (9,285) | | | $ | (86,963) | | $ | (27,325) | | | $ | (125,703) | | $ | (36,610) | |
Interest expense | |
| 2,188 | |
| 2,427 | | |
| 8,775 | |
| 1,925 | | |
| 10,963 | |
| 4,352 | |
Income tax benefit | |
| (111) | |
| (177) | | ||||||||||||||
Income tax provision (benefit) | |
| 29 | |
| 468 | | |
| (82) | |
| 290 | | |||||||
Depreciation and amortization | |
| 6,015 | |
| 6,483 | | |
| 6,214 | |
| 6,416 | | |
| 12,229 | |
| 12,899 | |
Other income, net | |
| (762) | |
| (56) | | ||||||||||||||
Gain on extinguishment of debt | | | (81,354) | | | — | | | | (81,354) | | | — | | |||||||
Other expense (income), net | |
| (1,578) | |
| 162 | | |
| (2,340) | |
| 107 | | |||||||
Impairment loss on intangible assets and goodwill | | | 2,021 | | | — | | | | 55,211 | | | — | | | | 57,232 | | | — | |
Non-cash losses and impairment of property, equipment and software | |
| — | |
| 69 | | ||||||||||||||
Non-cash stock-based compensation expense | |
| 6,894 | |
| 5,854 | | ||||||||||||||
Revaluation of contingent consideration | |
| (154) | |
| 3,205 | | ||||||||||||||
Revaluation of earnout liability | | | — | | | (11,179) | | ||||||||||||||
Revaluation of private warrant liability | | | (345) | | | (10,189) | | ||||||||||||||
Loss on reinsurance contract (1) | | | 48,244 | | | — | | | | 48,244 | | | — | | |||||||
Impairment loss on property, equipment, and software | |
| 254 | |
| — | | |
| 254 | |
| 70 | | |||||||
Stock-based compensation expense | |
| 6,404 | |
| 9,702 | | |
| 13,298 | |
| 15,556 | | |||||||
Mark-to-market losses (gains) | | | 279 | | | (5,184) | | | | (220) | | | (23,347) | | |||||||
Restructuring costs | | | 1,093 | | | — | | | | 2,077 | | | — | | |||||||
Acquisition and other transaction costs | |
| 1,112 | |
| 895 | | |
| 258 | |
| 357 | | |
| 386 | |
| 1,322 | |
Non-cash bonus expense | | | — | | | 1,526 | | | | — | | | (1,526) | | | | — | | | — | |
Adjusted EBITDA (loss) | | $ | (21,882) | | $ | (10,427) | | ||||||||||||||
Adjusted EBITDA (loss) as a percentage of revenue | | | (25) | % | | (16) | % | ||||||||||||||
Adjusted EBITDA (Loss) | | $ | (43,134) | | $ | (15,005) | | | $ | (65,016) | | $ | (25,361) | | |||||||
Adjusted EBITDA (Loss) as a percentage of revenue | | | (44) | % | | (21) | % | | | (35) | % | | (19) | % |
(1) See Note 16 in the notes to unaudited condensed consolidated financial statements.
Adjusted EBITDA (loss)(Loss) for the three months ended March 31,June 30, 2023, was $21.9$(43.1) million, a $11.5$28.1 million declineincrease from Adjusted EBITDA (Loss) of $10.4$(15.0) million for the same period in 2022. During 2022, the Company acquired RWS for an aggregate purchase price of $38.8 million. The declineincrease in Adjusted EBITDA (loss)(Loss) in 2023 is primarily driven by extreme weather events, lower ceding, and higher losses at HOA within the Insurance segment and the macro housing environment affecting the Vertical Software segment, primarily the moving business.business in our Vertical Software segment. Continued investments in sales and marketing and
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investments in establishing and maintaining the requirements of the Sarbanes-Oxley Act (“SOX”) and other internal controls across IT and accounting organizations further impacted Adjusted EBITDA (Loss).
Adjusted EBITDA (Loss) for the declinesix months ended June 30, 2023, was $(65.0) million, a $39.6 million increase from Adjusted EBITDA (Loss) of $(25.4) million for the same period in 2022. The increase in Adjusted EBITDA (loss)(Loss) in 2023 is primarily driven by extreme weather events, lower ceding, and the macro housing environment affecting primarily the moving business in our Vertical Software segment. Continued investments in sales and marketing and investments in establishing and maintaining the requirements of the Sarbanes-Oxley Act (“SOX”) and other internal controls across IT and accounting organizations further impacted Adjusted EBITDA (Loss).
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Liquidity and Capital Resources
Since inception, as a private company, the Company haswe have financed itsour operations primarily from the sales of redeemable convertible preferred stock and convertible promissory notes, and proceeds from the senior secured term loans. On December 23, 2020, the Companywe received approximately $269.5 million of aggregate cash proceeds from recapitalization, net of transaction costs, as itwe began trading publicly. During 2021, the Companywe completed a private offering of $425 million aggregate principal amounts of convertible debt maturing in 2026 (the “2026 Notes”), and raised $126.7 million and $4.3 million from the exercise of public warrants and stock options, respectively. Also during 2022, the Companywe drew $10.0 million on HOA’s term loan facility.
In April 2023, we issued $333 million of 6.75% Senior Secured Convertible Notes due in 2028 (the “2028 Notes”) in a private placement transaction. We used a portion of the net proceeds from the 2028 Notes offering to repurchase $200 million of the 2026 Notes and 2022,to fund the Company participatedrepayment of $9.7 million outstanding under HOA’s term loan facility, in each case plus accrued interest and unpaid interest thereon and related fees and expenses. We intend to use the remainder of the net proceeds for general corporate purposes.
We participate in an advance funding arrangement with third-party financers that provide the Companyus with contract premiums upfront for certain home warranty contracts. We remain obligated to repay these premiums to the third-party financer if a customer cancels its warranty contract prior to full repayment of the advance funding amount received by the Company.us. As of March 31,June 30, 2023, and December 31, 2022, the principal balance of this advance funding arrangement is $9.3$5.3 million and $15.7 million. See Note 7 (Debt) in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report for additional information.
As of March 31,June 30, 2023, the Companywe had cash and cash equivalents of $179.4$265.6 million and $14.8 million of restricted cash respectively.of $39.3 million. Restricted cash equivalents as of March 31,June 30, 2023, includes $5.2$29.1 million held by the Company’sour captive insurance company as collateral for the benefit of Homeowners of America (“HOA”), $1.3 million held in certificates of deposits and money market mutual funds pledged to the Department of Insurance in certain states as a condition of its Certificate of Authority for the purpose of meeting obligations to policyholders and creditors, $6.0$6.5 million in funds held for the payment of possible warranty claims as required under regulatory guidelines in seventeen states, and $2.4 million related to acquisition indemnifications.
The Company hasWe have incurred net losses since itsour inception and hashave an accumulated deficit at March 31,June 30, 2023, and December 31, 2022 totaling $626.9$713.8 million and $585.0 million, respectively.
As of March 31,June 30, 2023, and December 31, 2022, the Companywe had $444.2$564.0 million and $451.1 million, respectively, of aggregate principal amount outstanding in convertible notes, promissory notes, line of credit, term loan facility, and advance funding arrangement, respectively.
In April 2023, the Company issued $333 million aggregate principal amount of 6.75% Senior Secured Convertible Notes due in 2028 (the “2028 Notes”) in a private placement transaction. The Company used a portion of the net proceeds from the 2028 Notes offering to repurchase $200 million of the 2026 Notes and to fund the repayment of $9.7 million outstanding under HOA’s term loan facility, in each case plus accrued interest and unpaid interest thereon and related fees and expenses. Porch intends to use the remainder of the net proceeds for general corporate purposes. See Note 16 (Subsequent Events) in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report for additional information.arrangement.
Based on the Company’sour current operating and growth plan, management believes cash and cash equivalents at March 31,June 30, 2023, are sufficient to finance the Company’sour operations, planned capital expenditures, working capital requirements, and debt service obligations for at least the next 12 months. As the Company’sour operations evolve and we continue itsour growth strategy, including through acquisitions, the Companywe may elect or need to obtain alternative sources of capital, and itwe may finance additional liquidity needs in the future through one or more equity or debt financings. The CompanyWe 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 Companyus or could be dilutive to itsour stockholders.
Porch Group, Inc. is a holding company that transacts the majority of its business through operating subsidiaries, including insurance subsidiaries. Consequently, the Company’sour ability to pay dividends and expenses is largely
47
dependent on dividends or other distributions from its subsidiaries. The Company’sOur 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 of March 31,June 30, 2023, theseour insurance companies held cash and cash equivalents of $72.1$99.0 million and investments of $93.1$92.7 million.
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Insurance companies in the United States are also required by state law to maintain a minimum level of policyholder’s surplus. Insurance regulators in the states in which we operate have a risk-based capital standard designed to identify property and casualty insurers, or reinsurers, that may be inadequately capitalized based on inherent risks of the insurer’s assets and liabilities and its mix of net written premium. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action. AsWe are currently assessing the impact of December 31, 2022, the total adjusted capital of our U.S. insurance subsidiary wassubsequent event discussed in excess of its respective prescribed risk-basedthe “Recent Developments” section above on capital requirements. We recovered $47.6 million cash collateral in the third quarter of 2023 and are in the process of pursuing additional collateral. HOA has already secured supplemental reinsurance coverage in the amount of approximately $42 million and is currently seeking additional supplemental reinsurance coverage (whether from Porch Group’s captive reinsurer, third parties or a combination thereof) in order to maintain adequate coverage in future periods against potential excess losses in the event of a severe weather event, and to satisfy regulatory and rating agency requirements.
The CompanyWe 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.
The following table provides a summary of cash flow data for the threesix months ended March 31,June 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended March 31, |
| $ |
| % |
|
| Six Months Ended June 30, |
| $ |
| % |
| ||||||||||
| | 2023 |
| 2022 |
| Change |
| Change | | | 2023 |
| 2022 |
| Change |
| Change | | ||||||
Net cash used in operating activities | | $ | (22,031) | | $ | (15,401) | | $ | (6,630) |
| (43) | % | | $ | (8,777) | | $ | (4,156) | | $ | (4,621) |
| (111) | % |
Net cash used in investing activities | |
| (5,147) | |
| (8,077) | |
| 2,930 |
| 36 | % | |
| (7,950) | |
| (38,404) | |
| 30,454 |
| 79 | % |
Net cash (used in) provided by financing activities | |
| (7,274) | |
| 1,721 | |
| (8,995) |
| (523) | % | |
| 92,972 | |
| (155) | |
| 93,127 |
| (60,082) | % |
Change in cash, cash equivalents and restricted cash | | $ | (34,452) | | $ | (21,757) | | $ | (12,695) |
| (58.3) | % | | $ | 76,245 | | $ | (42,715) | | $ | 118,960 |
| 278.50 | % |
Operating Cash Flows
Net cash used in operating activities was $22.0$8.8 million for the threesix months ended March 31,June 30, 2023. Net cash used in operating activities consists of net loss of $38.7$125.7 million, adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments include impairment loss on goodwill and intangible assets of $2.0$57.2 million, stock-based compensation expense of $6.9$13.3 million, depreciation and amortization of $6.0$12.2 million, non-cash interest expense of $1.5$9.8 million, fair value adjustments to contingent consideration of $0.2$2.8 million (gain), and fair value adjustments to private warrant liability of $0.3$0.4 million (gain). Net changes in working capital were a useproceeds of cash of $0.2$56.2 million, primarily due to higher loss and loss adjustment expense reserves, other insurance liabilities, and accounts receivable offset by decreases in deferred revenue, and refundable deposits and accrued expenses, and increases in prepaid expenses and other current assets and reinsurance balance due, offset by higher losses and loss adjustment expense reserves, other insurance liabilities and accounts receivable.due.
Net cash used in operating activities was $15.4$4.2 million for the threesix months ended March 31,June 30, 2022. Net cash used in operating activities consists of net loss of $9.3$36.6 million, adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments include stock-based compensation expense of $5.9$15.6 million, depreciation and amortization of $6.5$12.9 million, non-cash interest expense of $2.3 million, loss on remeasurement of contingent consideration of $3.2$4.7 million, and fair value adjustments to earnout liability and private warrant liability of $11.2$13.8 million (gain) and $10.2$14.3 million (gain), respectively. Net changes in working capital were a usenet proceeds of cash of $2.7$22.9 million, primarily due to increases in prepaid expenses and current assets, offset by higherdeferred revenue, losses and loss adjustment expense reserves.reserves and other insurance liabilities, offset by higher reinsurance balance due.
Investing Cash Flows
Net cash used in investing activities was $5.1$8.0 million for the threesix months ended March 31,June 30, 2023. Net cash used in investing activities is primarily related to acquisitions, net of cash acquired, of $2.0 million, purchases of investments of $5.4$23.6 million, investments in developing internal-use software of $2.4$4.7 million, and purchases of property and equipment of $0.4$0.7 million. This was offset by the cash inflows related to maturities and sales of investments of $5.0$23.0 million.
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Net cash used in investing activities was $8.1$38.4 million for the threesix months ended March 31,June 30, 2022. Net cash used in investing activities is primarily related to acquisitions, net of cash acquired of $32.0 million, purchases of investments of $8.8$13.6 million, investments in developing internal-use software of $1.6$3.5 million, and purchases of property and equipment of $1.2 million, and a $5.0 million non-refundable deposit for an acquisition.$1.5 million. This was offset by the cash inflows related to maturities and sales of investments of $8.4$12.2 million.
Financing Cash Flows
Net cash used inprovided by financing activities was $7.3$93.0 million for the threesix months ended March 31,June 30, 2023. Net cash provided by financing activities is primarily related to the net proceeds from issuance of the 2028 Notes of $112.1 million offset by repurchases of stock of $5.6 million, repayments of advance funding of $1.3$2.7 million, debt repayments of $0.5$10.2 million and shares repurchased to pay income tax withholdings upon vesting of RSUs of $0.2$0.9 million.
Net cash provided byused in financing activities was $1.7$0.2 million for the threesix months ended March 31,June 30, 2022. Net cash provided byused in financing activities is primarily related to proceeds fromrepayments of advance funding and debt of $5.1$9.0 million, and proceeds from exercises of stock options of $0.5 million, partially offset by shares repurchased to pay income tax withholdings upon vesting of RSUs of $0.7$1.9 million and repaymentspayments of acquisition-related contingent consideration of $1.6 million, partially offset by proceeds from advance funding and debt of $3.2$10.7 million.
Off-Balance Sheet Arrangements
Since the date of incorporation, the Company haswe have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission (the “SEC”).
Recent Accounting Pronouncements
See Note 1 (Description of Business and Summary of Significant Accounting Policies) in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report for more information about recentNo recently issued accounting pronouncements the timing of their adoption, and the assessment,are expected to the extent one has been made, of their potentialbe applicable to our business or materially impact on the Company’sour financial condition and results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company isWe are exposed to a variety of market and other risks, including the effects of changes in interest rates, and inflation, as well as risks to the availability of funding sources, hazard events, and specific asset risks.
Interest Rate Risk
The market risk inherent in the Company’sour financial instruments and financial position represents the potential loss arising from adverse changes in interest rates. As of March 31,June 30, 2023, and December 31, 2022, the Company haswe have interest-bearing debt of $444.2$564.0 million and $451.1 million, respectively. The Company’sOur 0.75% Convertible Senior Notes due 2026 (the “2026 Notes”) have a principal balance of $425$225 million as of March 31,June 30, 2023, have a fixed coupon rate of 75 basis points,0.75%, and an effective interest rate of 1.3%. As such,Our 6.75% Senior Secured Convertible Notes due 2028 (the “2028 Notes”) have a principal balance of $333 million as of June 30, 2023, a fixed coupon rate of 6.75%, and an effective interest rate of 17.9%. Interest expense recognized related to the 2028 Notes was approximately $7.3 million in the three and six months ended June 30, 2023, including $4.4 million contractual interest expense and $2.9 million amortization of debt issuance costs and discount. Because the coupon rates are fixed, interest expense on the 2026 Notes and the 2028 Notes will not change if market interest rates increase. Other debt as of March 31,June 30, 2023, totaled $10.0$0.3 million and is variable-rate.
A 1% increase in interest rates in the Company’sour variable rate indebtedness would result in a nominal change in annual interest expense.
As of March 31,June 30, 2023, the Company’sour insurance subsidiary has a $93.1$92.7 million portfolio of fixed income securities and an unrealized loss of $5.3$6.1 million, as described in Note 3 in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report. In a rising interest rate environment, the portfolio would result in unrealized losses.
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As of March 31,June 30, 2023, accounts receivable and reinsurance balances due were $23.6$24.7 million and $292.8$272.5 million, respectively, were not interest-bearing assets, and are generally collected in less than 180 days. As such, the Company doeswe do not consider these assets to have material interest rate risk.
Inflation Risk
The Company believes itsWe believe our operations have been negatively affected by inflation in addition toand the change in the interest rate environment. General economic factors beyond itsour control and changes in the global economic environment, specifically fluctuations in inflation, including the access to credit under terms favorable to the Company,terms, could result in lower revenues, higher costs, and decreased margins and earnings in the foreseeable future. While the Company and its management teamswe take action wherever possible to reduce the impact of the effects of inflation, in the case of sustained inflation across several of the markets in which Porch operates,we operate, it could become increasingly difficult to effectively mitigate the increases to costs. In addition, the effects of inflation on consumers’ budgets could result in the reduction of consumer spending habits, specifically in the move and post-move markets. If unable to take actions to effectively mitigate the effect of the resulting higher costs, the Company’sour profitability and financial position could be materially and adversely impacted.
Foreign Currency Risk
There was no material foreign currency risk for the three and six months ended March 31,June 30, 2023. The Company’sOur activities to date have been conducted primarily in the United States.
Other Risks
We are exposed to a variety of market and other risks, including risks to the availability of funding sources, reinsurance providers, weather and other catastrophic hazard events, and specific asset risks.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31,June 30, 2023, which is the end of the period covered by this Quarterly Report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’sour disclosure controls and procedures to ensure that information required to be disclosed by the Companyus in reports we file or submit under the Exchange Act is (i) recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’sour management, including the Company’sour Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures were not effective as of March 31,June 30, 2023, due to the material weakness in internal control over financial reporting described in Part II, Item 9A, of theour Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 16, 2023.
Remediation Plan
Our plannedongoing remediation efforts related to the above identified material weakness include:
● |
● |
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● |
● |
These remediation measures may be time-consuming and costly. In addition, there is no assurance that we will be successful in remediating the material weakness. The Company plansWe plan to continue to assess internal controls and procedures and intendsintend to take further action as necessary or appropriate to address any other matters as they are identified.
Changes in Internal Control over Financial Reporting
Except for actions taken under the Remediation Plan described above in this Part I, Item 4, there has been no change in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the Company’sour internal control over financial reporting.
During the first six months of 2023, the Companywe have continued to take action on initiatives to improve theits internal control environment. We have been working to identify and implement specific remediation plans for these control deficiencies and have hired additional personnel to perform and monitor internal control activity. We intend to continue to take action on these initiatives to continue to improve our internal control environment.
Limitations on Effectiveness of Controls and Procedures
As specified above, the Companyour disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. CompanyOur management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
See Note 12 (Commitments and Contingencies) in the notes to the unaudited condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report, which is incorporated by reference into this Part II, Item 1, for a description of certain litigation and legal proceedings.
In addition, in the ordinary course of business, Porch and its subsidiaries are (or may become) parties to litigation involving property, personal injury, contract, intellectual property and other claims, stockholder derivative actions, class action lawsuits and other matters. The amounts that may be recovered in such matters may be subject to insurance coverage. Although the results of legal proceedings and claims cannot be predicted with certainty, neither Porch nor any of its subsidiaries is currently a party to any legal proceedings the outcome of which, we believe, if determined adversely to the Company,us, would individually or in the aggregate have a material adverse effect on the business, financial condition or results of operations.
Item 1A. Risk Factors
Except as set forth below, as of the date of this Quarterly Report on Form 10-Q, there have been no material changes from the risk factors disclosed in Part 1, Item 1A, of the Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 16, 2023.
Termination of a reinsurance contract due to distress at one of HOA’s reinsurers may expose HOA and the Company to various risks that could materially and adversely affect HOA’s and the Company’s business, financial condition, and results of operations.
In the third quarter of 2023, HOA, a subsidiary of Porch Group, discovered that for one of its reinsurance contracts for which capital was arranged by Vesttoo Ltd (“Vesttoo”), there are allegations of fraudulent activity in connection with collateral provided to HOA and certain other third parties. As a result, and in accordance with the terms of the reinsurance agreement, HOA terminated its reinsurance contract with the reinsurer on August 4, 2023, with an effective date of July 1, 2023. Had HOA not terminated the contract, the contract would have expired on its own terms on December 31, 2023. The agreement with this reinsurer provided coverage for 40% of HOA’s core book and coverage up to approximately $175 million in a catastrophic event.
Following the effective date of the termination, HOA seized approximately $47.6 million in available liquid collateral from a reinsurance trust, of which HOA was the beneficiary. In addition, HOA has secured supplemental reinsurance coverage in the amount of approximately $42 million and is currently seeking additional supplemental reinsurance coverage (whether from Porch Group, third parties or a combination thereof) in order to maintain adequate coverage in future periods against potential excess losses in the event of a severe weather event, and to satisfy regulatory and rating agency requirements. Regardless of whether sufficient coverage is obtained, HOA will continue to remain obligated with respect to all claims and claim settlement expenses under its policies, including claims incurred but not yet reported for prior periods and claims and expenses that are no longer subject to the reimbursement rights in favor of HOA under the terminated reinsurance contract. HOA is also seeking to understand and pursue its rights with respect to the letter of credit required by the reinsurance contract in the amount of $300 million as additional collateral, which advisors to the issuing bank have alleged is invalid.
In the event HOA is unable to enforce or recover the collateral underlying the letter of credit, secure sufficient replacement coverage on terms favorable to HOA, or a severe weather event occurs in the absence of sufficient coverage, HOA and the Company could be subject to significant and unforeseen risks, including, but not limited to, capital, liquidity, regulatory, rating agency, operational, financial, and accounting risks, any or all of which could have material and adverse impact on HOA’s and the Company’s business, operations, financial condition, and results of operations.
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The indenture governing our 2028 Notes contains, and instruments governing any future indebtedness of ours would likely contain, restrictions that may limit our flexibility in operating our business, and any default on our 2028 Notes or other future secured indebtedness could result in foreclosure by our secured debtholders on our assets.
The indenture and security agreement and related documents governing our 2028 Notes contain, and instruments governing any future indebtedness of ours would likely contain, a number of covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to, among other things:
• | create liens on certain assets; |
• | incur or guarantee additional debt or issue redeemable equity; |
• | pay dividends on, repurchase or make distributions on account of capital stock or make other restricted payments (including limiting repurchases of our 2026 Notes to $25 million per year and $50 million in the aggregate); |
• | make certain unpermitted investments; |
• | consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and |
• | sell, transfer or otherwise convey certain assets. |
The indenture governing our 2028 Notes also requires us to maintain a minimum amount of unrestricted cash and cash equivalents of at least $25 million (tested monthly on the last day of each calendar month) on a consolidated basis among Porch Group, Inc. and certain of its domestic subsidiaries.
In addition, if more than $30 million aggregate principal amount of our 2026 Notes remain outstanding on June 14, 2026, the holders of the 2028 Notes have the right to require us to repurchase for cash on June 15, 2026 all or any portion of their 2028 Notes at a repurchase price equal to 106.5% of the principal amount of the 2028 Notes to be repurchased, plus accrued and unpaid interest. As of April 30, 2023, there was $225 million aggregate principal amount of 2026 Notes outstanding. If we are unable to repurchase or otherwise refinance a sufficient amount of the remaining outstanding 2026 Notes prior to June 14, 2026 and the holders of all or a substantial portion of the outstanding 2028 Notes require us to repurchase their 2028 Notes pursuant to this indenture provision, our liquidity will be materially adversely affected, and there are no assurances that we would have sufficient funds available to satisfy the repurchase of all such 2028 Notes.
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As a result of these restrictions, we will be limited as to how we conduct our business, and we may be unable to raise additional debt or equity financing to compete effectively or to capitalize on available business opportunities. Any failure to comply with these covenants could result in a default under our 2028 Notes or instruments governing any future indebtedness of ours. Additionally, our 2028 Notes are secured by a first-priority lien in substantially all assets of Porch Group, Inc. and certain of its domestic subsidiaries. Upon a default, unless waived, amounts due under the 2028 Notes could be accelerated, and the holders of our 2028 Notes could initiate foreclosure proceedings against their collateral, which could potentially force us into bankruptcy or liquidation. In addition, a default under our 2028 Notes indenture could trigger a cross-default under agreements governing any future indebtedness as well as the indenture governing our 2026 Notes. Our results of operations may not be sufficient to service our indebtedness and to fund our other expenditures, and we may not be able to obtain financing to meet these requirements. If we experience a default under our 2028 Notes indenture, 2026 Notes indenture or instruments governing our future indebtedness, our business, financial condition, and results of operations may be materially adversely effected.affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchase Program
The following table summarizes repurchases of our stock in the quarter ended March 31, 2023. See Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for the description of our repurchase program and Note 8 (Equity and Warrants) to the accompanying consolidated financial statements included in this Quarterly Report for additional information.None.
| | | | | | | | | | | | |
| | | | | | | | Total Number of | | Approximate Dollar Value | ||
| | | | | | | | Shares Purchased as | | that May Yet | ||
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| |
| | |
| Part of Publicly |
| Be Purchased | |||
| | Total Number of |
| Average Price |
| Announced Plans |
| Under the Plans | ||||
| | Shares Purchased | | Paid per Share | | or Programs |
| or Programs (in millions) | ||||
Beginning repurchase authority | | | | | | | | | | | $ | 10.7 |
January 1, 2023 through January 31, 2023 |
| | 1,396,158 | | $ | 2.20 | | | 1,396,158 | | | 7.6 |
February 1, 2023 through February 28, 2023 |
|
| — | |
| — | |
| — | | | 7.6 |
March 1, 2023 through March 31, 2023 |
|
| — | |
| — | |
| — | | | 7.6 |
Total Fiscal 2023 First Quarter | | | 1,396,158 | | $ | 2.20 | | | 1,396,158 | | $ | 7.6 |
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.Matt Ehrlichman, our Chairman, Chief Executive Officer, and Founder, entered into a Rule 10b5-1 trading arrangement (as such term is defined in Item 408(a) of Regulation S-K) on June 2, 2023 (the “10b5-1 Plan”). The 10b5-1 Plan is scheduled to terminate on December 31, 2023, and covers the purchase of up to an aggregate of 2,327,777 shares of the Company’s common stock. The 10b5-1 Plan is intended to satisfy the affirmative defense Rule of 10b5-1(c). Trades under the 10b5-1 Plan will not commence until at least 90 days following the date on which such plan was entered. During the three months ended June 30, 2023, no other director or officer (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted, terminated or modified a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement, as each term is defined in Item 408(a) of Regulation S-K).
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Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
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31.1* | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
31.2* | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
32.1** | ||||
32.2** | ||||
101.INS* | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||
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101.SCH* | XBRL Taxonomy Extension Schema Document | |||
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101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |||
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101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |||
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101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |||
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101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |||
104* | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | |||
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* Filed herewith.
** These certifications are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.
# Indicates a management contract or compensatory plan or arrangement.
+ The schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
Date: May 10,August 9, 2023
| | |
| PORCH GROUP, INC. | |
| | |
| By: | /s/ Shawn Tabak |
| Name: | Shawn Tabak |
| Title: | Chief Financial Officer and Duly Authorized Officer |
| | (Principal Financial Officer) |
| | |
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