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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

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 November 7, 2022 was 100,554,543.

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

2

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.

3

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.

4

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)

5

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

6

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.

7

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

8

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.

9

Table of Contents

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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Table of Contents

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.

11

Table of Contents

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.

13

Table of Contents

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.

14

Table of Contents

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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Table of Contents

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