Quarterly Report (10-q)

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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 September 30, 2022

☐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 1^st 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 November 7, 2022 was 100,554,543.

Table of Contents

Table of Contents

		Page

Part I.	Financial Information	3

Item 1.	Financial Statements	3

	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021	3

	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021	4

	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2022 and 2021	5

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021	6

	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021	8

	Notes to Unaudited Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	59

Item 4.	Controls and Procedures	60

Part II.	Other Information	62

Item 1.	Legal Proceedings	62

Item 1A.	Risk Factors	62

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62

Item 3.	Defaults Upon Senior Securities	62

Item 4.	Mine Safety Disclosures	62

Item 5.	Other Information	62

Item 6.	Exhibits	63

Exhibit Index		63

Signatures		64

Table of Contents

PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

PORCH GROUP, INC.

Condensed Consolidated Balance Sheets

(all numbers in thousands, except share amounts)


	September 30, 2022		December 31, 2021
Assets
Current assets
Cash and cash equivalents	$	260,198	$	315,741
Accounts receivable, net		37,032		28,767
Short-term investments		7,212		9,251
Reinsurance balance due		303,987		228,416
Prepaid expenses and other current assets		21,160		14,338
Restricted cash		16,296		8,551
Total current assets		645,885		605,064
Property, equipment, and software, net		11,236		6,666
Operating lease right-of-use assets		4,697		4,504
Goodwill		228,091		225,654
Long-term investments		55,357		58,324
Intangible assets, net		111,728		129,830
Restricted cash, non-current		500		500
Long-term insurance commissions receivable		11,930		7,521
Other assets		3,057		684
Total assets	$	1,072,481	$	1,038,747

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	6,717	$	6,965
Accrued expenses and other current liabilities		36,847		37,675
Deferred revenue		277,616		201,085
Refundable customer deposit		19,867		15,274
Current portion of long-term debt		6,275		150
Losses and loss adjustment expense reserves		100,298		61,949
Other insurance liabilities, current		55,945		40,024
Total current liabilities		503,565		363,122
Long-term debt		425,012		414,585
Operating lease liabilities, non-current		2,968		2,694
Earnout liability, at fair value		57		13,866
Private warrant liability, at fair value		802		15,193
Other liabilities (includes $23,228 and $9,617 at fair value, respectively)		24,952		12,242
Total liabilities		957,356		821,702
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 – 100,410,325 and 97,961,597, respectively
Additional paid-in capital		664,362		641,406
Accumulated other comprehensive loss		(6,571)		(259)
Accumulated deficit		(542,676)		(424,112)
Total stockholders’ equity		115,125		217,045
Total liabilities and stockholders’ equity	$	1,072,481	$	1,038,747

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

PORCH GROUP, INC.

Condensed Consolidated Statements of Operations

(all numbers in thousands, except share amounts, unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue	$	75,366	$	62,769	$	208,696	$	140,852
Operating expenses⁽¹⁾:
Cost of revenue		33,269		19,158		83,016		44,587
Selling and marketing		30,245		22,874		84,815		60,636
Product and technology		14,438		11,317		44,446		34,158
General and administrative		25,257		22,034		80,360		66,463
Impairment loss on intangible assets and goodwill		57,057		—		57,057		—
Total operating expenses		160,266		75,383		349,694		205,844
Operating loss		(84,900)		(12,614)		(140,998)		(64,992)
Other income (expense):
Interest expense		(2,085)		(1,857)		(6,236)		(4,296)
Change in fair value of earnout liability		43		7,413		13,809		(15,388)
Change in fair value of private warrant liability		124		2,692		14,391		(17,521)
Gain (loss) on extinguishment of debt		—		(3,133)		—		5,110
Investment income and realized gains, net of investment expenses		335		248		775		448
Other expense, net		69		316		(37)		225
Total other income (expense)		(1,514)		5,679		22,702		(31,422)
Loss before income taxes		(86,414)		(6,935)		(118,296)		(96,414)
Income tax benefit (expense)		23		1,836		(268)		9,917
Net loss	$	(86,391)	$	(5,099)	$	(118,564)	$	(86,497)

Loss per share - basic (Note 15)	$	(0.88)	$	(0.05)	$	(1.22)	$	(0.93)
Loss per share - diluted (Note 15)	$	(0.88)	$	(0.08)	$	(1.22)	$	(0.93)

Shares used in computing basic loss per share		97,792,485		96,839,292		97,009,351		92,544,137
Shares used in computing diluted loss per share		97,792,485		97,545,942		97,009,351		92,544,137

(1)	Amounts include stock-based compensation expense, as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Cost of revenue	$	—	$	—	$	—	$	1
Selling and marketing		1,689		1,382		3,592		4,888
Product and technology		911		1,367		3,888		5,522
General and administrative		2,489		3,135		13,165		18,950
	$	5,089	$	5,884	$	20,645	$	29,361

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

PORCH GROUP, INC.

Condensed Consolidated Statements of Comprehensive Loss

(all numbers in thousands, unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net loss	$	(86,391)	$	(5,099)	$	(118,564)	$	(86,497)
Other comprehensive income (loss):
Current period change in net unrealized loss, net of tax		(2,012)		(154)		(6,312)		113
Comprehensive loss	$	(88,403)	$	(5,253)	$	(124,876)	$	(86,384)

Table of Contents

PORCH GROUP, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(all numbers in thousands, except share amounts, unaudited)


								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	—		—		—		(5,796)		—		(5,796)
Other comprehensive loss	—		—		—		—		(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	$	(429,908)	$	(2,774)	$	214,879
Net loss	—		—		—		(26,377)		—		(26,377)
Other comprehensive loss	—		—		—		—		(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 units	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	$	(456,285)	$	(4,559)	$	198,980
Net loss	—		—		—		(86,391)		—		(86,391)
Other comprehensive loss	—		—		—		—		(2,012)		(2,012)
Stock-based compensation	—		—		5,089		—		—		5,089
Vesting of restricted stock units	1,062,323		—		—		—		—		—
Exercise of stock options	197,758		—		416		—		—		416
Income tax withholdings	(290,284)		—		(957)		—		—		(957)
Balances as of September 30, 2022	100,410,325	$	10	$	664,362	$	(542,676)	$	(6,571)	$	115,125

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PORCH GROUP, INC.

Condensed Consolidated Statements of Stockholders’ Equity - Continued

(all numbers in thousands, except share amounts, unaudited)


								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Loss		Equity
Balances as of December 31, 2020	81,669,151	$	8	$	424,823	$	(317,506)	$	—	$	107,325
Net loss	—		—		—		(65,101)		—		(65,101)
Stock-based compensation	—		—		4,462		—		—		4,462
Stock-based compensation - earnout	—		—		12,373		—		—		12,373
Issuance of common stock for acquisitions	90,000		—		1,169		—		—		1,169
Reclassification of earnout liability upon vesting	—		—		25,815		—		—		25,815
Vesting of restricted stock awards	2,078,102		—		—		—		—		—
Exercise of stock warrants	8,087,623		1		93,007		—		—		93,008
Exercise of stock options	593,106		—		355		—		—		355
Income tax withholdings	(1,062,250)		—		(16,997)		—		—		(16,997)
Transaction costs	—		—		(402)		—		—		(402)
Balances as of March 31,2021	91,455,732	$	9	$	544,605	$	(382,607)	$	—	$	162,007
Net loss	—		—		—		(16,297)		—		(16,297)
Other comprehensive income	—		—		—		—		267		267
Stock-based compensation	—		—		2,466		—		—		2,466
Stock-based compensation - earnout	—		—		4,176		—		—		4,176
Issuance of common stock for acquisitions	1,292,441		—		28,372		—		—		28,372
Reclassification of private warranty liability upon exercise	—		—		16,843		—		—		16,843
Vesting of restricted stock awards	33,182		—		—		—		—		—
Exercise of stock warrants	2,862,312		1		33,761		—		—		33,762
Exercise of stock options	946,392		—		2,227		—		—		2,227
Income tax withholdings	(296,643)		—		(5,194)		—		—		(5,194)
Transaction costs	—		—		140		—		—		140
Balances as of June 30, 2021	96,293,416	$	10	$	627,396	$	(398,904)	$	267	$	228,769
Net loss	—		—		—		(5,099)		—		(5,099)
Other comprehensive income	—		—		—		—		(154)		(154)
Stock-based compensation	—		—		1,641		—		—		1,641
Stock-based compensation - earnout	—		—		4,243		—		—		4,243
Issuance of common stock for acquisitions	102,636		—		1,937		—		—		1,937
Reclassification of private warranty liability upon exercise	—		—		14,505		—		—		14,505
Vesting of restricted stock awards	271,432		—		—		—		—		—
Exercise of stock warrants	557,816		—		—		—		—		—
Exercise of stock options	339,150		—		934		—		—		934
Income tax withholdings	(231,452)		—		(1,587)		—		—		(1,587)
Capped call transactions	—		—		(52,913)		—		—		(52,913)
Balances as of September 30, 2021	97,332,998	$	10	$	596,156	$	(404,003)	$	113	$	192,276

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PORCH GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(all numbers in thousands, unaudited)


	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net loss	$	(118,564)	$	(86,497)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		21,574		10,787
Amortization of operating lease right-of-use assets		1,621		1,298
Impairment loss on intangible assets and goodwill		57,057		—
Loss on sale and impairment of property, equipment, and software		200		202
Gain on extinguishment of debt		—		(5,110)
Loss (gain) on remeasurement of private warrant liability		(14,391)		17,521
Loss (gain) on remeasurement of contingent consideration		5,251		(380)
Loss (gain) on remeasurement of earnout liability		(13,809)		15,388
Stock-based compensation		20,645		29,361
Amortization of investment premium/accretion of discount, net		1,702		941
Net realized losses on investments		187		45
Interest expense (non-cash)		2,287		67
Other		480		(1,379)
Change in operating assets and liabilities, net of acquisitions and divestitures
Accounts receivable		(8,639)		(5,424)
Reinsurance balance due		(75,571)		(33,097)
Prepaid expenses and other current assets		(6,297)		90
Accounts payable		(248)		(23,284)
Accrued expenses and other current liabilities		(8,001)		3,031
Losses and loss adjustment expense reserves		38,349		1,892
Other insurance liabilities, current		15,921		5,085
Deferred revenue		71,600		42,948
Refundable customer deposits		4,593		(2,441)
Deferred income tax benefit		—		(8,153)
Long-term insurance commissions receivable		(4,409)		(3,794)
Operating lease liabilities, non-current		(1,936)		(1,469)
Other		(2,410)		655
Net cash used in operating activities		(12,808)		(41,717)
Cash flows from investing activities:
Purchases of property and equipment		(1,986)		(588)
Capitalized internal use software development costs		(5,803)		(2,629)
Purchases of short-term and long-term investments		(19,446)		(19,126)
Maturities, sales of short-term and long-term investments		17,794		16,367
Acquisitions, net of cash acquired		(37,003)		(178,681)
Net cash used in investing activities		(46,444)		(184,657)
Cash flows from financing activities:
Proceeds from debt issuance, net of fees		15,000		413,537
Repayments of principal and related fees		(150)		(42,965)
Capped call transactions		—		(42,330)
Proceeds from exercises of warrants		—		126,772
Proceeds from exercises of stock options		1,108		3,516
Income tax withholdings paid upon vesting of restricted stock units		(2,879)		(23,778)
Payments of acquisition-related contingent consideration		(1,625)		—
Net cash provided by financing activities		11,454		434,752
Net change in cash, cash equivalents, and restricted cash	$	(47,798)	$	208,378
Cash, cash equivalents, and restricted cash, beginning of period	$	324,792	$	207,453
Cash, cash equivalents, and restricted cash end of period	$	276,994	$	415,831

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PORCH GROUP, INC.

Condensed Consolidated Statements of Cash Flows - Continued

(all numbers in thousands, unaudited)


	Nine Months Ended September 30,
	2022		2021
Supplemental disclosures
Cash paid for interest	$	3,181	$	2,675
Non-cash consideration for acquisitions	$	14,952	$	42,229
Reduction of earnout liability due to a vesting event	$	—	$	25,815
Payable for capped call transaction	$	—	$	10,583

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PORCH GROUP, INC.

Notes to Condensed Consolidated Statements

(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)

1. Description of Business and Summary of Significant Accounting Policies

Description of Business

Porch Group, Inc. (“Porch Group,” “Porch” or the “Company”) is a vertical software platform for the home, providing software and services to over 30,900 home services companies. 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 others. Porch’s Insurance segment, with over 390,000 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 segment also includes Porch’s warranty service offering.

Porch helps home service providers grow their business and improve their customer experience. In addition, through these relationships Porch gains access to homebuyers and is able to offer services to make the moving process easier, helping consumers save time and make better decisions about critical services, including insurance, warranty, moving, security, TV/Internet, home repair and improvement.

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, 2021, filed with the SEC on March 16, 2022. The information as of December 31, 2021, included in the unaudited condensed consolidated balance sheets was derived from the Company’s 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’s financial position, results of operations, comprehensive loss, stockholders’ equity, and cash flows for the periods and dates presented. The results of operations for the three and nine months ended September 30, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, or any other interim period or future year.

Comprehensive Loss

Comprehensive loss consists of adjustments related to unrealized gains and losses on available-for-sale securities.

Reclassifications

Certain reclassifications to previously reported 2021 balances were made to conform to the current period presentation in the unaudited condensed consolidated statements of cash flows.

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

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PORCH GROUP, INC.

Notes to Condensed Consolidated Statements - Continued

(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)

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.

Concentrations

Financial instruments which potentially subject the Company 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 balance in the course of collection.

The Company’s insurance carrier subsidiary has exposure and remains liable in the event of insolvency of its primary reinsurers. Management and its reinsurance intermediary regularly assess the credit quality and ratings of its reinsurer counterparties. Two reinsurers represented more than 10% individually, and 44% in aggregate, of the Company’s insurance subsidiary’s total reinsurance balance due as of September 30, 2022.

Substantially all of the Company’s insurance-related revenues in the Insurance segment are derived from customers in Texas (which represent approximately 53% of such revenues in the nine months ended September 30, 2022), South Carolina, North Carolina, Georgia, Virginia and Arizona, which could be adversely affected by economic conditions, an increase in competition, or environmental impacts and changes.

No individual customer represented more than 10% of the Company’s total revenue for the three and nine months ended September 30, 2022, or 2021. As of September 30, 2022, and December 31, 2021, no individual customer accounted for 10% or more of the Company’s total accounts receivable.

As of September 30, 2022, the Company held approximately $138.5 million of cash with two U.S. commercial banks.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. The Company maintains cash balances that may exceed the insured limits by the Federal Deposit Insurance Corporation.

Restricted cash equivalents as of September 30, 2022 includes $5.1 million held by the Company’s captive insurance company as a collateral for the benefit of Homeowners of America (“HOA”), $0.5 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, $8.3 million in funds held for the payment of possible warranty claims as required under regulatory guidelines in twenty five states, and $2.9 million related to acquisition indemnifications, of which $0.5 million is recorded in non-current assets. Restricted cash equivalents as of December 31, 2021, includes $0.3 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, $5.9 million in funds held for the payment of possible warranty claims as required under regulatory guidelines in twenty five states, $0.3 million of customer deposits, and $2.6 million related to acquisition indemnifications in escrow accounts, of which $0.5 million is recorded in non-current assets.

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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:


	September 30, 2022		December 31, 2021

Cash and cash equivalents	$	260,198	$	315,741
Restricted cash and restricted cash equivalents - current		16,296		8,551
Restricted cash and restricted cash equivalents - non-current		500		500
Cash, cash equivalents and restricted cash	$	276,994	$	324,792

Accounts Receivable and Long-term Insurance Commissions Receivable

Accounts receivable consist principally of amounts due from enterprise customers and other corporate partnerships, as well as credit card receivables. The Company estimates allowances for uncollectible receivables based on the creditworthiness of its customers, historical trend analysis and general economic conditions. Consequently, an adverse change in those factors could affect the Company’s estimate of allowance for doubtful accounts. The allowance for uncollectible receivables at September 30, 2022, and December 31, 2021, was $0.6 million and $0.4 million, respectively.

Long-term insurance commissions receivable balance consists of the estimated commissions from policy renewals expected to be collected. The Company records the amount of renewal insurance commissions expected to be collected in the next twelve months as current accounts receivable.

Deferred Policy Acquisition Costs

The Company capitalizes 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’s insurance subsidiary of new or renewal insurance contracts. DAC are amortized to expense on a straight-line basis over the terms of the policies to which they relate, which is generally one year. The amortization of DAC is included in sales and marketing expense in the unaudited condensed consolidated statements of operations and comprehensive loss. 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 September 30, 2022, and December 31, 2021, DAC of $9.2 million and $4.0 million is included in prepaid expenses and other current assets.

Changes in DAC for the three and nine months ended September 30, 2022, are as follows:


	2022
Deferred policy acquisition costs at December 31, 2021 (net)	$	3,988
Capitalized costs		16,753
Amortized costs		(13,001)
Deferred policy acquisition costs at March 31, 2022 (net)		7,740
Capitalized costs		23,617
Amortized costs		(23,584)
Deferred policy acquisition costs at June 30, 2022 (net)		7,773
Capitalized costs		27,956
Amortized costs		(26,491)
Deferred policy acquisition costs at September 30, 2022 (net)	$	9,238

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PORCH GROUP, INC.

Notes to Condensed Consolidated Statements - Continued

(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)

Fair Value of Financial Instruments

Fair value, as defined by the accounting standards, represents the amount at which an asset or liability would be transferred in a current orderly transaction between willing market participants. Emphasis is placed on observable inputs being used to assess fair value. To reflect this approach, the standards require a three-tiered fair value hierarchy be applied based on the nature of the inputs used when measuring fair value. The three hierarchical levels of inputs are as follows:

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.

Other Insurance Liabilities, Current

The following table details the components of other insurance liabilities, current on the condensed consolidated balance sheets:


	As of September 30, 2022		As of December 31, 2021
Ceded reinsurance premiums payable	$	26,727	$	22,523
Commissions payable, reinsurers and agents		13,633		10,697
Advance premiums		12,794		4,277
Funds held under reinsurance treaty		1,886		2,206
General and accrued expenses payable		905		321
Other insurance liabilities, current	$	55,945	$	40,024

Income Taxes

Provisions for income taxes for the three months ended September 30, 2022, and 2021 were a $23 thousand benefit and a $1.8 million benefit, respectively, and the effective tax rates for these periods were 0.0% benefit and 26.5% benefit, respectively. Provisions for income taxes for the nine months ended September 30, 2022, and 2021, were a $0.3 million expense and a $9.9 million benefit, respectively, and the effective rates for these periods were 0.2% expense and 10.3% benefit, respectively. The difference between the Company’s effective tax rates for the 2022 period and the U.S. statutory rate of 21% was primarily due to a full valuation allowance related to the Company’s net deferred assets. The difference between the Company’s effective tax rates for the 2021 period and the U.S. statutory rate of 21% was primarily due to the release of a portion of the valuation allowance due to deferred tax liabilities created by certain acquisitions.

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PORCH GROUP, INC.

Notes to Condensed Consolidated Statements - Continued

(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)

Recently Adopted Accounting Standards

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this update require an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date. The amendments of this ASU do not affect the accounting for other assets or liabilities that may arise from revenue contracts with customers in accordance with Topic 606. The amendments of this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods in those fiscal years. The ASU clarifies that early adoption of the amendments is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. The Company early adopted this ASU as of January 1, 2022, and will apply the guidance prospectively for business combinations that occur after the adoption date. Therefore, the adoption will have no impact to the existing consolidated balance sheets, statements of operations, and statements of cash flows.

2. Revenue

Disaggregation of Revenue

The Company generates revenue in its Vertical Software segment from (1) software and service subscription fees received for continued access to and transactions processed using owned software platforms by individual contractors, small business service providers and large enterprise service providers, (2) move-related transactions for a variety of services when end customers are connected with service providers primarily related to moving or settling into a new home, and (3) post-move transactions for the delivery of leads to service providers who primarily support the continued maintenance of the home.

The revenue generated by the Company’s Insurance segment is primarily from the sale of its own written insurance and warranty policies or third-party policies via its agency. This revenue includes insurance and warranty premiums earned over the life of the policy, reinsurance profit share, policy fees, commissions earned at the time it is put in force or ceded.

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PORCH GROUP, INC.

Notes to Condensed Consolidated Statements - Continued

(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)

Total revenues consisted of the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Vertical Software segment
Software and service subscriptions	$	17,529	$	15,238	$	55,165	$	38,716
Move-related transactions (excluding insurance)		21,569		21,576		51,155		46,742
Post-move transactions		5,365		5,473		15,644		16,171
Total Vertical Software segment revenue		44,463		42,287		121,964		101,629

Insurance segment
Insurance and warranty premiums, commissions and policy fees⁽¹⁾		30,903		20,482		86,732		39,223
Total Insurance segment revenue		30,903		20,482		86,732		39,223

Total revenue	$	75,366	$	62,769	$	208,696	$	140,852

⁽¹⁾ Revenue recognized during the three and nine months ended September 30, 2022, includes revenue of $19.1 million and $56.4 million, respectively, which is accounted for separately from the revenue from contracts with customers. Revenue recognized during the three and nine months ended September 30, 2021, includes revenue of $11.2 million and $19.9 million, respectively, which is accounted for separately from the revenue from contracts with customers.

Contracts with Customers

Contract Assets - Insurance Commissions Receivable

A summary of the activity impacting the contract assets during the nine months ended September 30, 2022, is presented below:


	Contract Assets
Balance at December 31, 2021	$	9,384
Estimated lifetime value of commissions on insurance policies sold by carriers		7,580
Cash receipts		(2,748)
Balance at September 30, 2022	$	14,216

As of September 30, 2022, $2.3 million of contract assets are expected to be collected within the next 12 months and therefore are included in current accounts receivable on the condensed consolidated balance sheets. The remaining $11.9 million of contract assets are expected to be collected in the following periods and are included in long-term insurance commissions receivable on the condensed consolidated balance sheets.

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PORCH GROUP, INC.

Notes to Condensed Consolidated Statements - Continued

(all numbers in thousands, except share amounts and unless otherwise stated, unaudited)

Contract Liabilities — Refundable Customer Deposits

A summary of the activity impacting the contract liabilities during the nine months ended September 30, 2022, is presented below:


	Contract
	Liabilities
Balance at December 31, 2021	$	15,274
Additions to contract liabilities		25,952
Contract liabilities transferred to revenue		(21,359)
Balance at September 30, 2022	$	19,867

As of September 30, 2022, $19.9 million in contract liabilities related to refundable customer deposits received in advance of warranty services provided, are included in current refundable customer deposits on the consolidated balance sheets because the policyholder may cancel the policy at any time and receive a pro-rated refund. If the policies are not canceled, the balance is expected to be transferred to revenue over the term of the policies, which is, on average, 19 months.

Deferred Revenue

Timing may differ between the satisfaction of performance obligations and the collection of amounts from customers. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. To the extent the amounts relate to services or coverage performed by the Company over time, these liabilities are classified as deferred revenue. If the amounts collected are related to a point in time obligation which has yet to be performed, these liabilities are classified as refundable customer deposits.

A summary of the activity impacting deferred revenue balances during the three and nine months ended September 30, 2022, is presented below:


		Vertical Software			Insurance			Total

PRCH

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