(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and assumptions of management. Although the Company believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, the Company cannot assure you that it will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning the Company's possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. These statements may be preceded by, followed by or include the words "believes," "estimates," "expects," "projects," "forecasts," "may," "will," "should," "seeks," "plans," "scheduled," "anticipates" or "intends" or similar expressions.
Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements which speak only as of the date hereof. Unless specifically indicated otherwise, the forward-looking statements in this Annual Report do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that have not been completed as of the date of this filing. You should understand that the following important factors, among others, could affect the Company's future results and could cause those results or other outcomes to differ materially from those expressed or implied in the Company's forward-looking statements:
? expansion plans and opportunities, including recently completed acquisitions as well as future acquisitions or additional business combinations;
?costs related to being a public company;
?litigation, complaints, and/or adverse publicity;
the impact of changes in consumer spending patterns, consumer preferences, ? local, regional and national economic conditions, crime, weather, demographic trends and employee availability;
? further expansion into the insurance industry, and the related federal and state regulatory requirements;
?privacy and data protection laws, privacy or data breaches, or the loss of data; and
? the duration and scope of the COVID pandemic, and its continued effect on the business and financial conditions of the Company.
The risks described in this Annual Report are not exhaustive. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can the Company assess the impact of all such risk factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward- looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. The Company undertakes no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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Porch is a vertical software platform for the home, providing software and services to over 24,000 home services companies, such as home inspectors, mortgage companies and loan officers, title companies, moving companies, real estate agencies, utility companies, roofers and others. Porch helps these service providers grow their business and improve their customer experience. Porch provides software and services to home services companies and, through these relationships, gains unique and early access to homebuyers and homeowners, assists homebuyers and homeowners with critical services such as insurance and moving, and, in turn, Porch's platform drives demand for other services from such companies as part of our value proposition. Porch has three types of customers: (1) home services companies, such as home inspectors, mortgage companies, and loan officers and title companies, for whom Porch provides software and services and who pay Porch recurring SaaS fees and increasingly provide introductions to homebuyers and homeowners; (2) consumers, such as homebuyers and homeowners, whom Porch assists with the comparison and provision of various critical home services, such as insurance, moving, security, TV/Internet, and home repair and improvement; and (3) service providers, such as insurance carriers, moving companies, security companies, title companies, mortgage companies and TV/Internet providers, who pay Porch for new customer sign-ups.
Porch has established many partnerships across a number of home-related industries to increase its service offerings for consumers. Additionally, Porch has also proven effective at selectively acquiring companies which can be efficiently integrated into Porch's platform. In 2017, we significantly expanded our position in the home inspection industry by acquiring ISN(TM), a developer of ERP and CRM software for home inspectors. In November 2018, we acquired HireAHelper(TM), a provider of software and demand for moving companies. In 2021, we successfully completed several acquisitions, including V12, HOA, Rynoh, AHP and Floify, to enter into new verticals and increase our capabilities in offering insurance and warranty products to consumers.
We sell our software and services to companies using a variety of sales and marketing tactics. We have teams of inside sales representatives organized by vertical market who engage directly with companies. We have enterprise sales teams which target the large named accounts in each of our vertical markets. These teams are supported by a variety of typical software marketing tactics, including both digital, in-person (such as trade shows and other events) and content marketing.
For consumers, Porch largely relies on our unique and proprietary relationships with over 24,000 companies using Porch's software to provide the company with end customer access and introductions. Porch then utilizes technology, lifecycle marketing and teams in lower cost locations to operate as a Moving Concierge to assist these consumers with services. Porch has invested in limited direct-to-consumer marketing capabilities, but expects to become more advanced over time with capabilities such as digital and social retargeting.
Key Performance Measures and Operating Metrics
In the management of our businesses, we identify, measure and evaluate a variety of operating metrics. The key performance measures and operating metrics we use in managing our businesses are set forth below. These key performance measures and operating metrics are not prepared in accordance with generally accepted accounting principles in the United States ("GAAP"), and may not be comparable to or calculated in the same way as other similarly titled measures and metrics used by other companies. The key performance measures presented have been adjusted for divested Porch businesses in 2018 through 2020.
Average Companies in Quarter - Porch provides software and services to home services companies and, through these relationships, gains unique and early access to homebuyers and homeowners, assists homebuyers and homeowners with critical services such as insurance, warranty and moving. Porch's customers include home services companies, for whom Porch provides software and services and who provide introductions to homebuyers and homeowners. Porch tracks the ? average number of home services companies from which it generates revenue each quarter in order to measure our ability to attract, retain and grow our relationships with home services companies. Porch management defines the average number of companies in a quarter as the straight-line average of the number of companies as of the end of period compared with the beginning of period across all of Porch's home services verticals that (i) generate recurring revenue and (ii) generated revenue in the
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quarter. For new acquisitions, we determine the number of customers in their initial quarter based on the percentage of the quarter they were a part of Porch.
Average Revenue per Account per Month in Quarter - Management views Porch's ability to increase revenue generated from existing customers as a key component of Porch's growth strategy. Average Revenue per Account per Month in ? Quarter is defined as the average revenue per month generated across all our home services company customer accounts in a quarterly period. Average Revenue per Account per Month in Quarter is derived from all customers and total revenue; not only customers and revenues associated with Porch's referral network.
The following table summarizes our Average Companies in Quarter and Average Revenue per Account per Month in Quarter for each of the quarterly periods indicated:
2021 2021 2021 2021 Q1 Q2 Q3 Q4 Average Companies in Quarter 13,995 17,120 20,472 24,603 Average Revenue per Account per Month in Quarter $ 637 $ 1,000 $ 1,022 $ 699 2020 2020 2020 2020 Q1 Q2 Q3 Q4 Average Companies in Quarter 10,903 10,523 10,792 11,157 Average Revenue per Account per Month in Quarter $ 484 $ 556 $ 664 $ 556 2019 2019 2019 2019 Q1 Q2 Q3 Q4 Average Companies in Quarter 10,199 10,470 10,699 10,972 Average Revenue per Account per Month in Quarter $ 305 $ 468 $ 552 $ 450
In 2021, the company completed acquisitions of V12 in Q1, HOA and Rynoh in Q2, AHP in Q3 and Floify in Q4, that impacted the average number of companies in the quarter.
Due to COVID-19, some small companies put their business with the Company on hold which is reflected in lower number of total companies in 2020 and higher average revenue per account.
Monetized Services in Quarter - Porch connects consumers with home services companies nationwide and offers a full range of products and services where homeowners can, among other things: (i) compare and buy home insurance policies (along with auto, flood and umbrella policies) and warranties with competitive rates and coverage; (ii) arrange for a variety of services in connection with their move, from labor to load or unload a truck to full-service, long-distance moving services; (iii) discover and install home automation and security systems; (iv) compare Internet and television options for their new home;
Average Revenue per Monetized Service in Quarter - Management believes that shifting the mix of services delivered to homebuyers and homeowners toward higher revenue services is a key component of Porch's growth strategy. Average ? revenue per monetized services in quarter is the average revenue generated per monetized service performed in a quarterly period. When calculating Average Revenue per Monetized Service in quarter, average revenue is defined as total quarterly service transaction revenues generated from monetized services.
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The following table summarizes our monetized services and average revenue per monetized service for each of the quarterly periods indicated:
2021 2021 2021 2021 Q1 Q2 Q3 Q4 Monetized Services in Quarter 182,779 302,462 329,359 260,352 Average Revenue per Monetized Service in Quarter $ 92 $ 129 $ 144 $ 132 2020 2020 2020 2020 Q1 Q2 Q3 Q4 Monetized Services in Quarter 152,165 181,520 198,165 169,949 Average Revenue per Monetized Service in Quarter $ 93 $ 86 $ 97 $ 98 2019 2019 2019 2019 Q1 Q2 Q3 Q4 Monetized Services in Quarter 185,378 205,887 211,190 172,862 Average Revenue per Monetized Service in Quarter $ 43 $ 63 $ 76 $ 78
In 2021, the company completed acquisitions of V12 in Q1, HOA and Rynoh in Q2, AHP in Q3 and Floify in Q4, that impacted the number of monetized services in the quarter.
In 2020, the Company shifted insurance monetization from getting paid per quote to earning multiyear insurance commissions, resulting in fewer monetized transactions with higher average revenue.
In March 2020, COVID-19 impacted the service volumes during the period from March until June. The impact on service volumes, largely recovered by June 30, 2020 and after adjusting for insurance monetization remains above prior year volumes.
Equity and Debt Financing
During 2021, the Company raised $126.7 million of additional equity capital from the exercise of public and private warrants. In September 2021, the Company raised net cash of $413.5 million from the issuance of convertible notes payable. Senior secured debt of $47.0 million was paid down with a portion of the proceeds from the issuance of convertible notes. The Company used $52.9 million of the proceeds from the issuance of convertible notes for the purchase of capped call transactions for purposes of limiting the dilution from the potential conversion of the notes into common stock. The proceeds from these equity and debt offerings provide cash for general corporate purposes and additional merger and acquisitions.
Acquisitions During 2021, 2020 and 2019, the Company completed significant business combination transactions. The purpose of each of the acquisitions were to expand the scope and nature of the Company's product and service offerings, obtain new customer acquisition channels, add additional team members with important skillsets, and realize synergies. The table below identifies the acquisitions in 2021 related to the vertical software and insurance and warranty segments: Vertical Software Insurance 2021 acquisitions: V12 Data $ 21,756 $ - HOA - 114,828 Rynoh 35,802 - AHP - 46,250 Floify 95,399 - Other acquisitions 32,249 - Total 2021 purchase price consideration $ 185,206 $ 161,078 Total 2020 purchase price consideration $ 17,623 $ - Total 2019 purchase price consideration $ 500 $ -
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Merger and Public Company Costs
Porch Group, Inc. was originally known as PropTech Acquisition Corporation, a Nasdaq-listed special purpose acquisition company ("PTAC"), which completed its initial public offering in November 2019. In July 2020, PTAC entered into a merger agreement to acquire Porch.com, Inc., and on December 23, 2020 (the "PTAC Merger Closing Date"), the merger was completed and Porch.com, Inc. became a wholly owned subsidiary of PTAC. On the same date, PTAC changed its name from "PropTech Acquisition Corporation" to "Porch Group, Inc.," and Porch Group, Inc.'s common stock commenced trading on the NASDAQ Capital Market under the ticker "PRCH." References in this Annual Report to Porch prior to the PTAC Merger Closing Date refer to Porch.com, Inc., which is considered the Company's accounting predecessor.
While the legal acquirer in the merger agreement was PTAC, for financial accounting and reporting purposes under GAAP, Porch was the accounting acquirer and the merger was accounted for as a "reverse recapitalization." A reverse recapitalization does not result in a new basis of accounting, and the financial statements of the combined entity represent the continuation of the financial statements of Porch in many respects. Under this method of accounting, PTAC was treated as the "acquired" company for financial reporting purposes. For accounting purposes, Porch was deemed to be the accounting acquirer in the transaction and, consequently, the transaction was treated as a recapitalization of Porch (i.e., a capital transaction involving the issuance of stock by PTAC for the stock of Porch). Accordingly, the consolidated assets, liabilities and results of operations of the pre-merger Porch entity became the historical financial statements of Porch Group, Inc., and PTAC's assets, liabilities and results of operations were consolidated with Porch beginning on the acquisition date. Operations prior to the PTAC Merger Closing Date are presented as those of Porch. The net assets of PTAC were recognized at historical, with no goodwill or other intangible assets recorded. The most significant change in Porch's reported financial position and results is an increase in cash of approximately $269.5 million.
As a consequence of the PTAC merger, Porch has become the successor to an SEC-registered and NASDAQ-listed company which will require Porch to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. Porch expects to incur additional annual expenses as a public company for, among other things, directors' and officers' liability insurance, director fees and additional internal and external accounting and legal and administrative resources, including increased audit and legal fees.
In March 2020, the World Health Organization declared a pandemic related to the global novel coronavirus disease 2019 ("COVID-19") outbreak. The COVID-19 pandemic and the measures adopted by government entities in response to it have adversely affected Porch's business operations, which negatively impacted revenue primarily in the first half of 2020. Due to the impact of the COVID-19 pandemic and related mitigation measures, Porch's ability to conduct ordinary business activities has been and may continue to be impaired for an indefinite period. The extent of the continuing impact of the COVID-19 pandemic on Porch's operational and financial performance will depend on various future developments, including the duration and spread of the outbreak and impact on the Company's customers, suppliers, and employees, all of which is uncertain at this time. Porch expects the COVID-19 pandemic to continue to have an uncertain impact on future revenue and results of operations, but Porch is unable to predict at this time the size and duration of such impact. For more information on Porch's operations and risks related to health epidemics, including the coronavirus, please see "Item 1A. Risk Factors - Risks Relating to Porch's Business and Industry."
Adoption of New Accounting Standards
We adopted Accounting Standards Update No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), also referred to as Topic 842 at the beginning of fiscal 2021, and as a result, the consolidated balance sheet as of December 31, 2021 is not comparable with that of December 31, 2020.
In addition, in fiscal 2021 we adopted Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, ASU No. 2019-04, Codification Improvements to Topic 326 and ASU 2019-05, Financial Instruments - Credit Losses (Topic 326) - Targeted Transition Relief, by using the modified retrospective transition method.
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We also early adopted Accounting Standards Update No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, for the fiscal year beginning January 1, 2021. See Note 1 (Description of Business and Summary of Significant Accounting Policies) to the accompanying consolidated financial statements included in Item 8 of this Annual Report, which is incorporated herein by reference.
Key Factors Affecting Operating Results
The Company has been implementing its strategy as a vertical software platform for the home, providing software and services to over 24,000 home services companies, such as home inspectors, moving companies, utility companies, warranty companies and others. The following are key factors affecting our operating results in 2019, 2020 and 2021:
Continued investment in growing and expanding our position in the home ? inspection industry including through our core ERP and CRM software offered by
Continued investment in growing and expanding our position in providing moving ? services to consumers as a result of the 2018 acquisition of HireAHelper(TM), a provider of software and demand for moving companies.
Intentionally building operating leverage in the business by focusing on growing operating expenses at a slower rate than the growth in revenue. We are ? specifically increasing economies of scale related to our variable selling costs, Moving Concierge call center operations and product and technology costs.
In 2021, the Company successfully completed several acquisitions, investing $256.4 million in cash, net of cash acquired, and $35.7 million in common stock ? to acquire companies to expand the scope and nature of the Company's service offerings, add additional team members with important skillsets, and realize synergies. Such acquisitions included the following:
In January 2021, Porch acquired V12 Data, an omnichannel marketing platform.
In April 2021, Porch acquired HOA, an insurance managing general agency and
In May 2021, Porch acquired Rynoh, a software and data analytics company that
In September 2021, Porch acquired AHP, a company providing home warranty
In October 2021, Porch acquired Floify, a SaaS software provider to mortgage companies and loan officers that helps create a better mortgage and refinancing
In 2021, a number of holders of warrants exercised their warrants to acquire ? approximately 11.5 million shares of common stock, resulting in cash proceeds of $126.8 million. All of the unexercised public warrants were redeemed effective as of April 16, 2021.
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In September 2021, the Company raised $413.5 million in net proceeds from a private offering of its 0.75% Convertible Senior Notes due 2026 (the "2026 Notes"). See Note 7 (Debt) to the accompanying consolidated financial statements included in Item 8 of this Annual Report. The proceeds from this ? offering, after paying down the Senior Secured Term Loan and purchasing the capped call transactions, increased the Company's unrestricted cash and cash equivalents balance at December 31, 2021 to $315.7 million. This level of cash is expected to provide sufficient financial resources for the Company's ongoing plans for future acquisitions and other investments, such as operating leverage and organic growth.
? Ongoing expansion in other software verticals related to the home and related services such as title, warranty and mortgage software.
Basis of Presentation
The consolidated financial statements and accompanying notes of Porch include the accounts of the Company and its consolidated subsidiaries and were prepared in accordance with GAAP. All significant intercompany accounts and transactions are eliminated in consolidation.
The Company operates in two operating segments: Vertical Software and Insurance. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker ("CODM") in making decisions regarding resource allocation and assessing performance. The Company has determined that its Chief Executive Officer is the CODM.
Components of Results of Operations
The Company generates its Core Services Revenue from (1) fees received for connecting homeowners to individual contractors, small business service providers and large enterprise service providers, (2) commissions from third-party insurance and warranty carriers, and (3) insurance and warranty premiums, policy fees and other insurance-related fees generated through its own insurance carrier. The Company's Managed Services Revenue is generated from fees received for providing select and limited services directly to homeowners. The Company's Software and Service Subscription Revenue is generated from fees received for providing subscription access to the Company's software platforms and subscription services across various industries.
In the Core Services Revenue stream, the Company connects service providers with homeowners that meet pre-defined criteria and may be looking for relevant services. service providers include a variety of service providers throughout a homeowner's lifecycle, including movers, TV/Internet, warranty, and security monitoring providers, plumbers, electricians, roofers, title companies, etc. The Company also sells home insurance and home warranty policies through the Company's own insurance subsidiary, as well as for third-party insurance carriers.
Managed Services Revenue includes fees earned from homeowners for providing select services directly to the homeowner, including handyman and moving . . .
Mar 16, 2022
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