Blend Labs, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited condensed consolidated financial statements. Blend provides a cloud-based software platform for financial services firms; it reported results as a pre-IPO company and completed its IPO after quarter-end.
Financial performance and liquidity
Amounts below are in millions of dollars except percentages and transaction counts.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $32.1 | $21.9 | $63.9 | $37.5 |
| Gross profit / margin | $19.7 / 61% | $13.3 / 60% | $40.7 / 64% | $21.5 / 57% |
| Operating expenses | $59.3 | $34.1 | $107.6 | $65.4 |
| Operating loss | $(39.6) | $(20.8) | $(66.8) | $(43.9) |
| Net income (loss) | $5.8 | $(20.6) | $(21.3) | $(43.4) |
| Net cash used in operating activities | Not presented for quarter | Not presented for quarter | $(53.1) | $(39.7) |
- Revenue increased 46% in Q2 and 70% in the first half, primarily with higher banking transaction volume. Transactions rose 51% in Q2 to 520,000 and 90% in the first half to 1.015 million.
- Operating expenses rose 74% in Q2 and 64% in the first half. General and administrative expense included Title365 transaction and integration costs; first-half acquisition transaction costs were approximately $8.5 million.
- Q2 net income included a $45.3 million income tax benefit from a partial release of the historical valuation allowance related to deferred tax liabilities recorded in the Title365 acquisition. The company still reported an operating loss; the tax benefit is an unusual, acquisition-related item. Q2 net income was allocated to participating securities, leaving no net income attributable to common stockholders.
- At June 30, cash and cash equivalents were $369.7 million and marketable securities were $84.0 million, totaling $453.7 million. Accumulated deficit was $294.2 million.
- First-half financing cash flow was $342.6 million, including $309.7 million net proceeds from Series G preferred stock. The company used $53.1 million in operating cash, versus $39.7 million in the prior-year period.
Material changes and significant transactions
- Title365 acquisition: Blend acquired 90.1% of the title insurance agency on June 30 for estimated consideration of $421.1 million. Because control transferred on the final day of the quarter, Title365 contributed immaterial revenue and expenses to reported Q2 and first-half results. Purchase accounting was preliminary; $284.8 million of goodwill and $194.0 million of acquired intangible assets were recorded.
- Acquisition funding and debt: A $225 million senior secured term loan was funded July 1, 2021, in part to fund the acquisition; the related $25 million revolving facility remained undrawn. At June 30, acquisition consideration payable included $225 million classified as long-term and approximately $195.6 million as current. The facilities mature June 30, 2026, have no scheduled amortization, and bear floating interest at adjusted LIBOR plus 7.50% or base rate plus 6.50%, subject to floors. The agreement includes covenants, a minimum-liquidity requirement, and security over substantially all assets other than Title365 and its subsidiaries, subject to exceptions.
- IPO: On July 20, Blend sold 20 million shares at $18 per share and received $325.7 million net proceeds. An additional 2,468,111 shares sold August 17 generated $41.4 million net proceeds; total reported net proceeds were $367.1 million.
- Operating expenses increased alongside headcount, product investment, and transaction volume. Stock-based compensation was $10.6 million in the first half, compared with $6.6 million a year earlier.
Outlook, commentary, risks and contingencies
- Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It expects continued operating losses as it invests in growth, and expects Title365 to increase revenue and cost of revenue in the near term. Management expects the acquisition to raise near-term revenue growth, but anticipates the growth rate will decline after the following 12 months. It also expects increased expenses from integration, acquired-intangible amortization, debt interest, and public-company costs.
- Management said cash, cash equivalents, and marketable securities at June 30 were expected to fund operations for at least 12 months. This assessment preceded the July IPO proceeds and the July term-loan funding.
- Title365’s remaining 9.9% interest is redeemable under a put option exercisable beginning five years after closing; Blend may call that interest beginning after two years. The contractual price uses the greater of $49.5 million plus 5% annual compounded interest or 4.4 times trailing 12-month EBITDA.
- Customer concentration remains relevant: one customer represented 14% of Q2 revenue and 13% of first-half revenue; a second represented 11% of first-half revenue. The filing also identifies customer retention, transaction volumes, mortgage-market cyclicality, competition, cybersecurity, privacy, regulatory compliance, and acquisition integration as significant risks.
- Blend administers escrow and trust funds of approximately $108.1 million held at third-party institutions. These funds are excluded from its balance sheet, but Blend is contingently liable for their disposition. The filing reported no material legal proceedings or material commitments and contingencies as of June 30.
- COVID-19 had disrupted office and partner operations; management said demand and results had not been adversely affected thus far and attributed some transaction growth to accelerated digitization. The filing cautions that the pandemic’s future effects remain uncertain.
- Management reported disclosure controls and procedures were effective at a reasonable assurance level and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- How Title365 integration, its preliminary purchase-price allocation, synergies, and post-acquisition results compare with management’s expectations.
- The ongoing cash cost of the term loan, applicable floating rate, covenant and minimum-liquidity compliance, and any use of the revolving facility.
- Underlying operating performance excluding the $45.3 million acquisition-related tax benefit, including cash burn, gross margins, and the pace of operating-expense growth.
- Customer concentration, renewal and usage trends, and sensitivity to mortgage and real-estate transaction volumes.
- Potential dilution and future compensation expense from equity awards, including the founder award; the filing reports $24.0 million of expense on its first tranche after the IPO and a $5.7 million catch-up charge for remaining tranches.
- Risks tied to Title365’s redeemable noncontrolling interest, title-insurance claims and regulation, escrow-fund handling, and the company’s multi-class voting structure.