Porch(US:PRCH)2022-03-16 10:14PART I Business Overview Porch Group operates a vertical software platform for the home, providing services across Vertical Software and Insurance segments - Porch is a vertical software platform for the home, providing software and services to over 24,000 home services companies15 - The company operates in two reportable segments: Vertical Software and Insurance16 - The Vertical Software segment provides SaaS fees and gains early access to homebuyers and homeowners through relationships with home services companies17 - The Insurance segment offers property-related insurance policies through its own risk-bearing carrier and independent agency, and home warranty products18 Estimated Total Addressable Market (TAM) by Service Offering | Service Offering | Estimated TAM (Billions USD) | | :--------------- | :--------------------------- | | Moving Services | $4.7 | | P&C Insurance | $181 (Home & Auto) + $4.5 (Home Warranty) | | Contractor Services | $150 | | Mover Marketing | $9.7 | - Key growth strategies include selling more software, increasing revenue per homebuyer, expanding insurance offerings (e.g., V12 Data, HOA, AHP, Rynoh, Floify acquisitions), and geographic expansion6364656667686972737475 Risk Factors This section outlines significant risks that could materially and adversely affect the company's business, financial condition, and results of operations - The company operates in a highly competitive and evolving industry, facing challenges from well-established competitors and new entrants108 - Success is dependent on maintaining strategic, proprietary relationships with third parties for access to personal data and information, which could be impacted by changes in policies or regulations114115 - Future growth relies on increasing revenue per customer and consumer, which may not be successful116 - The business is sensitive to general economic events, trends in the housing market, severe weather, and other catastrophes, particularly impacting consumer confidence and spending127131134 - Expansion into the insurance business introduces various risks, including claims exceeding reserves, reinsurance availability, and regulatory compliance195197202209218221222223224225226227228229230231232233 - The company has identified material weaknesses in internal control over financial reporting as of December 31, 2021, related to IT general controls, control activity documentation, and personnel quantity174176 Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments308 Properties The company leases real properties in the United States and other countries to support its business operations - The company leases real properties in the United States and other countries for business operations309 - Current facilities are suitable and adequate for anticipated future needs, with no expected problems in lease renewal or acquisition309 Legal Proceedings The company is involved in several legal proceedings, including mass tort actions alleging TCPA violations and a breach of contract claim - Porch and/or GoSmith.com are party to twelve legal proceedings alleging violations of the Telephone Consumer Protection Act (TCPA) for automated calling and Do Not Call restrictions310 - Former owners of Kandela, LLC filed complaints alleging breach of contract and fraudulent inducement related to an earnout agreement, currently in arbitration312314 - A putative class action claims failure to pay overtime, compensation at separation, and unfair business practices by HireAHelper™; a settlement deal has been reached and is awaiting court approval315 - The company is also involved in other ordinary course litigation, but believes no current proceedings would individually or in aggregate have a material adverse effect on its business, financial condition, or results of operations316 Mine Safety Disclosures This item is not applicable to the company - Not applicable317 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NASDAQ Capital Market under "PRCH", with no cash dividends paid or planned - Common stock trades on the NASDAQ Capital Market under the symbol "PRCH"319 - As of March 11, 2022, there were 686 stockholders of record319 - The company has not paid any cash dividends on its common stock to date and has no current plans to do so, prioritizing future earnings for operations, expansion, and debt repayment320300 - No issuer purchases of equity securities were made324 - Between January 7, 2021, and October 27, 2021, the company issued 2,042,652 shares of common stock to previous owners of acquisition targets325 Reserved This item is reserved and contains no information - This item is reserved330 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and operations, highlighting key performance, acquisitions, COVID-19 impact, and financial results - Porch is a vertical software platform for the home, serving over 24,000 home services companies, with three customer types: home services companies, consumers, and service providers336 - The company's growth strategy includes selective acquisitions, with V12, HOA, Rynoh, AHP, and Floify acquired in 2021 to expand verticals and insurance capabilities337342345356 - The COVID-19 pandemic adversely affected business operations and revenue, particularly in the first half of 2020, with an uncertain ongoing impact352 - Revenue is generated from recurring SaaS fees, reoccurring B2B2C transaction revenues for move-related services, and B2C transaction revenues from post-move services76361 - Critical accounting policies include Revenue Recognition, Stock-Based Compensation, and Business Combinations, which involve significant management estimates and assumptions377380385388 - The company raised $126.7 million from warrant exercises and $413.5 million (net cash) from convertible notes in 2021, providing sufficient financial resources for operations and future acquisitions347356446447449 Key Performance Measures and Operating Metrics Management uses non-GAAP operating metrics to evaluate business performance, tracking customer acquisition, revenue per account, and service penetration Average Companies and Revenue per Account (Quarterly) | Metric | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | | :-------------------------------------- | :------- | :-------- | :-------- | :-------- | | Average Companies in Quarter | 13,995 | 17,120 | 20,472 | 24,603 | | Average Revenue per Account per Month ($) | 637 | 1,000 | 1,022 | 699 | | | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | | Average Companies in Quarter | 10,903 | 10,523 | 10,792 | 11,157 | | Average Revenue per Account per Month ($) | 484 | 556 | 664 | 556 | | | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | | Average Companies in Quarter | 10,199 | 10,470 | 10,699 | 10,972 | | Average Revenue per Account per Month ($) | 305 | 468 | 552 | 450 | Monetized Services and Revenue per Service (Quarterly) | Metric | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | | :-------------------------------------- | :-------- | :-------- | :-------- | :-------- | | Monetized Services in Quarter | 182,779 | 302,462 | 329,359 | 260,352 | | Average Revenue per Monetized Service ($) | 92 | 129 | 144 | 132 | | | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | | Monetized Services in Quarter | 152,165 | 181,520 | 198,165 | 169,949 | | Average Revenue per Monetized Service ($) | 93 | 86 | 97 | 98 | | | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | | Monetized Services in Quarter | 185,378 | 205,887 | 211,190 | 172,862 | | Average Revenue per Monetized Service ($) | 43 | 63 | 76 | 78 | - Acquisitions in 2021 (V12, HOA, Rynoh, AHP, Floify) significantly impacted the average number of companies and monetized services342345 - In 2020, a shift in insurance monetization from per-quote to multi-year commissions led to fewer monetized transactions but higher average revenue per service346 Results of Operations The company experienced a net loss of $106.6 million in 2021, primarily due to higher stock-based compensation and earnout liabilities, despite a 166% revenue increase Consolidated Statements of Operations Summary (2021 vs. 2020) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | Change ($ thousands) | Change (%) | | :--------------------------- | :----------------- | :----------------- | :------------------- | :--------- | | Revenue | 192,433 | 72,299 | 120,134 | 166% | | Cost of revenue | 58,725 | 17,562 | 41,163 | 234% | | Selling and marketing | 84,273 | 41,665 | 42,608 | 102% | | Product and technology | 47,005 | 28,546 | 18,459 | 65% | | General and administrative | 85,795 | 28,199 | 57,596 | 204% | | Total operating expenses | 275,798 | 114,530 | 161,268 | 141% | | Operating loss | (83,365) | (42,231) | (41,134) | 97% | | Net loss | (106,606) | (54,032) | (52,574) | 97% | - Revenue increase in 2021 was driven by acquisitions and organic growth in insurance, moving services, and inspection businesses, contributing $124.4 million391 - Cost of revenue increased significantly in 2021, primarily due to $18.3 million for insurance losses and warranty claims from HOA and AHP acquisitions, and growth in moving business and marketing data costs392394 - Selling and marketing expenses as a percentage of revenue improved from 58% in 2020 to 44% in 2021, reflecting growing economies of scale395 - General and administrative expenses surged in 2021 due to a $21.6 million increase in stock-based compensation, $10.1 million in public company legal/accounting fees, and $27 million from acquired entities398 Total Stock-Based Compensation Expenses | Category | 2021 ($ thousands) | 2020 ($ thousands) | 2019 ($ thousands) | | :------------------------------- | :----------------- | :----------------- | :----------------- | | Secondary market transaction | 1,933 | 1,616 | 33,232 | | Employee earnout restricted stock | 22,961 | — | — | | Employee awards | 13,698 | 9,680 | 2,740 | | Total | 38,592 | 11,296 | 35,972 | Segment Results of Operations In 2021, Vertical Software generated $137.1 million (71% of total revenue) and Insurance generated $55.3 million (29%), with both segments showing positive Adjusted EBITDA Segment Revenue (2019-2021) | Segment | 2021 ($ thousands) | 2020 ($ thousands) | 2019 ($ thousands) | | :---------------- | :----------------- | :----------------- | :----------------- | | Vertical Software | 137,150 | 63,799 | 59,259 | | Insurance | 55,283 | 4,166 | — | | Divested Businesses | — | 4,334 | 18,336 | | Total revenue | 192,433 | 72,299 | 77,595 | - In 2021, Vertical Software segment revenue was $137.1 million (71% of total), and Insurance segment revenue was $55.3 million (29% of total), with significant growth in Insurance due to HOA and AHP acquisitions429430 Segment Adjusted EBITDA (Loss) (2019-2021) | Segment | 2021 ($ thousands) | 2020 ($ thousands) | 2019 ($ thousands) | | :-------------------------- | :----------------- | :----------------- | :----------------- | | Vertical Software | 20,733 | 12,718 | 4,616 | | Insurance | 9,007 | 405 | — | | Corporate and Other | (53,760) | (30,001) | (36,645) | | Divested Businesses | — | (1,441) | (4,806) | | Total segment adjusted EBITDA (loss) | (24,020) | (18,319) | (36,835) | Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted EBITDA (loss) and Contribution Margin to assess performance, both showing improvement in 2021 - Adjusted EBITDA (loss) is defined as net income (loss) adjusted for interest, taxes, other expenses, depreciation, amortization, non-cash impairment charges, stock-based compensation, acquisition impacts, and certain transaction costs434 - Contribution margin is calculated as revenue less cost of revenue and variable selling and marketing costs437 Contribution Margin (2019-2021) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | 2019 ($ thousands) | | :-------------------------------------- | :----------------- | :----------------- | :----------------- | | Revenue | 192,433 | 72,299 | 77,595 | | Less: Cost of revenue | (58,725) | (17,562) | (21,500) | | Revenue less cost of revenue | 133,708 | 54,737 | 56,095 | | Less: Variable selling and marketing costs | (58,317) | (32,328) | (43,942) | | Contribution margin | 75,391 | 22,409 | 12,153 | | Contribution margin as a percentage of revenue | 39% | 31% | 16% | - Contribution margin increased by $53.0 million (236.4%) in 2021, with $48.7 million from acquired businesses and the remainder from organic growth443 Adjusted EBITDA (Loss) (2019-2021) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | 2019 ($ thousands) | | :-------------------------------------- | :----------------- | :----------------- | :----------------- | | Net loss | (106,606) | (54,032) | (103,319) | | Interest expense | 5,757 | 14,734 | 7,134 | | Income tax (benefit) expense | (10,273) | (1,689) | 96 | | Depreciation and amortization | 16,386 | 6,644 | 7,377 | | Non-cash stock-based compensation expense | 38,592 | 11,296 | 35,972 | | Revaluation of earnout liability | 18,519 | — | — | | Revaluation of private warrant liability | 15,389 | (2,427) | — | | Adjusted EBITDA (loss) | (24,020) | (18,319) | (36,835) | | Adjusted EBITDA (loss) as a percentage of revenue | (12)% | (25)% | (47)% | - Adjusted EBITDA (loss) improved from (25)% of revenue in 2020 to (12)% in 2021, despite a decline in absolute terms due to weather-related losses in HOA, increased investments, and higher G&A costs as a public company444 Liquidity and Capital Resources The company's liquidity is primarily financed through equity and debt offerings, with $315.7 million in cash as of December 31, 2021 - Since inception, operations have been financed primarily through sales of redeemable convertible preferred stock, convertible promissory notes, and senior secured loans445 - In 2021, the company raised $126.7 million from warrant exercises and $413.5 million (net cash) from convertible notes, using a portion to repay $47.0 million in senior secured debt446447 - As of December 31, 2021, cash and cash equivalents were $315.7 million, with an accumulated deficit of $424.1 million and $425.6 million in outstanding debt448 - Management believes current cash and equivalents are sufficient for operations, capital expenditures, working capital, and debt service for at least the next 12 months449 - Insurance company subsidiaries are highly regulated, with restrictions on dividends and requirements to maintain minimum policyholder's surplus and risk-based capital levels450451 Summary of Cash Flow Data (2020-2021) | Cash Flow Activity | 2021 ($ thousands) | 2020 ($ thousands) | Change ($ thousands) | Change (%) | | :------------------------------ | :----------------- | :----------------- | :------------------- | :--------- | | Net cash used in operating activities | (34,777) | (48,669) | 13,892 | (29)% | | Net cash used in investing activities | (263,433) | (10,671) | (252,762) | NM | | Net cash provided by financing activities | 415,549 | 259,614 | 155,935 | 60% | - Net cash used in investing activities significantly increased in 2021 to $263.4 million, primarily due to $256.4 million for acquisitions456 Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily interest rate risk, inflation risk, and foreign currency risk - The company's interest-bearing debt of $425.6 million as of December 31, 2021, is primarily fixed-rate (0.75% convertible senior notes), limiting exposure to interest rate increases472 - A $67.6 million fixed income securities portfolio held by the insurance subsidiary is subject to unrealized losses in a rising interest rate environment473 - Inflation may have a material impact on the business in the future due to significant increases in the consumer price index, supply chain disruptions, and geopolitical events475 - Foreign currency risk was not material for the years ended December 31, 2021, 2020, and 2019, as activities are primarily conducted in the United States476 Financial Statements and Supplementary Data This item presents the company's audited consolidated financial statements and the independent auditor's report, including an adverse opinion on internal controls - The independent registered public accounting firm issued an unqualified opinion on the consolidated financial statements but an adverse opinion on the effectiveness of internal control over financial reporting as of December 31, 2021481482837 - Critical audit matters included the accounting for business combinations (fair values of acquired intangible assets) and the identified material weaknesses in internal control over financial reporting485486487488489 Consolidated Balance Sheets Summary (2021 vs. 2020) | Metric | Dec 31, 2021 ($ thousands) | Dec 31, 2020 ($ thousands) | | :--------------------------- | :------------------------- | :------------------------- | | Total assets | 1,038,747 | 268,387 | | Total current assets | 605,064 | 215,801 | | Goodwill | 225,654 | 28,289 | | Intangible assets, net | 129,830 | 15,961 | | Total liabilities | 821,702 | 161,062 | | Total stockholders' equity | 217,045 | 107,325 | Consolidated Statements of Operations Summary (2021 vs. 2020 vs. 2019) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | 2019 ($ thousands) | | :--------------------------- | :----------------- | :----------------- | :----------------- | | Revenue | 192,433 | 72,299 | 77,595 | | Total operating expenses | 275,798 | 114,530 | 165,717 | | Operating loss | (83,365) | (42,231) | (88,122) | | Net loss | (106,606) | (54,032) | (103,319) | Consolidated Statements of Cash Flows Summary (2021 vs. 2020 vs. 2019) | Cash Flow Activity | 2021 ($ thousands) | 2020 ($ thousands) | 2019 ($ thousands) | | :------------------------------ | :----------------- | :----------------- | :----------------- | | Net cash used in operating activities | (34,777) | (48,669) | (29,335) | | Net cash used in investing activities | (263,433) | (10,671) | (5,208) | | Net cash provided by financing activities | 415,549 | 259,614 | 34,486 | 1. Description of Business and Summary of Significant Accounting Policies This note details the company's business model, segments, and significant accounting policies, including the impact of the 2020 merger and COVID-19 - Porch Group, Inc. is a vertical software platform for the home, with Vertical Software and Insurance segments502 - The December 23, 2020 merger with PropTech Acquisition Corporation was accounted for as a reverse recapitalization, with Porch.com, Inc. as the accounting acquirer504506 - The COVID-19 pandemic adversely affected business operations starting March 2020, with an uncertain ongoing impact on future revenues and results507 - The company adopted ASU 2016-02 (Leases), ASU 2016-13 (Credit Losses), and early adopted ASU 2020-06 (Convertible Instruments) in fiscal 2021353354355579581582 - Revenue recognition follows a five-step framework, distinguishing between Core Services, Managed Services, and Software and Service Subscription revenue545547 - Business acquisitions are accounted for using the acquisition method, recording identifiable intangible assets and goodwill at fair value574 2. Revenue Total revenue in 2021 was $192.4 million, with significant increases in contract assets and deferred revenue, largely from the Insurance segment Disaggregation of Revenue (2019-2021) | Revenue Type | 2021 ($ thousands) | 2020 ($ thousands) | 2019 ($ thousands) | | :------------------------------ | :----------------- | :----------------- | :----------------- | | Core services revenue | 98,275 | 53,048 | 49,449 | | Managed services revenue | 37,154 | 11,579 | 21,888 | | Software and service subscription revenue | 57,004 | 7,672 | 6,258 | | Total revenue | 192,433 | 72,299 | 77,595 | - Revenue from divested businesses was $4.3 million in 2020 and $18.3 million in 2019, with no divestitures in 2021594 Contract Assets (Insurance Commissions Receivable) Activity | Metric | Amount ($ thousands) | | :-------------------------------------- | :------------------- | | Balance at December 31, 2019 | — | | Estimated lifetime value of insurance policies sold by carriers | 4,313 | | Cash receipts | (784) | | Balance at December 31, 2020 | 3,529 | | Estimated lifetime value of insurance policies sold by carriers | 8,089 | | Cash receipts | (2,234) | | Balance at December 31, 2021 | 9,384 | Contract Liabilities (Refundable Customer Deposits) Activity | Metric | Amount ($ thousands) | | :-------------------------------------- | :------------------- | | Balance at January 1, 2019 | — | | Additions (prepayment, interest) | 7,152 | | Transferred to revenue | (878) | | Balance at December 31, 2019 | 6,274 | | Additions (interest) | 440 | | Transferred to revenue | (3,521) | | Balance at December 31, 2020 | 3,193 | | Additions (new, interest) | 3,566 | | Transferred to revenue | (6,250) | | Repayment | (887) | | Impact of acquisitions | 15,652 | | Balance at December 31, 2021 | 15,274 | Deferred Revenue by Segment (2019-2021) | Segment | 2021 ($ thousands) | 2020 ($ thousands) | 2019 ($ thousands) | | :---------------- | :----------------- | :----------------- | :----------------- | | Vertical Software | 3,814 | 5,208 | 3,333 | | Insurance | 197,271 | — | — | | Total | 201,085 | 5,208 | 3,333 | 3. Investments The company's investment portfolio, primarily held by its insurance subsidiary, totaled $67.6 million in fair value as of December 31, 2021, with $0.7 million in net investment income and realized gains Investment Income and Realized Gains (2021) | Metric | 2021 ($ thousands) | | :-------------------------------------------- | :----------------- | | Investment income, net of investment expenses | 768 | | Realized gains on investments | 62 | | Realized losses on investments | (129) | | Total | 701 | Investment Securities Amortized Cost, Fair Value, and Unrealized Gains/Losses (Dec 31, 2021) | Security Type | Amortized Cost ($ thousands) | Gross Unrealized Gains ($ thousands) | Gross Unrealized Losses ($ thousands) | Fair Value ($ thousands) | | :------------------------------------------ | :--------------------------- | :----------------------------------- | :------------------------------------ | :----------------------- | | U.S. Treasuries | 5,452 | 1 | (36) | 5,417 | | Obligations of states, municipalities and political subdivisions | 8,913 | 21 | (84) | 8,850 | | Corporate bonds | 31,491 | 89 | (155) | 31,425 | | Residential and commercial mortgage-backed securities | 14,387 | 34 | (139) | 14,282 | | Other loan-backed and structured securities | 7,637 | 5 | (41) | 7,601 | | Total debt securities | 67,880 | 150 | (455) | 67,575 | - The company believes unrealized losses on fixed-maturity securities are primarily due to interest rate changes, not credit quality, and does not consider any investments to be other-than-temporarily impaired610 4. Fair Value This note provides fair value measurements for financial assets and liabilities, totaling $84.9 million and $38.7 million respectively, as of December 31, 2021 Fair Value Measurement at December 31, 2021 (Recurring Basis) | Category | Level 1 ($ thousands) | Level 2 ($ thousands) | Level 3 ($ thousands) | Total Fair Value ($ thousands) | | :---------------------------------------- | :-------------------- | :-------------------- | :-------------------- | :----------------------------- | | Assets | | | | | | Money market mutual funds | 17,318 | — | — | 17,318 | | Debt securities (U.S. Treasuries) | 5,417 | — | — | 5,417 | | Debt securities (States, municipalities) | — | 8,850 | — | 8,850 | | Debt securities (Corporate bonds) | — | 31,425 | — | 31,425 | | Debt securities (Mortgage-backed) | — | 14,282 | — | 14,282 | | Debt securities (Other loan-backed) | — | 7,601 | — | 7,601 | | Total Assets | 22,735 | 62,158 | — | 84,893 | | Liabilities | | | | | | Contingent consideration - business combinations | — | — | 9,617 | 9,617 | | Contingent consideration - earnout | — | — | 13,866 | 13,866 | | Private warrant liability | — | — | 15,193 | 15,193 | | Total Liabilities | — | — | 38,676 | 38,676 | - Contingent consideration for business combinations and earnout liabilities are valued using Monte Carlo simulation, with key inputs including forecasted revenue, EBITDA, stock price, discount rates, and volatility614615616617 - Private warrant liabilities are estimated using the Black-Scholes-Merton option pricing model, with key inputs including exercise price, expected volatility, remaining contractual term, and stock price620 5. Property, Equipment, and Software The company's net property, equipment, and software totaled $6.7 million as of December 31, 2021, with $4.4 million in depreciation and amortization expense Property, Equipment, and Software, Net (2021 vs. 2020) | Category | Dec 31, 2021 ($ thousands) | Dec 31, 2020 ($ thousands) | | :-------------------------------- | :------------------------- | :------------------------- | | Software and computer equipment | 7,287 | 1,381 | | Furniture, office equipment, and other | 2,006 | 567 | | Internally developed software | 13,102 | 10,741 | | Leasehold improvements | 2,191 | 1,112 | | Less: Accumulated depreciation and amortization | (17,920) | (9,208) | | Property, equipment, and software, net | 6,666 | 4,593 | - Depreciation and amortization expense related to property, equipment, and software was $4.4 million in 2021, $3.8 million in 2020, and $3.7 million in 2019626 6. Intangible Assets and Goodwill Intangible assets, net, increased to $129.8 million and goodwill to $225.7 million in 2021, primarily due to acquisitions, with no impairment losses recorded Intangible Assets, Net (Dec 31, 2021) | Category | Weighted Average Useful Life (years) | Intangible Assets, gross ($ thousands) | Accumulated Amortization ($ thousands) | Intangible Assets, Net ($ thousands) | | :-------------------------- | :----------------------------------- | :------------------------------------- | :------------------------------------- | :----------------------------------- | | Customer relationships | 9.0 | 56,810 | (6,760) | 50,050 | | Acquired technology | 5.0 | 48,135 | (10,095) | 38,040 | | Trademarks and tradenames | 12.0 | 25,389 | (2,587) | 22,802 | | Non-compete agreements | 2.0 | 450 | (251) | 199 | | Value of business acquired | 1.0 | 400 | (294) | 106 | | Renewal rights | 6.0 | 9,734 | (811) | 8,923 | | Trademarks and tradenames (Indefinite) | Indefinite | 4,750 | — | 4,750 | | Insurance licenses (Indefinite) | Indefinite | 4,960 | — | 4,960 | | Total intangible assets | | 150,628 | (20,798) | 129,830 | - Aggregate amortization expense for intangibles was $12.3 million in 2021, $2.9 million in 2020, and $3.7 million in 2019628 Goodwill Carrying Amount Changes (2019-2021) | Metric | Amount ($ thousands) | | :--------------------------- | :------------------- | | Balance as of January 1, 2019 | 21,305 | | Acquisitions | 916 | | Divestitures | (3,657) | | Purchase price adjustments | (290) | | Balance as of December 31, 2019 | 18,274 | | Acquisitions | 10,176 | | Divestitures | (161) | | Balance as of December 31, 2020 | 28,289 | | Acquisitions | 197,365 | | Balance as of December 31, 2021 | 225,654 | - No goodwill impairment losses were recorded during the years ended December 31, 2021, 2020, and 2019530 7. Debt As of December 31, 2021, total debt was $425.6 million, primarily from 0.75% Convertible Senior Notes due 2026, with prior loans repaid and a PPP loan forgiven Debt Composition (Dec 31, 2021) | Debt Type | Principal ($ thousands) | Unaccreted Discount ($ thousands) | Debt Issuance Costs ($ thousands) | Carrying Value ($ thousands) | | :---------------------------- | :---------------------- | :-------------------------------- | :-------------------------------- | :--------------------------- | | Convertible senior notes, due 2026 | 425,000 | — | (10,785) | 414,215 | | Other notes | 600 | (80) | — | 520 | | Total | 425,600 | (80) | (10,785) | 414,735 | - In September 2021, Porch issued $425 million in 0.75% Convertible Senior Notes due 2026, with net proceeds of approximately $413.5 million631 - The 2026 Notes are convertible under specific conditions related to stock price, trading price, corporate actions, or redemption, with an initial conversion price of approximately $25.0027 per share633 - The company purchased capped call transactions for $52.9 million to offset potential dilution from the conversion of the 2026 Notes639640 - The $8.1 million Paycheck Protection Program Loan received in April 2020 was forgiven in whole in June 2021, resulting in an $8.2 million gain on extinguishment658 - All outstanding obligations under the Senior Secured Term Loan (Runway Loan Agreement) were repaid in September 2021, resulting in a $3.1 million loss on extinguishment650 8. Equity and Warrants As of December 31, 2021, the company had 97.96 million common shares outstanding, with a fully diluted capital structure including warrants and convertible notes - As of December 31, 2021, the company had 410 million authorized shares (400M common, 10M preferred) and 97,961,597 common shares issued and outstanding671491 Fully Diluted Capital Structure (Dec 31, 2021 vs. 2020) | Category | Dec 31, 2021 (shares) | Dec 31, 2020 (shares) | | :---------------------------------------- | :-------------------- | :-------------------- | | Issued and outstanding common shares | 95,911,597 | 75,519,151 | | Earnout common shares | 2,050,000 | 6,150,000 | | Total common shares issued and outstanding | 97,961,597 | 81,669,151 | | Common shares reserved for future issuance: | | | | Public warrants | — | 8,625,000 | | Private warrants | 1,795,700 | 5,700,000 | | Common stock options outstanding | 4,822,992 | 6,414,611 | | Restricted stock units and awards | 2,717,154 | 2,581,902 | | 2020 Equity Plan pool reserved for future issuance | 8,126,263 | 11,137,824 | | Convertible senior notes, due 2026 | 16,998,130 | — | | Total shares of common stock outstanding and reserved for future issuance | 132,421,836 | 116,128,488 | - Public warrants were redeemed on April 16, 2021, ceasing trading on Nasdaq677 - Private warrants (1,795,700 outstanding as of Dec 31, 2021) are liability-classified and remeasured at fair value periodically675676 - Capped call transactions are expected to reduce potential dilution from the 2026 Convertible Senior Notes, effectively increasing the conversion price from $25 to approximately $37.74 per share672 9. Stock-Based Compensation Total stock-based compensation expense was $38.6 million in 2021, significantly higher than 2020, primarily due to employee and CEO earnout restricted stock vesting - The 2020 Stock Incentive Plan reserves 8,126,263 shares for future issuance, with annual increases682 Stock-Based Compensation Expense (2019-2021) | Category | 2021 ($ thousands) | 2020 ($ thousands) | 2019 ($ thousands) | | :------------------------------- | :----------------- | :----------------- | :----------------- | | Secondary market transaction | 1,933 | 1,616 | 33,232 | | Employee earnout restricted stock | 22,961 | — | — | | Employee awards | 13,698 | 9,680 | 2,740 | | Total operating expenses | 38,592 | 11,296 | 35,972 | - In 2021, $11.2 million in stock-based compensation expense was recorded for employee earnout restricted shares, and $11.8 million for CEO earnout restricted shares, as market vesting conditions were met699701 - The total unrecognized stock-based compensation expense for RSUs as of December 31, 2021, was approximately $44.7 million, to be recognized over a weighted-average period of 1.6 years695 10. Income Taxes The company recognized an income tax benefit of $10.3 million in 2021, primarily due to a partial release of its valuation allowance from deferred tax liabilities from acquisitions Income Tax Benefit (Expense) Provision (2019-2021) | Category | 2021 ($ thousands) | 2020 ($ thousands) | 2019 ($ thousands) | | :------------------------ | :----------------- | :----------------- | :----------------- | | Current | 860 | (71) | (67) | | Deferred | 9,413 | 1,760 | (29) | | Income tax benefit (expense) | 10,273 | 1,689 | (96) | - Income tax benefit in 2021 was primarily due to the partial release of the valuation allowance as a result of deferred tax liabilities from acquisitions409 - The company maintains a full valuation allowance against substantially all of its net deferred tax assets due to the uncertainty of their realization, with the allowance increasing by $25.3 million in 2021705706 - As of December 31, 2021, the company had federal NOL carryforwards of $360.3 million and state NOLs of $209.4 million, subject to Section 382 limitations707 11. 401(k) Savings Plan The company operates nine 401(k) savings plans for domestic employees, making its first contributions of approximately $0.6 million in 2021 - The company has nine 401(k) savings plans covering substantially all domestic employees711 - In 2021, the company made approximately $0.6 million in contributions to the plans, having made no contributions prior to 2021712 12. Business Combinations and Disposals The company completed several significant business combinations in 2021, totaling $346.3 million in purchase consideration, to expand service offerings and capabilities - The company completed several business combinations in 2021, 2020, and 2019 to expand product/service offerings, acquire new customer channels, and realize synergies713 2021 Acquisitions Purchase Consideration | Acquisition | Cash ($ thousands) | Issuance of Common Stock ($ thousands) | Holdback Liabilities & Escrow ($ thousands) | Contingent Consideration - Equity ($ thousands) | Contingent Consideration - Liability ($ thousands) | Total Purchase Consideration ($ thousands) | | :---------- | :----------------- | :------------------------------------- | :------------------------------------------ | :-------------------------------------------- | :------------------------------------------------- | :----------------------------------------- | | V12 Data | 20,196 | — | 150 | — | 1,410 | 21,756 | | HOA | 84,370 | 22,773 | 1,000 | 6,685 | — | 114,828 | | Rynoh | 32,302 | — | 3,500 | — | — | 35,802 | | AHP | 43,750 | — | 2,500 | — | — | 46,250 | | Floify | 75,959 | 9,908 | 900 | — | 8,632 | 95,399 | | Other | 27,121 | 3,026 | 1,775 | — | 327 | 32,249 | | Total | 283,698 | 35,707 | 9,825 | 6,685 | 10,369 | 346,284 | - Revenue from the five significant 2021 acquisitions (V12 Data, HOA, Rynoh, AHP, Floify) included in the consolidated statements of operations through December 31, 2021, was $79.6 million, with a net loss of $1.8 million735 Unaudited Pro Forma Consolidated Financial Information (2020-2021) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | | :-------- | :----------------- | :----------------- | | Revenue | 215,769 | 148,771 | | Net loss | (112,239) | (61,253) | - In 2020, the company disposed of the Serviz business, recording a $1.4 million gain on divestiture743 13. Leases The company leases office facilities under operating lease agreements, recognizing $4.5 million in ROU assets and $4.7 million in lease liabilities as of December 31, 2021 - The company leases office facilities under operating lease agreements with initial terms of 1 to 5 years, and renewal options up to 10 additional years747 - Upon adoption of Topic 842 on January 1, 2021, the company recognized ROU assets and lease liabilities590 Operating Lease Costs and Balance Sheet Information (2021) | Metric | 2021 ($ thousands) | | :-------------------------------------- | :----------------- | | Operating lease cost | 2,155 | | Variable lease cost | 339 | | Total lease cost | 2,494 | | Operating cash outflows for operating leases | 2,141 | | Right-of-use assets obtained in exchange for new lease obligations | 6,365 | | Operating lease right-of-use assets | 4,504 | | Operating lease liabilities, current | 1,957 | | Operating lease liabilities, non-current | 2,694 | | Total operating lease liabilities | 4,651 | - As of December 31, 2021, the weighted-average remaining lease term was 2.1 years, and the weighted-average discount rate was 9.4%751 14. Reinsurance The company's insurance subsidiary, HOA, uses reinsurance to manage risk exposure, employing quota share and excess of loss treaties to limit net retention - HOA uses reinsurance to manage exposure to property and casualty insurance risks, including from catastrophes754 - The 2021 reinsurance program includes two quota share placements (Coastal and Core, both at 90% of subject losses) and property catastrophe excess of loss treaties756757 - HOA remains primarily liable to policyholders for reinsured portions and monitors reinsurer financial condition and credit risk754755 Effects of Reinsurance on Premiums (April 5 - Dec 31, 2021) | Metric | Written ($ thousands) | Earned ($ thousands) | | :-------------- | :-------------------- | :------------------- | | Direct premiums | 266,609 | 213,423 | | Ceded premiums | (237,102) | (199,366) | | Net premiums| 29,507 | 14,057 | Effects of Reinsurance on Incurred Losses and LAE (April 5 - Dec 31, 2021) | Metric | Amount ($ thousands) | | :------------------ | :------------------- | | Direct losses and LAE | 181,256 | | Ceded losses and LAE | (162,752) | | Net losses and LAE| 18,504 | 15. Unpaid Losses and Loss Adjustment Reserve The liability for losses and loss adjustment expenses (LAE) is an estimate of future claim costs, totaling $61.9 million gross of reinsurance as of December 31, 2021 - The liability for losses and loss adjustment expenses (LAE) is an estimate of amounts required to cover known incurred losses and LAE, including IBNR534 Rollforward of Losses and LAE Reserve (April 5 - Dec 31, 2021) | Metric | Amount ($ thousands) | | :-------------------------------------------- | :------------------- | | Losses and LAE reserve at April 5 | 84,366 | | Reinsurance recoverables on losses and LAE | (82,898) | | Losses and LAE reserve, net of reinsurance recoverables at April 5 | 1,468 | | Net incurred losses and LAE during the current year | 18,504 | | Net claim and LAE payments during the current year | (14,775) | | Reserve for losses and LAE, net of reinsurance recoverables, at end of year | 5,197 | | Reinsurance recoverables on losses and LAE | 56,752 | | Losses and LAE reserve at December 31 | 61,949 | - Changes in estimates for prior year claims resulted in a $0.9 million increase in provisions for losses and LAE during 2021760 16. Commitments and Contingencies The company has commitments related to a pending acquisition of CSE for $48.6 million, non-cancelable purchase commitments, and is involved in various litigations - The company has a stock purchase agreement to acquire CSE, a California-based personal lines insurer, for $48.6 million in cash, subject to customary closing conditions and regulatory approval763 Non-Cancelable Purchase Commitments (as of Dec 31, 2021) | Year | Amount ($ thousands) | | :-------- | :------------------- | | 2022 | 2,535 | | 2023 | 1,600 | | 2024 | 1,600 | | 2025 | — | | 2026 | — | | Total | 5,735 | - The company is party to twelve legal proceedings alleging TCPA violations, a breach of contract claim related to the Kandela acquisition, and a putative wage and hours class action767769771 - HOA is subject to Texas state insurance regulations, requiring a minimum of $2.5 million in capital stock and $2.5 million in surplus, and limiting dividends to the greater of 10% of statutory surplus or prior year's net income773775 17. Segment Information The company's two reportable segments, Vertical Software and Insurance, reflect how the Chief Operating Decision Maker manages the business - The company has two reportable segments: Vertical Software and Insurance, based on how the CODM manages the business778 - Vertical Software segment includes software fees and non-insurance revenue, while the Insurance segment offers homeowner/auto insurance and home warranty services779780 Segment Revenues (2019-2021) | Segment | 2021 ($ thousands) | 2020 ($ thousands) | 2019 ($ thousands) | | :---------------- | :----------------- | :----------------- | :----------------- | | Vertical Software | 137,150 | 63,799 | 59,259 | | Insurance | 55,283 | 4,166 | — | | Divested Businesses | — | 4,334 | 18,336 | | Total segment revenue | 192,433 | 72,299 | 77,595 | Segment Adjusted EBITDA (Loss) (2019-2021) | Segment | 2021 ($ thousands) | 2020 ($ thousands) | 2019 ($ thousands) | | :-------------------------- | :----------------- | :----------------- | :----------------- | | Vertical Software | 20,733 | 12,718 | 4,616 | | Insurance | 9,007 | 405 | — | | Corporate and Other | (53,760) | (30,001) | (36,645) | | Divested Businesses | — | (1,441) | (4,806) | | Total segment adjusted EBITDA (loss) | (24,020) | (18,319) | (36,835) | 18. Related Parties The company has engaged in various transactions with related parties, including a $17.3 million capital contribution from the CEO and legal service expenses - In July 2020, the CEO made a $17.3 million capital contribution to the company in connection with the PTAC Merger Agreement787 - In 2019, the CEO purchased convertible promissory notes with an aggregate principal balance of $1.0 million788 - The company sold a direct-to-customer security services business to a related party in 2019788 - The company purchased legal services totaling $2.9 million in 2020 and $0.9 million in 2019 from a law firm where an immediate family member of the CEO was a partner791 19. Basic and Diluted Net Loss Per Share Due to reported net losses in all periods, basic net loss per share equals diluted net loss per share, with a $(1.14) loss per share in 2021 - Basic and diluted net loss per share are presented using the two-class method792 - Due to reported net losses in all periods, all potentially dilutive securities are antidilutive, resulting in basic net loss per share equaling diluted net loss per share793 Basic and Diluted Net Loss Per Share (2019-2021) | Metric | 2021 | 2020 | 2019 | | :-------------------------------------- | :-------- | :-------- | :-------- | | Net loss attributable to common stockholders ($ thousands) | (106,606) | (71,316) | (103,319) | | Weighted average shares outstanding (Basic) | 93,884,566 | 36,344,234 | 31,170,351 | | Loss per share - basic ($) | (1.14) | (1.96) | (3.31) | | Loss per share - diluted ($) | (1.14) | (2.03) | (3.31) | 20. Subsequent Events Subsequent events include a definitive agreement to acquire certain businesses of RWS, Inc. for approximately $33.0 million and the grant of $5.0 million in annual equity awards to the CEO - On February 28, 2022, the company entered into an agreement to acquire certain businesses of RWS, Inc. for approximately $33.0 million in cash and common stock798 - The RWS acquisition includes contingent consideration based on product line performance and is subject to regulatory approval for warranty operations in California and Florida798799 - In February 2022, the CEO was granted $5.0 million in annual equity awards, including performance-based restricted stock units (CEO PRSUs) and time-based restricted stock units (CEO RSUs)799 - CEO PRSUs vest based on stock price hurdles ($26.00, $28.00, $30.00) within 36 months, while CEO RSUs and CEO TWW RSUs vest quarterly over 30-36 months, all with a three-year post-vesting holding period799800 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There are no changes in or disagreements with accountants on accounting and financial disclosure to report - Not applicable817 Controls and Procedures The company's disclosure controls and procedures were deemed ineffective as of December 31, 2021, due to identified material weaknesses in internal control over financial reporting - Disclosure controls and procedures were not effective as of December 31, 2021, due to material weaknesses in internal control over financial reporting818 - Management identified material weaknesses related to: a) design and implementation of IT general controls; b) identification, design, implementation, and retention of evidence of control activities; and c) quantity of personnel to design and operate internal controls822 - Despite material weaknesses, management concluded that the consolidated financial statements fairly present the financial position, results of operations, and cash flows819823 - The assessment of internal control over financial reporting excluded 2021 acquired businesses, which constituted approximately 68% of total assets and 51% of total revenue824838 - Planned remediation efforts include consolidating fin