Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis provides information that Offerpad’s management believes is relevant to an assessment and understanding of Offerpad’s consolidated results of operations and financial condition. The discussion should be read together with the unaudited interim condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and accompanying notes included in Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 7, 2022.
This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” in this Form 10-Q. Offerpad’s actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in Part I, Item 1A of Offerpad’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Unless the context otherwise requires, references to “we”, “our” and “the Company” refer to the business and operations of OfferPad, Inc. and its consolidated subsidiaries prior to the Business Combination (as defined below) and to Offerpad Solutions Inc. and its consolidated subsidiaries, following the consummation of the Business Combination.
Overview
Offerpad was founded in 2015 to create a better residential real estate experience by combining advanced technology solutions with fundamental industry expertise. We provide streamlined, data driven iBuying and real estate solutions for the on-demand customer. Our digital “Solutions Center” platform gives users a holistic, customer-centric experience, enabling them to efficiently sell and buy their homes online with streamlined access to ancillary services such as mortgage and title insurance.
Our platform provides a unique dual approach to helping home sellers. In our “Express” offering, sellers can access our website or mobile app to receive a competitive cash offer for their home within 24 hours and quickly close without the major inconveniences associated with traditional real estate selling. In our “Flex” offering, we leverage our technology, scale and logistical expertise to renovate and list a seller’s home for sale while also typically providing a backup “Express” cash offer to the seller, thereby providing optionality of process and certainty of outcome. Our platform provides home buyers the opportunity to browse and tour homes online and submit purchase offers online in a simple process on their own time, with or without an agent. We also offer seamless, integrated access to in-house agents to advise on the purchase of a home as well as access to mortgage services through our in-house mortgage solution, Offerpad Home Loans, or through one of our preferred providers. We believe by offering both “Express” and “Flex” to sellers, and a guided yet flexible and customizable experience to buyers, we have reinvented the home selling and buying experience to meet the digital and on-demand needs of modern consumers.
We have created a pioneering iBuying company and leading on-demand real estate marketplace that has transacted on homes representing approximately $8.7 billion of aggregate revenue since inception in 2015 through September 30, 2022. Our significant growth relative to our limited capital invested is testament to our efficiency and results driven culture, increasing our total contribution margin after interest (per home sold) from approximately $4,900 in 2019 to approximately $9,000 in 2020 and approximately $22,900 in 2021. Since inception, we have focused on improving the unit economics of our model across our markets, with the added benefit of maximizing operational leverage as we scale. A foundation of our strategic approach to growth has been to prove out our business model first, control costs and refine our valuation automation and logistical operations before we scale into additional markets. Our contribution margin after interest across markets, which was approximately 7% company-wide in 2021, is a testament to our understanding of how to grow efficiently and enter into new markets, improve unit economics and increase operating leverage.
As of September 30, 2022, Offerpad operated in over 1,800 cities and towns in 28 metropolitan markets across 16 states.
As we expand further into our existing markets, launch new markets, and develop a wide range of new ancillary services, we look forward to bringing our mission of providing your best way to buy and sell a home to even more homeowners and prospective home purchasers across the country.
The Business Combination
On September 1, 2021 (the “Closing Date”), we consummated the transactions contemplated by the Agreement and Plan of Merger, dated March 17, 2021 (the “Merger Agreement”), by and among OfferPad, Inc. (“Old Offerpad”), Supernova Partners Acquisition Company, Inc., a Delaware corporation (“Supernova”), and Orchids Merger Sub, Inc., a Delaware corporation (“Merger Sub”). Pursuant to these transactions, Merger Sub merged with and into Old Offerpad, with Old Offerpad becoming a wholly owned subsidiary of Supernova (the “Business Combination” and, collectively with the other transactions described in the Merger Agreement, the “Transactions”).
Offerpad Solutions Inc. | Third Quarter 2022 Form 10-Q | 28
On the Closing Date, and in connection with the closing of the Transactions, Supernova changed its name to Offerpad Solutions Inc. (“Offerpad Solutions”).
We accounted for the Business Combination as a reverse recapitalization whereby Old Offerpad was determined as the accounting acquirer and Supernova as the accounting acquiree. While Supernova was the legal acquirer in the Business Combination, because Old Offerpad was determined as the accounting acquirer, the historical financial statements of Old Offerpad became the historical financial statements of the combined company, upon the consummation of the Business Combination. Accordingly, Offerpad Solutions, as the parent company of the combined business, is the successor SEC registrant, meaning that our financial statements for previous periods will be disclosed in the registrant’s future periodic reports filed with the SEC.
The Business Combination had a significant impact on our reported financial position and results as a result of the reverse recapitalization. One of the most significant changes in our reported financial position and results was an increase in cash and cash equivalents. Upon the closing of the Business Combination, Offerpad Solutions received total gross proceeds of $284.0 million, which consisted of $34.0 million from Supernova’s trust and operating accounts, $200.0 million in proceeds from the private placement (“PIPE Investment”) and $50.0 million in proceeds from the execution of the forward purchase agreements pursuant to which certain affiliates of Supernova agreed to purchase, upon the closing of the Transactions, an aggregate of 5,000,000 shares of Offerpad Solutions Class A common stock and an aggregate of 1,666,667 warrants to purchase one share of Offerpad Solutions Class A common stock, for an aggregate purchase price of $50,000,000, or $10.00 per share of Offerpad Solutions Class A common stock and one-third of one warrant to purchase one share of Offerpad Solutions Class A common stock (“Forward Purchase Agreements”). This was partially offset by transaction costs for the Business Combination of approximately $51.2 million, which principally consisted of advisory, legal and other professional fees, and $63.4 million of cumulative debt repayments, inclusive of accrued but unpaid interest, that were paid in conjunction with the closing of the Business Combination.
Additionally, in connection with the Business Combination, we recognized a $26.5 million warrant liability on our condensed consolidated balance sheet for the fair value of the public warrants and private placement warrants that were previously issued by Supernova and assumed in the Business Combination, along with the additional private placement warrants that were issued upon the closing of the Business Combination. We adjust the warrants to fair value at each reporting period. The warrant liabilities are subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our unaudited condensed consolidated statements of operations. As a result of the recurring fair value measurement, our future financial statements and results of operations may fluctuate quarterly, based on factors that are outside of our control. Due to the recurring fair value measurement, we expect that we will recognize non-cash gains or losses on the warrants each reporting period and that the amount of such gains or losses could be material.
As a result of the Business Combination, we became an SEC-registered and NYSE listed company, which has required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We have incurred and expect to continue to incur additional annual operating expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees, and additional internal and external accounting, legal and administrative resources.
General Economic Conditions and Health of the U.S. Residential Real Estate Industry
Our business and operating results are impacted by the general economic conditions and the health of the U.S. residential real estate industry, particularly the single family home resale market. Our business model depends on a high volume of residential real estate transactions throughout the markets in which we operate. This transaction volume affects all of the ways that we generate revenue, including our ability to acquire new homes and generate associated fees, and our ability to sell homes that we own.
The residential real estate market conditions were generally favorable during the first six months of 2022, with strong consumer demand and home price appreciation, resulting from a limited supply of new and resale single family homes on the market, and steady employment and wage growth. However, towards the end of the second quarter of 2022 and continuing through the third quarter of 2022, consumer demand for residential real estate softened compared to the corresponding prior year periods and much of the first half of 2022, as the combination of the sudden and significant increase in mortgage interest rates, increased inflation in the broader economy, volatility and declines in the stock market, and various other macroeconomic conditions and geopolitical concerns impacted consumer budgets and confidence. These macroeconomic factors have negatively impacted housing affordability and homebuyer sentiment, causing many prospective customers to delay their homebuying decisions. This has resulted in a sequential decline in our revenue in the third quarter of 2022 compared to the second quarter of 2022 and an increase in the average period of time our homes are being held in inventory, causing an increase in holding costs and downward pressure on sales prices and margins. We expect these macroeconomic trends to continue through the fourth quarter of 2022, with lower revenue and margins anticipated as compared to the corresponding prior year period. If these macroeconomic trends continue for an extended period of time, we expect these factors will continue to
Offerpad Solutions Inc. | Third Quarter 2022 Form 10-Q | 29
negatively impact housing affordability and homebuyer sentiment, and result in a decline in the demand for our homes and the services offered by our platform, which could materially impact our financial condition and results of operations.
Our Business Model
Revenue Model
Our mission is to provide your best way to buy and sell a home. Period. Offerpad was founded to create a better residential real estate experience by combining advanced technology solutions with fundamental industry expertise. The “Express” cash offer is the flagship offering, allowing customers to sell on their own schedule and without the hassle of showings, open houses, and aligning closing dates with the purchase date of their new home. However, this is only one of several offerings within our Solutions Center designed to meet the unique needs of our customers. With Offerpad “Flex”, customers partner with Offerpad to list their home for sale on the open market while utilizing Offerpad’s concierge and renovation services, as well as work with an Offerpad Solutions Expert to help them find their next home. Through Offerpad “Flex”, our customers essentially dual track a sale by utilizing both our personalized listing services while also having our initial cash offer as a backup option, typically for up to 60 days.
We typically acquire homes directly from individual sellers. After purchasing the home, we make necessary repairs and upgrades before listing it for sale on our platforms and Multiple Listing Services (“MLS”). We resell these homes to both individual consumer and institutional investor buyers. Currently, revenues from home sales through our “Express” cash offer are our primary source of revenue; however, we expect greater contribution from our “Flex” offering as we drive expansion of this offering and from ancillary services in the future as our full product offering expands and matures.
Offers
We generate demand for our services through traditional media, digital media, organic referral, and partnership channels. Partnership channels include relationships with homebuilders, brokerages, and complementary industry partners. Interested home sellers visit our desktop or mobile website or app and fill out a short questionnaire about their home. If the home fits our eligible criteria, an Offerpad employee will reach out within 24 hours via email, phone, or text to deliver and discuss Offerpad’s cash purchase offer and review any other services that may be of interest to the customer, including our Flex listing and buyer representation services and our mortgage solutions offerings. If a customer chooses to list their home with Offerpad Flex, once a customer sells a home directly to a buyer using Flex, we earn a service fee, typically as a percentage of the sales price of the home.
Home Acquisition and Renovation
Once the offer is received and reviewed by the customer, if they choose to proceed, a purchase contract is generated and signed. If the customer is represented by a third party agent, we work directly with such agent in addition to paying the agent’s fee. Upon signing, an Offerpad employee and a third-party inspector visit the home (either virtually or in person) to verify the information gathered during underwriting and identify any necessary repairs. Once repairs are agreed upon (if any), the homeowner chooses the closing date that meets their needs. The ability to choose the closing date is a very important feature, as it allows the homeowner to close around buying their next home or other influential events.
If renovations were deemed necessary in the underwriting process, an Offerpad Project Manager will begin coordinating the renovation after we close on the home purchase. We utilize a mix of Offerpad employed foreman and crew members as well as third-party specialists to execute necessary renovations. Our renovation strategy is focused on maximizing return through accretive upgrades and ensuring the home is in list-ready condition and is continually refined based on market level trends. We actively manage our vendor network through quality, cost, and timeliness evaluations.
Home Resale
Post-renovation, an Offerpad employee completes a final walkthrough to ensure the renovation was performed according to plan and quality specifications. Efficiently turning over our inventory is important as we incur holding costs (including property taxes, insurance, utilities, and homeowner association dues) and financing costs while we own the home. However, we routinely make strategic decisions or offer services that are designed to generate improved returns even if resulting in an increase in average inventory holding period. In order to minimize the sales period, we market our homes across a wide variety of websites and platforms to generate buyer demand. This includes the Offerpad website and mobile app, local MLS, and syndication across online real estate portals.
Prior to listing the home for sale, an Offerpad Asset Manager will reevaluate the current market and comparable properties using the same underwriting technology as is used in the buying process to price the home accordingly. Our acquisition and resale teams work closely to ensure market level trends are captured and anticipated in pricing decisions. The ultimate goal during the resale process is to maximize return on investment when considering pricing and holding periods.
Offerpad Solutions Inc. | Third Quarter 2022 Form 10-Q | 30
Once a purchase offer is received on a home, we enter into negotiations with the buyer and upon agreement of price, terms and conditions, we enter into a purchase contract. If the buyer is represented by an agent, we work directly with the agent. The buyer then conducts a customary inspection of the home and takes possession of the home upon funding and closing. We pay agent commissions for home buyers out of funds received at closing.
Factors Affecting Our Performance
Market Penetration in Existing Markets
Residential real estate is one of the largest industries with roughly $2.5 trillion in value of homes transacted in 2021 in the United States and is highly fragmented with over 100,000 brokerages, according to the National Association of Realtors (NAR) as of 2020. In 2021, we estimate that we captured roughly 0.9% market share across our then active 21 markets. Given this high degree of fragmentation, we believe that bringing a solutions-oriented approach to the market with multiple buying and selling services to meet the unique needs of customers could lead to continued market share growth and accelerated adoption of the digital model. We have demonstrated higher market share in certain markets, providing the backdrop to grow our overall market penetration as our offerings expand and evolve. By providing a consistent, transparent, and unique experience, we expect to continue to build upon our past success and further strengthen our brand and consumer adoption.
Expansion into New Markets
Since our launch in 2015, we have expanded into 21 markets as of the end of 2021, and during the first nine months of 2022, we expanded into seven additional markets, bringing our total markets served to 28 as of September 30, 2022.
Our 28 markets as of September 30, 2022 covered roughly 26% of the 6.9 million homes sold in 2021 in the United States. Given this current coverage, we believe there is significant opportunity to both increase market penetration in our existing markets and to grow our business through new market expansion, although new market expansion typically generates lower initial margins as we begin operations that increase as we scale volumes. Also, because of our strategic approach to renovations, as well as the listing and buyer representation of our Flex product, we believe a significant portion of the total addressable market is serviceable with our business model.
While we intend to be flexible in assessing market entry points, we will generally look to expand into new markets with qualities similar to our existing markets, including median price point, annual transaction count, as well as strong presence of new homebuilders. We believe the scale and versatility of our platform will allow us to continue to expand into new markets, with our primary barriers to entry consisting largely of capital needed to expand operations and the tendency of consumers to adopt our real estate offerings.
Ancillary Products and Services
Core to our long-term strategy is a suite of offerings to meet the unique needs of our customers. As such, we view adding both additional products and services as well as additional product specific features as critical to supporting this strategy. We aim to deliver our offerings to customers in a smooth, efficient, digital driven platform, focused on transparency and ease of use. The primary goal is to be able to offer multiple services tied to the core real estate transaction, allowing customers to bundle and save. Although further developing these products and services will require significant investment, growing our current offerings and offering additional ancillary products and services, potentially including stand-alone remodel services, energy efficiency solutions, smart home technology, insurance, moving services, and home warranty services, we believe will strengthen our unit economics and allow us to better optimize pricing. Generally, the revenue and margin profiles of our ancillary products and services are different from our “Express” offering that accounts for the vast majority of our revenue, with most ancillary products and services having a smaller average revenue per transaction than our “Express” offering, but a higher margin.
Below is a summary of our current ancillary products and services:
•Concierge Listing Service: While partnering with Offerpad, the customer will be provided with complementary list-ready services to prepare their home for market, such as carpet cleaning, landscape and pool maintenance, and handyman services. Customers also have the ability to utilize Offerpad’s renovation advance program to complete strategic upgrades to maximize the resale value of the home.
•Offerpad Home Loans (“OPHL”): We provide access to mortgage services through our in-house mortgage solution, OPHL, or through a third-party lending partner.
•Bundle Rewards: The Offerpad Bundle Rewards program allows customers to receive multiple discounts when selling and buying a home with Offerpad, and by obtaining their home loan with OPHL.
•Title and Escrow: To deliver title and escrow closing services, we have a national relationship with a leading title and escrow company, through which we are able to leverage our size and scale to provide exceptional service with favorable economics.
Offerpad Solutions Inc. | Third Quarter 2022 Form 10-Q | 31
Unit Economics
We view Contribution Margin and Contribution Margin after Interest (see “—Non-GAAP Financial Measures”) as key performance indicators for unit economic performance, which are currently primarily driven by our Express transactions. Future financial performance improvements are expected to be driven by expanding unit level margins through initiatives such as:
•Continued optimization of acquisition, renovation, and resale processes, as we expand our market footprint and increase penetration in existing markets;
•Effectively increasing our Flex business alongside the Express business, optimizing customer engagement and increasing conversion of requests for home purchases; and
•Introducing and scaling additional ancillary services to complement our core Express and Flex products.
Operating Leverage
We utilize our technology and product teams to design systems and workflows to make our operations teams more efficient and able to support and scale with the business. Many positions are considered volume based, and as we continue to grow, we focus on developing more automation tools to gain additional leverage. Additionally, as we continue to grow the business, we expect to be able to gain operating leverage on portions of our cost structure that are more fixed in nature as opposed to purely variable. These types of costs include general and administrative expenses and certain marketing and information technology expenses, which grow at a slower pace than proportional to revenue growth.
Inventory Financing
Our business model requires significant capital to purchase inventory homes. Inventory financing is a key enabler to our growth and we rely on our non-recourse asset-backed financing facilities, which consist of senior and mezzanine secured credit facilities to finance our home purchases. The loss of adequate access to these types of facilities, or the inability to maintain these types of facilities on favorable terms, would impair our performance. See “—Liquidity and Capital Resources—Financing Activities.”
Seasonality
The residential real estate market is seasonal and varies from market to market. Typically, the greatest number of transactions occur in the spring and summer, with fewer transactions occurring in the fall and winter. Our financial results, including revenue, margins, inventory, and financing costs, have historically had seasonal characteristics generally consistent with the residential real estate market, a trend we expect to continue in the future, subject to the market conditions discussed above.
Risk Management
Our business model is based upon acquiring homes at a price which will allow us to provide a competitive offer to the consumer, while being able to add value through the renovation process, and relist the home so that it sells at a profit and in a relatively short period of time. We have invested significant resources into our underwriting and asset management systems. Our software engineering and data science teams focus on underwriting accuracy, portfolio health, and workflow optimization. Our underwriting tools are constantly updated with inputs from third party data sources, proprietary data sources as well as internal data to adjust to the latest market conditions. This allows us to assess and adjust to changes in the local housing market conditions based on our technology, analysis and local real estate experience, in order to mitigate our risk exposure. Further, our listed homes are in market-ready and move-in ready condition following the repairs and renovations we conduct.
Historically, we have been able to manage our portfolio risk in part by our ability to manage holding periods for our inventory. Traditionally, resale housing pricing moves gradually through cycles; therefore, shorter inventory holding periods limit pricing exposure. As we increased our scale and improved our workflow optimization in prior years, combined with favorable housing market conditions across our markets, our average inventory holding period of homes sold improved from 138 days in 2016 to 76 days in 2021, reducing our pricing risk from holding aged inventory.
However, towards the end of the second quarter of 2022 and continuing through the third quarter of 2022, consumer demand for residential real estate softened compared to the corresponding prior year periods and much of the first half of 2022. This has resulted in a sequential decline in our revenue in the third quarter of 2022 compared to the second quarter of 2022 and an increase in the average period of time our homes are being held in inventory, causing an increase in holding costs and downward pressure on sales prices and margins. We expect these macroeconomic trends to continue through the fourth quarter of 2022, with lower revenue and margins anticipated as compared to the corresponding prior year period. In response to this softening consumer demand and given our focus on risk management, we have continued to adjust pricing on our inventory to reflect market level trends. We have also adjusted our home purchase criteria through more conservative acquisition underwriting. These actions have resulted in a reduction in our home acquisition pace to allow us to manage overall inventory growth.
Offerpad Solutions Inc. | Third Quarter 2022 Form 10-Q | 32
Non-GAAP Financial Measures
In addition to our results of operations below, we report certain financial measures that are not required by, or presented in accordance with, U.S. generally accepted accounting principles (“GAAP”). These measures have limitations as analytical tools when assessing our operating performance and should not be considered in isolation or as a substitute for GAAP measures, including gross profit and net income. We may calculate or present our non-GAAP financial measures differently than other companies who report measures with similar titles and, as a result, the non-GAAP financial measures we report may not be comparable with those of companies in our industry or in other industries.
Adjusted Gross Profit, Contribution Profit, and Contribution Profit After Interest (and related margins)
To provide investors with additional information regarding our margins, we have included Adjusted Gross Profit, Contribution Profit, and Contribution Profit After Interest (and related margins), which are non-GAAP financial measures. We believe that Adjusted Gross Profit, Contribution Profit, and Contribution Profit After Interest are useful financial measures for investors as they are used by management in evaluating unit level economics and operating performance across our markets. Each of these measures is intended to present the economics related to homes sold during a given period. We do so by including revenue generated from homes sold (and ancillary services) in the period and only the expenses that are directly attributable to such home sales, even if such expenses were recognized in prior periods, and excluding expenses related to homes that remain in inventory as of the end of the period presented. Contribution Profit provides investors a measure to assess Offerpad’s ability to generate returns on homes sold during a reporting period after considering home acquisition costs, renovation and repair costs, and adjusting for holding costs and selling costs. Contribution Profit After Interest further impacts gross profit by including interest costs (including senior and mezzanine secured credit facilities) attributable to homes sold during a reporting period. We believe these measures facilitate meaningful period over period comparisons and illustrate our ability to generate returns on assets sold after considering the costs directly related to the assets sold in a presented period.
Adjusted Gross Profit, Contribution Profit and Contribution Profit After Interest (and related margins) are supplemental measures of our operating performance and have limitations as analytical tools. For example, these measures include costs that were recorded in prior periods under GAAP and exclude, in connection with homes held in inventory at the end of the period, costs required to be recorded under GAAP in the same period.
Accordingly, these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. We include a reconciliation of these measures to the most directly comparable GAAP financial measure, which is gross profit.
Adjusted Gross Profit / Margin
We calculate Adjusted Gross Profit as gross profit under GAAP adjusted for (1) net inventory impairment plus (2) interest expense associated with homes sold in the presented period and recorded in cost of revenue. Net inventory impairment is calculated by adding back the inventory impairment charges recorded during the period on homes that remain in inventory at period end and subtracting the inventory impairment charges recorded in prior periods on homes sold in the current period. We define Adjusted Gross Margin as Adjusted Gross Profit as a percentage of revenue.
We view this metric as an important measure of business performance, as it captures gross margin performance isolated to homes sold in a given period and provides comparability across reporting periods. Adjusted Gross Profit helps management assess performance across the key phases of processing a home (acquisitions, renovations, and resale) for a specific resale cohort.
Contribution Profit / Margin
We calculate Contribution Profit as Adjusted Gross Profit, minus (1) direct selling costs incurred on homes sold during the presented period, minus (2) holding costs incurred in the current period on homes sold during the period recorded in sales, marketing, and operating, minus (3) holding costs incurred in prior periods on homes sold in the current period recorded in sales, marketing, and operating, plus (4) other income which is primarily comprised of interest income earned on our cash and cash equivalents and income earned from the sale of certain fixed assets. The composition of our holding costs is described in the footnotes to the reconciliation table below. We define Contribution Margin as Contribution Profit as a percentage of revenue.
We view this metric as an important measure of business performance as it captures the unit level performance isolated to homes sold in a given period and provides comparability across reporting periods. Contribution Profit helps management assess inflows and outflow directly associated with a specific resale cohort.
Offerpad Solutions Inc. | Third Quarter 2022 Form 10-Q | 33
Contribution Profit / Margin After Interest
We define Contribution Profit After Interest as Contribution Profit, minus (1) interest expense associated with homes sold in the presented period and recorded in cost of revenue, minus (2) interest expense associated with homes sold in the presented period, recorded in costs of sales, and previously excluded from Adjusted Gross Profit, and minus (3) interest expense under our senior and mezzanine secured credit facilities incurred on homes sold during the period. This includes interest expense recorded in prior periods in which the sale occurred. Our senior and mezzanine secured credit facilities are secured by our homes in inventory and drawdowns are made on a per-home basis at the time of purchase and are required to be repaid at the time the homes are sold. See “—Liquidity and Capital Resources—Financing Activities.” We define Contribution Margin After Interest as Contribution Profit After Interest as a percentage of revenue.
We view this metric as an important measure of business performance. Contribution Profit After Interest helps management assess Contribution Margin performance, per above, when fully burdened with costs of financing.
The following table presents a reconciliation of our Adjusted Gross Profit, Contribution Profit and Contribution Profit After Interest to our gross profit, which is the most directly comparable GAAP measure, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
(in thousands, except percentages and homes sold, unaudited) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Gross profit (GAAP) |
|
$ |
2,159 |
|
|
$ |
53,122 |
|
|
$ |
227,282 |
|
|
$ |
137,523 |
|
Gross margin |
|
|
0.3 |
% |
|
|
9.8 |
% |
|
|
6.9 |
% |
|
|
11.4 |
% |
Homes sold |
|
|
2,280 |
|
|
|
1,673 |
|
|
|
8,770 |
|
|
|
3,950 |
|
Gross profit per home sold |
|
$ |
0.9 |
|
|
$ |
31.8 |
|
|
$ |
25.9 |
|
|
$ |
34.8 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Inventory impairment - current period (1) |
|
|
27,529 |
|
|
|
676 |
|
|
|
39,807 |
|
|
|
713 |
|
Inventory impairment - prior period (2) |
|
|
(8,955 |
) |
|
|
(152 |
) |
|
|
(1,205 |
) |
|
|
(142 |
) |
Interest expense capitalized (3) |
|
|
2,508 |
|
|
|
1,410 |
|
|
|
9,579 |
|
|
|
2,783 |
|
Adjusted gross profit |
|
$ |
23,241 |
|
|
$ |
55,056 |
|
|
$ |
275,463 |
|
|
$ |
140,877 |
|
Adjusted gross margin |
|
|
2.8 |
% |
|
|
10.2 |
% |
|
|
8.4 |
% |
|
|
11.7 |
% |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct selling costs (4) |
|
|
(21,419 |
) |
|
|
(11,350 |
) |
|
|
(76,797 |
) |
|
|
(28,172 |
) |
Holding costs on sales - current period (5)(6) |
|
|
(1,765 |
) |
|
|
(910 |
) |
|
|
(5,884 |
) |
|
|
(2,365 |
) |
Holding costs on sales - prior period (5)(7) |
|
|
(405 |
) |
|
|
(295 |
) |
|
|
(916 |
) |
|
|
(214 |
) |
Other income (8) |
|
|
643 |
|
|
|
— |
|
|
|
671 |
|
|
|
248 |
|
Contribution profit |
|
$ |
295 |
|
|
$ |
42,501 |
|
|
$ |
192,537 |
|
|
$ |
110,374 |
|
Contribution margin |
|
|
0.0 |
% |
|
|
7.9 |
% |
|
|
5.9 |
% |
|
|
9.2 |
% |
Homes sold |
|
|
2,280 |
|
|
|
1,673 |
|
|
|
8,770 |
|
|
|
3,950 |
|
Contribution profit per home sold |
|
$ |
0.1 |
|
|
$ |
25.4 |
|
|
$ |
22.0 |
|
|
$ |
27.9 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense capitalized (3) |
|
|
(2,508 |
) |
|
|
(1,410 |
) |
|
|
(9,579 |
) |
|
|
(2,783 |
) |
Interest expense on homes sold - current period (9) |
|
|
(5,707 |
) |
|
|
(2,381 |
) |
|
|
(19,225 |
) |
|
|
(5,904 |
) |
Interest expense on homes sold - prior period (10) |
|
|
(2,382 |
) |
|
|
(697 |
) |
|
|
(3,733 |
) |
|
|
(468 |
) |
Contribution (loss) profit after interest |
|
$ |
(10,301 |
) |
|
$ |
38,013 |
|
|
$ |
160,000 |
|
|
$ |
101,219 |
|
Contribution margin after interest |
|
|
(1.3 |
)% |
|
|
7.0 |
% |
|
|
4.9 |
% |
|
|
8.4 |
% |
Homes sold |
|
|
2,280 |
|
|
|
1,673 |
|
|
|
8,770 |
|
|
|
3,950 |
|
Contribution (loss) profit after interest per home sold |
|
$ |
(4.5 |
) |
|
$ |
22.7 |
|
|
$ |
18.2 |
|
|
$ |
25.6 |
|
(1)Inventory impairment – current period is the inventory valuation adjustments recorded during the period presented associated with homes that remain in inventory at period end.
(2)Inventory impairment – prior period is the inventory valuation adjustments recorded in prior periods associated with homes that sold in the period presented.
(3)Interest expense capitalized represents all interest related costs, including senior and mezzanine secured credit facilities, incurred on homes sold in the period presented that were capitalized and expensed in cost of sales at the time of sale.
(4)Direct selling costs represents selling costs incurred related to homes sold in the period presented. This primarily includes broker commissions and title and escrow closing fees.
(5)Holding costs primarily include insurance, utilities, homeowners association dues, property taxes, cleaning, and maintenance costs.
(6)Represents holding costs incurred on homes sold in the period presented and expensed to Sales, marketing, and operating on the Condensed Consolidated Statements of Operations.
(7)Represents holding costs incurred in prior periods on homes sold in the period presented and expensed to Sales, marketing, and operating on the Condensed Consolidated Statements of Operations.
Offerpad Solutions Inc. | Third Quarter 2022 Form 10-Q | 34
(8)Other income principally represents interest income earned on our cash and cash equivalents and income earned from the sale of certain fixed assets.
(9)Represents both senior and mezzanine interest expense incurred on homes sold in the period presented and expensed to interest expense on the Condensed Consolidated Statements of Operations.
(10)Represents both senior and mezzanine secured credit facilities interest expense incurred in prior periods on homes sold in the period presented and expensed to interest expense on the Condensed Consolidated Statements of Operations.
Adjusted Net Income (Loss) and Adjusted EBITDA
We also present Adjusted Net Income (Loss) and Adjusted EBITDA, which are non-GAAP financial measures, which our management team uses to assess our underlying financial performance. We believe these measures provide insight into period over period performance, adjusted for non-recurring or non-cash items.
We calculate Adjusted Net Income (Loss) as GAAP Net Income (Loss) adjusted for the change in fair value of warrant liabilities. We define Adjusted Net Income (Loss) Margin as Adjusted Net Income (Loss) as a percentage of revenue.
We calculate Adjusted EBITDA as Adjusted Net Income (Loss) adjusted for interest expense, amortization of capitalized interest, taxes, depreciation and amortization and stock-based compensation expense. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of revenue.
Adjusted Net Income (Loss) and Adjusted EBITDA are supplemental to our operating performance measures calculated in accordance with GAAP and have important limitations. For example, Adjusted Net Income (Loss) and Adjusted EBITDA exclude the impact of certain costs required to be recorded under GAAP and could differ substantially from similarly titled measures presented by other companies in our industry or companies in other industries. Accordingly, these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.
The following table presents a reconciliation of our Adjusted Net Income (Loss) and Adjusted EBITDA to our GAAP Net Income (Loss), which is the most directly comparable GAAP measure, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
(in thousands, except percentages, unaudited) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net loss (GAAP) |
|
$ |
(80,022 |
) |
|
$ |
(15,303 |
) |
|
$ |
(27,476 |
) |
|
$ |
(6,346 |
) |
Change in fair value of warrant liabilities |
|
|
(1,961 |
) |
|
|
13,185 |
|
|
|
(20,162 |
) |
|
|
13,185 |
|
Adjusted net (loss) income |
|
$ |
(81,983 |
) |
|
$ |
(2,118 |
) |
|
$ |
(47,638 |
) |
|
$ |
6,839 |
|
Adjusted net (loss) income margin |
|
|
(10.0 |
)% |
|
|
(0.4 |
)% |
|
|
(1.5 |
)% |
|
|
0.6 |
% |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
15,889 |
|
|
|
5,495 |
|
|
|
30,856 |
|
|
|
9,670 |
|
Amortization of capitalized interest (1) |
|
|
2,508 |
|
|
|
1,410 |
|
|
|
9,579 |
|
|
|
2,783 |
|
Income tax (benefit) expense |
|
|
(3,474 |
) |
|
|
81 |
|
|
|
35 |
|
|
|
170 |
|
Depreciation and amortization |
|
|
515 |
|
|
|
156 |
|
|
|
764 |
|
|
|
433 |
|
Amortization of stock-based compensation |
|
|
2,265 |
|
|
|
1,053 |
|
|
|
6,293 |
|
|
|
2,316 |
|
Adjusted EBITDA |
|
$ |
(64,280 |
) |
|
$ |
6,077 |
|
|
$ |
(111 |
) |
|
$ |
22,211 |
|
Adjusted EBITDA margin |
|
|
(7.8 |
)% |
|
|
1.1 |
% |
|
|
(0.0 |
)% |
|
|
1.8 |
% |
(1)Amortization of capitalized interest represents all interest related costs, including senior and mezzanine secured interest related costs, incurred on homes sold in the period presented that were capitalized and expensed in cost of sales at the time of sale.
Offerpad Solutions Inc. | Third Quarter 2022 Form 10-Q | 35
Results of Operations
The following details our consolidated results of operations and includes a discussion of our operating results and significant items explaining the material changes in our operating results during the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021.
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenue |
|
(in thousands, except percentages) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
Revenue |
|
$ |
821,732 |
|
|
$ |
540,287 |
|
|
$ |
281,445 |
|
|
|
52.1 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenue |
|
|
819,573 |
|
|
|
487,165 |
|
|
|
332,408 |
|
|
|
68.2 |
% |
|
|
99.7 |
% |
|
|
90.2 |
% |
Gross profit |
|
|
2,159 |
|
|
|
53,122 |
|
|
|
(50,963 |
) |
|
|
(95.9 |
)% |
|
|
0.3 |
% |
|
|
9.8 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, marketing and operating |
|
|
55,043 |
|
|
|
38,727 |
|
|
|
16,316 |
|
|
|
42.1 |
% |
|
|
6.7 |
% |
|
|
7.2 |
% |
General and administrative |
|
|
14,640 |
|
|
|
8,160 |
|
|
|
6,480 |
|
|
|
79.4 |
% |
|
|
1.8 |
% |
|
|
1.5 |
% |
Technology and development |
|
|
2,687 |
|
|
|
2,777 |
|
|
|
(90 |
) |
|
|
(3.2 |
)% |
|
|
0.3 |
% |
|
|
0.5 |
% |
Total operating expenses |
|
|
72,370 |
|
|
|
49,664 |
|
|
|
22,706 |
|
|
|
45.7 |
% |
|
|
8.8 |
% |
|
|
9.2 |
% |
(Loss) income from operations |
|
|
(70,211 |
) |
|
|
3,458 |
|
|
|
(73,669 |
) |
|
* |
|
|
|
(8.5 |
)% |
|
|
0.6 |
% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liabilities |
|
|
1,961 |
|
|
|
(13,185 |
) |
|
|
15,146 |
|
|
|
(114.9 |
)% |
|
|
0.2 |
% |
|
|
(2.4 |
)% |
Interest expense |
|
|
(15,889 |
) |
|
|
(5,495 |
) |
|
|
(10,394 |
) |
|
|
189.2 |
% |
|
|
(1.9 |
)% |
|
|
(1.0 |
)% |
Other income, net |
|
|
643 |
|
|
|
— |
|
|
|
643 |
|
|
|
100.0 |
% |
|
|
0.1 |
% |
|
|
0.0 |
% |
Total other expense |
|
|
(13,285 |
) |
|
|
(18,680 |
) |
|
|
5,395 |
|
|
|
(28.9 |
)% |
|
|
(1.6 |
)% |
|
|
(3.4 |
)% |
Loss before income taxes |
|
|
(83,496 |
) |
|
|
(15,222 |
) |
|
|
(68,274 |
) |
|
|
448.5 |
% |
|
|
(10.2 |
)% |
|
|
(2.8 |
)% |
Income tax benefit (expense) |
|
|
3,474 |
|
|
|
(81 |
) |
|
|
3,555 |
|
|
* |
|
|
|
0.4 |
% |
|
|
(0.0 |
)% |
Net loss |
|
$ |
(80,022 |
) |
|
$ |
(15,303 |
) |
|
$ |
(64,719 |
) |
|
|
422.9 |
% |
|
|
(9.7 |
)% |
|
|
(2.8 |
)% |
* Not meaningful
Revenue
Revenue increased by $281.4 million, or 52.1%, to $821.7 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase was primarily attributable to higher sales volumes and a higher average sales price. We sold 2,280 homes during the three months ended September 30, 2022 compared to 1,673 homes during the three months ended September 30, 2021, representing an increase of 36%. Additionally, the average resale home price increased by 11% from $323,000 in the three months ended September 30, 2021 to $360,000 in the three months ended September 30, 2022. These increases were the result of the increase in number of markets due to our strategic market expansion plans, an increase in existing market penetration, and increases in overall residential housing prices caused by limited housing supply on the market.
Cost of Revenue and Gross Profit
Cost of revenue increased by $332.4 million, or 68.2%, to $819.6 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. This increase was primarily attributable to higher sales volumes, and a higher average home acquisition price.
Gross profit margin was 0.3% for the three months ended September 30, 2022 compared to 9.8% for the three months ended September 30, 2021. The decrease in gross profit margin was primarily due to a decrease in the difference between the average home resale price and the average home acquisition price during the three months ended September 30, 2022 compared to the three months ended September 30, 2021. This decrease in the third quarter of 2022 was primarily due to the impact of the softening consumer demand for residential real estate resulting from the sudden and significant increase in mortgage interest rates, combined with elevated home prices resulting from the increased home price appreciation over the past few years. This, in turn, also resulted in an increase in the average period of time our homes are being held in inventory. Additionally, gross profit margin for the three months ended September 30, 2021 was higher due to the more conservative acquisition underwriting through the first half of 2021 following the COVID-19 pandemic. The decrease in gross profit margin during the three months ended September 30, 2022 was also due to a $26.5 million increase in the inventory valuation adjustment as a result of the softening consumer demand for residential real estate, causing the net realizable value for certain homes in inventory to be lower than their respective cost.
Sales, Marketing and Operating
Sales, marketing and operating expense increased by $16.3 million, or 42.1%, to $55.0 million, and improved 50 basis points to 6.7% as a percentage of revenue, for the three months ended September 30, 2022 compared to the three months ended
Offerpad Solutions Inc. | Third Quarter 2022 Form 10-Q | 36
September 30, 2021. The increase in expense was primarily attributable to the increase in variable costs associated with the increase in homes sold, and higher employee compensation costs associated with increased employee headcount. This increase in expense was partially offset by a $5.8 million decrease in advertising expense, as we reduced marketing efforts in the third quarter of 2022 in response to the softening consumer demand for residential real estate. The decline as a percentage of revenue was primarily due to the overall increased cost leverage achieved from the significant increase in revenue, while effectively managing our cost structure.
General and Administrative
General and administrative expense increased by $6.5 million, or 79.4%, to $14.6 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. This represented an increase as a percentage of revenue of 30 basis points to 1.8%. The increase in expense was primarily attributable to additional expenses incurred as a public company as a result of the Business Combination on September 1, 2021, including costs associated with obtaining directors’ and officers’ liability insurance and increased legal, accounting and financial compliance costs and professional fees. The increase in expense was also due to higher employee compensation costs associated with increased employee headcount as a result of the recent growth in the business, and higher stock-based compensation expense associated with new grants of equity awards during 2022.
Technology and Development
Technology and development expense decreased by $0.1 million, or 3.2%, to $2.7 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. This represented a decrease as a percentage of revenue of 20 basis points. The decrease in expense was primarily attributable to lower incentive compensation costs. The improvement as a percentage of revenue was primarily attributable to effectively leveraging our cost structure as revenue increased significantly.
Change in Fair Value of Warrant Liabilities
Change in fair value of warrant liabilities for the three months ended September 30, 2022 represents a $2.0 million gain that was recorded as a result of the fair value adjustment of the warrant liabilities that were assumed in connection with the Business Combination.
Interest Expense
Interest expense increased by $10.4 million, or 189.2%, to $15.9 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase in expense was primarily attributable to an increase in the average outstanding balance of our senior secured credit facilities due to an increase in real estate inventory funded by the facilities and an increase in the weighted average variable interest rates associated with these senior credit facilities.
Other Income, Net
Other income during the three months ended September 30, 2022 principally represents interest income earned on our cash and cash equivalents.
Income Tax Benefit (Expense)
We recorded a $3.5 million income tax benefit and $0.1 million of income tax expense during the three months ended September 30, 2022 and 2021, respectively, and our effective tax rate was 4.2% and (0.5)% for the respective periods. Our effective tax rate during the three months ended September 30, 2022 differed from the federal statutory rate of 21% primarily due to net operating loss carryforwards, stock-based compensation, changes in the fair value of warrant liabilities and state taxes.
Offerpad Solutions Inc. | Third Quarter 2022 Form 10-Q | 37
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenue |
|
(in thousands, except percentages) |
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
Revenue |
|
$ |
3,275,100 |
|
|
$ |
1,202,906 |
|
|
$ |
2,072,194 |
|
|
|
172.3 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenue |
|
|
3,047,818 |
|
|
|
1,065,383 |
|
|
|
1,982,435 |
|
|
|
186.1 |
% |
|
|
93.1 |
% |
|
|
88.6 |
% |
Gross profit |
|
|
227,282 |
|
|
|
137,523 |
|
|
|
89,759 |
|
|
|
65.3 |
% |
|
|
6.9 |
% |
|
|
11.4 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, marketing and operating |
|
|
190,170 |
|
|
|
95,398 |
|
|
|
94,772 |
|
|
|
99.3 |
% |
|
|
5.7 |
% |
|
|
7.9 |
% |
General and administrative |
|
|
45,418 |
|
|
|
18,031 |
|
|
|
27,387 |
|
|
|
151.9 |
% |
|
|
1.4 |
% |
|
|
1.5 |
% |
Technology and development |
|
|
9,112 |
|
|
|
7,663 |
|
|
|
1,449 |
|
|
|
18.9 |
% |
|
|
0.3 |
% |
|
|
0.6 |
% |
Total operating expenses |
|
|
244,700 |
|
|
|
121,092 |
|
|
|
123,608 |
|
|
|
102.1 |
% |
|
|
7.5 |
% |
|
|
10.0 |
% |
(Loss) income from operations |
|
|
(17,418 |
) |
|
|
16,431 |
|
|
|
(33,849 |
) |
|
|
(206.0 |
)% |
|
|
(0.5 |
)% |
|
|
1.4 |
% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liabilities |
|
|
20,162 |
|
|
|
(13,185 |
) |
|
|
33,347 |
|
|
|
(252.9 |
)% |
|
|
0.6 |
% |
|
|
(1.1 |
)% |
Interest expense |
|
|
(30,856 |
) |
|
|
(9,670 |
) |
|
|
(21,186 |
) |
|
|
219.1 |
% |
|
|
(0.9 |
)% |
|
|
(0.8 |
)% |
Other income, net |
|
|
671 |
|
|
|
248 |
|
|
|
423 |
|
|
|
170.6 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Total other expense |
|
|
(10,023 |
) |
|
|
(22,607 |
) |
|
|
12,584 |
|
|
|
(55.7 |
)% |
|
|
(0.3 |
)% |
|
|
(1.9 |
)% |
Loss before income taxes |
|
|
(27,441 |
) |
|
|
(6,176 |
) |
|
|
(21,265 |
) |
|
|
344.3 |
% |
|
|
(0.8 |
)% |
|
|
(0.5 |
)% |
Income tax expense |
|
|
(35 |
) |
|
|
(170 |
) |
|
|
135 |
|
|
* |
|
|
|
(0.1 |
)% |
|
|
(0.0 |
)% |
Net loss |
|
$ |
(27,476 |
) |
|
$ |
(6,346 |
) |
|
$ |
(21,130 |
) |
|
|
333.0 |
% |
|
|
(0.8 |
)% |
|
|
(0.5 |
)% |
* Not meaningful
Revenue
Revenue increased by $2,072.2 million, or 172.3%, to $3,275.1 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily attributable to higher sales volumes and a higher average sales price. We sold 8,770 homes during the nine months ended September 30, 2022 compared to 3,950 homes during the nine months ended September 30, 2021, representing an increase of 122%. Additionally, the average resale home price increased by 23% from $303,000 in the nine months ended September 30, 2021 to $372,000 in the nine months ended September 30, 2022. These increases were the result of the increase in number of markets due to our strategic market expansion plans, an increase in existing market penetration, and increases in overall residential housing prices caused by limited housing supply on the market and the impact of generally strong consumer demand across our markets during the first six months of 2022.
Cost of Revenue and Gross Profit
Cost of revenue increased by $1,982.4 million, or 186.1%, to $3,047.8 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. This increase was primarily attributable to higher sales volumes, and a higher average home acquisition price.
Gross profit margin was 6.9% for the nine months ended September 30, 2022 compared to 11.4% for the nine months ended September 30, 2021. The decrease in gross profit margin was primarily due to a decrease in the difference between the average home resale price and the average home acquisition price during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. This decrease was primarily due to more conservative acquisition underwriting through the first half of 2021 following the COVID-19 pandemic, which resulted in a higher gross profit margin during the nine months ended September 30, 2021. Additionally, gross profit margin during the nine months ended September 30, 2022 was negatively impacted by the softening consumer demand for residential real estate during the third quarter of 2022, resulting from the sudden and significant increase in mortgage interest rates, combined with elevated home prices resulting from the increased home price appreciation over the past few years. This, in turn, also resulted in an increase in the average period of time our homes are being held in inventory. The decrease in gross profit margin was also due to a $48.4 million increase in the inventory valuation adjustment as a result of the softening consumer demand for residential real estate, causing the net realizable value for certain homes in inventory to be lower than their respective cost.
Sales, Marketing and Operating
Sales, marketing and operating expense increased by $94.8 million, or 99.3%, to $190.2 million, and improved 220 basis points to 5.7% as a percentage of revenue, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase in expense was primarily attributable to the increase in variable costs associated with the significant increase in homes sold, and higher employee compensation costs associated with increased employee headcount. This increase in expense was also due to a $6.2 million increase in advertising expense due to an increase in the number of
Offerpad Solutions Inc. | Third Quarter 2022 Form 10-Q | 38
markets due to our strategic market expansion plans. The decline as a percentage of revenue was due to the overall increased cost leverage achieved from the significant increase in revenue, while effectively managing our cost structure.
General and Administrative
General and administrative expense increased by $27.4 million, or 151.9%, to $45.4 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. This represented a slight decrease as a percentage of revenue of 10 basis points to 1.4%. The increase in expense was primarily attributable to higher employee compensation costs associated with increased employee headcount as a result of the recent growth in the business, and additional expenses incurred as a public company as a result of the Business Combination on September 1, 2021, including costs associated with obtaining directors’ and officers’ liability insurance and increased legal, accounting and financial compliance costs and professional fees. The increase in expense was also due to higher stock-based compensation expense associated with new grants of equity awards during 2022. The slight improvement as a percentage of revenue was principally attributable to effectively leveraging our cost structure as revenue increased significantly.
Technology and Development
Technology and development expense increased by $1.4 million, or 18.9%, to $9.1 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. This represented a decrease as a percentage of revenue of 30 basis points. The increase in expense was primarily attributable to higher employee compensation costs associated with increased employee headcount as a result of the recent growth in the business. The improvement as a percentage of revenue was principally attributable to effectively leveraging our cost structure as revenue increased significantly.
Change in Fair Value of Warrant Liabilities
Change in fair value of warrant liabilities for the nine months ended September 30, 2022 represents an $20.2 million gain that was recorded as a result of the fair value adjustment of the warrant liabilities that were assumed in connection with the Business Combination.
Interest Expense
Interest expense increased by $21.2 million, or 219.1%, to $30.9 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase in expense was primarily attributable to an increase in the average outstanding balance of our senior secured credit facilities due to an increase in real estate inventory funded by the facilities and an increase in the weighted average variable interest rates associated with these senior credit facilities.
Other Income, Net
Other income during the nine months ended September 30, 2022 principally represents interest income earned on our cash and cash equivalents. Other income, net during the nine months ended September 30, 2021 principally represents a gain from the disposal of fixed assets.
Income Tax Expense
We recorded income tax expense of $0.04 million and $0.2 million during the nine months ended September 30, 2022 and 2021, respectively, and our effective tax rate was (0.1)% and (2.8)% for the nine months ended September 30, 2022 and 2021, respectively. Our effective tax rate during the nine months ended September 30, 2022 differed from the federal statutory rate of 21% primarily due to net operating loss carryforwards, stock-based compensation, changes in the fair value of warrant liabilities and state taxes.
Liquidity and Capital Resources
Overview
Cash and cash equivalents balances consist of operating cash on deposit with financial institutions. Our principal sources of liquidity have historically consisted of cash generated from our operations and financing activities. As of September 30, 2022, we had cash and cash equivalents of $196.8 million and had a total undrawn borrowing capacity of $748.0 million, consisting of $625.7 million under our senior secured credit facilities and $122.3 million under our mezzanine secured credit facilities (as described further below).
We generated net income during the year ended December 31, 2021. However, we have incurred losses for the nine months ended September 30, 2022, and each year from inception through December 31, 2020, and may incur additional losses in the future. We continue to invest in the development and expansion of our operations. These investments include improvements in infrastructure and a continual improvement to our software, as well as investments in sales and marketing as we expand into new markets.
Offerpad Solutions Inc. | Third Quarter 2022 Form 10-Q | 39
We expect our working capital requirements to continue to increase over the long term, as we seek to increase our inventory and expand into more markets across the United States. We believe our cash on hand, together with proceeds from the resale of homes and cash from future borrowings available under each of our existing credit facilities or the entry into new financing arrangements, will be sufficient to meet our short-term and long-term working capital and capital expenditure requirements for at least the next twelve months. However, our ability to fund our working capital and capital expenditure requirements will depend in part on the residential real estate market conditions in the markets in which we operate and in the U.S. in general, and various other general economic, financial, competitive, legislative, regulatory and other conditions that may be beyond our control. Depending on these and other market conditions, we may seek additional financing. Volatility in the credit markets, rising interest rates and softening consumer demand for residential real estate may have an adverse effect on our ability to obtain debt financing on favorable terms or at all. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common stock, or may require us to agree to unfavorable terms, and our existing stockholders may experience significant dilution.
Financing Activities
Our financing activities include borrowing under our senior secured credit facilities, mezzanine secured credit facilities and new issuances of equity. Historically, we have required access to external financing resources in order to fund growth, expansion into new markets and strategic initiatives, and we expect this to continue in the future. Our access to capital markets can be impacted by factors outside our control, including economic conditions.
Buying and selling high-valued assets, such as single-family residential homes, is very cash intensive and has a significant impact on our liquidity and capital resources. We use non-recourse secured credit facilities, consisting of both senior secured credit facilities and mezzanine secured credit facilities, to finance a significant portion of our real estate inventory and related home renovations. Some of our secured credit facilities, however, are not fully committed, meaning the applicable lender may not be obligated to advance new loan funds if they choose not to do so. Our ability to obtain and maintain access to these or similar kinds of credit facilities is significant for us to operate the business.
Senior Secured Credit Facilities
The following summarizes certain details related to our senior secured credit facilities (in thousands, except interest rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2022 |
Borrowing
Capacity |
|
Outstanding
Amount |
|
Weighted-
Average
Interest Rate |
|
End of
Revolving / Withdrawal
Period |
|
Final
Maturity
Date |
Facility with financial institution 1 |
$ |
600,000 |
|
$ |
400,637 |
|
|
4.11 |
% |
June 2024 |
|
June 2024 |
Facility with financial institution 2 |
|
400,000 |
|
|
306,689 |
|
|
3.63 |
% |
September 2023 |
|
March 2024 |
Facility with financial institution 3 |
|
500,000 |
|
|
213,177 |
|
|
4.04 |
% |
December 2023 |
|
December 2024 |
Facility with a related party |
|
85,000 |
|
|
38,840 |
|
|
6.13 |
% |
December 2022 |
|
December 2022 |
Senior secured credit facilities |
$ |
1,585,000 |
|
$ |
959,343 |
|
|
|
|
|
|
As of September 30, 2022, we had four senior secured credit facilities that we use to fund the purchase of homes and build our inventory, three with separate financial institutions and one with a related party, which holds more than 5% of our Class A common stock. Borrowings on the senior secured credit facilities with financial institutions accrue interest at a benchmark reference rate, which may be based on SOFR or LIBOR, plus a margin that varies by facility. Borrowings on the senior secured credit facility with a related party accrue interest at a rate based on a LIBOR reference rate plus a margin of 4.0%, with a minimum interest rate of 6.0%. The senior secured credit facility with a related party provides increased flexibility regarding property eligibility and greater funding operation efficiencies.
Borrowings under our senior secured credit facilities are collateralized by the real estate inventory financed by the senior secured credit facility. The lenders have legal recourse only to the assets securing the debt and do not have general recourse against us with limited exceptions. We have, however, provided limited non-recourse carve-out guarantees under our senior and mezzanine secured credit facilities for certain of the SPEs’ obligations in situations involving “bad acts” by an Offerpad entity and certain other limited circumstances that are generally under our control. Each senior secured facility contains eligibility requirements that govern whether a property can be financed. When we resell a home, the proceeds are used to reduce the corresponding outstanding balance under both the related senior secured credit facility and the mezzanine secured credit facility.
Offerpad Solutions Inc. | Third Quarter 2022 Form 10-Q | 40
Mezzanine Secured Credit Facilities
In addition to the senior secured credit facilities, we have utilized mezzanine secured credit facilities which are structurally and contractually subordinated to the related senior secured credit facilities. The following table summarizes certain details related to our mezzanine secured credit facilities (in thousands, except interest rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2022 |
Borrowing
Capacity |
|
Outstanding
Amount |
|
Weighted-
Average
Interest Rate |
|
End of
Revolving / Withdrawal
Period |
|
Final
Maturity
Date |
Facility 1 with a related party |
$ |
97,500 |
|
$ |
66,213 |
|
|
11.00 |
% |
June 2024 |
|
June 2024 |
Facility with third-party lender 1 |
|
90,000 |
|
|
71,510 |
|
|
9.50 |
% |
September 2023 |
|
March 2024 |
Facility with third-party lender 2 |
|
112,500 |
|
|
47,570 |
|
|
9.50 |
% |
December 2023 |
|
December 2024 |
Facility 2 with a related party |
|
14,000 |
|
|
6,412 |
|
|
11.00 |
% |
December 2022 |
|
December 2022 |
Mezzanine secured credit facilities |
$ |
314,000 |
|
$ |
191,705 |
|
|
|
|
|
|
As of September 30, 2022, we had four mezzanine secured credit facilities, two with separate third-party lenders and two with a related party, which holds more than 5% of our Class A common stock. Borrowings on the mezzanine secured credit facilities with third-party lenders accrue interest at a fixed rate of 9.50%. Borrowings on the mezzanine secured credit facilities with a related party accrue interest at a fixed rate of 11.00%. The mezzanine secured credit facilities with a related party provide increased flexibility regarding property eligibility and greater funding operation efficiencies.
Borrowings under our mezzanine secured credit facilities are collateralized by a second lien on the real estate inventory financed by the relevant senior secured credit facility. The lenders have legal recourse only to the assets securing the debt, and do not have general recourse against us with limited exceptions. When we resell a home, the proceeds are used to reduce the corresponding outstanding balance under both the related senior secured credit facility and the mezzanine secured credit facility.
Covenants for Senior Secured Credit Facilities and Mezzanine Secured Credit Facilities
The secured credit facilities include customary representations and warranties, covenants and events of default. Financed properties are subject to customary eligibility criteria and concentration limits. The terms of these facilities and related financing documents require us to comply with a number of customary financial and other covenants, such as maintaining certain levels of liquidity, tangible net worth or leverage (ratio of debt to tangible net worth). As of September 30, 2022, we were in compliance with all covenants.
Cash Flows
The following summarizes our cash flows for the nine months ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
($ in thousands) |
|
2022 |
|
|
2021 |
|
Net cash used in operating activities |
|
$ |
(91,924 |
) |
|
$ |
(704,812 |
) |
Net cash used in investing activities |
|
|
(917 |
) |
|
|
(11,577 |
) |
Net cash provided by financing activities |
|
|
122,076 |
|
|
|
802,305 |
|
Net change in cash, cash equivalents and restricted cash |
|
$ |
29,235 |
|
|
$ |
85,916 |
|
Operating Activities
Net cash used in operating activities was $91.9 million and $704.8 million for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, net cash used in operating activities primarily resulted from a $101.2 million increase in real estate inventory due to the execution of our growth plan and generally favorable housing market conditions across our markets during the first six months of 2022. Net cash used in operating activities during the nine months ended September 30, 2022 was also impacted by the $27.5 million net loss during the period, which included a $49.7 million non-cash inventory valuation adjustment as a result of the softening consumer demand for residential real estate, which began towards the end of the second quarter of 2022 and continued through the third quarter of 2022, and a $20.2 million non-cash gain as a result of the fair value adjustment of the warrant liabilities.
For the nine months ended September 30, 2021, net cash used in operating activities primarily resulted from a $722.0 million increase in real estate inventory due to the execution of our growth plan and favorable housing market conditions across our markets. This cash outflow related to increased inventory levels was partially offset by a $17.1 million increase in accrued liabilities principally attributable to increased compensation, legal and professional obligations, and marketing accruals, as well as the change in fair value of warrant liabilities of $13.2 million.
Offerpad Solutions Inc. | Third Quarter 2022 Form 10-Q | 41
Investing Activities
Net cash used in investing activities was $0.9 million and $11.6 million during the nine months ended September 30, 2022 and 2021, respectively. Net cash used in investing activities during the nine months ended September 30, 2022 represents purchases of property and equipment.
Net cash used in investing activities during the nine months ended September 30, 2021 represents purchases of property and equipment of $13.6 million, which was partially offset by proceeds from sales of property and equipment of $2.0 million.
Financing Activities
Net cash provided by financing activities was $122.1 million and $802.3 million during the nine months ended September 30, 2022 and 2021, respectively. Net cash provided financing activities during the nine months ended September 30, 2022 primarily consisted of $2,889.8 million of borrowings from credit facilities and notes payable, which was partially offset by $2,771.9 million of repayments of credit facilities and notes payable. This net increase in credit facility funding of $117.9 million was directly related to financing the increase in inventory during the period.
Net cash provided by financing activities during the nine months ended September 30, 2021 primarily consisted of $1,702.7 million of borrowings from credit facilities and notes payable, which was partially offset by $1,130.6 million of repayments of credit facilities and notes payable. This net increase in credit facility funding of $572.1 million was directly related to financing the increase in inventory during the period. Net cash provided by financing activities during the nine months ended September 30, 2021 also included $284.0 million of proceeds from the Business Combination, which was offset by issuance costs of $51.2 million.
Contractual Obligations and Commitments
Information regarding our contractual obligations and commitments is provided in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
There have been no material changes in our contractual obligations and commitments since December 31, 2021 through September 30, 2022.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with GAAP. In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.
There have been no material changes to the critical accounting policies and estimates included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Our significant accounting policies and methods used in the preparation of our condensed consolidated financial statements are described in Note 2, “Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1, of this Quarterly Report on Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2, “Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1, of this Quarterly Report on Form 10-Q.