Offerpad Solutions Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unless stated otherwise, financial figures below are in millions of dollars. Offerpad operates a technology-enabled home buying and selling platform, primarily reselling homes it acquires and renovates. At quarter-end it operated in 20 U.S. metropolitan markets. The September 1, 2021 SPAC business combination was accounted for as a reverse recapitalization, with Old Offerpad as the accounting acquirer.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $540.3 | $186.4 | $1,202.9 | $841.0 |
| Gross profit / margin | $53.1 / 9.8% | $19.8 / 10.6% | $137.5 / 11.4% | $62.5 / 7.4% |
| Operating income (loss) | $3.5 | ($1.9) | $16.4 | ($14.2) |
| Net income (loss) | ($15.3) | ($2.9) | ($6.3) | ($21.8) |
| GAAP net loss per share, diluted | ($0.13) | ($0.05) | ($0.08) | ($0.38) |
| Adjusted EBITDA, non-GAAP | $6.1 | ($0.8) | $22.2 | ($9.6) |
Q3 homes sold increased 123% to 1,673; average resale price rose 31% to $323,000. For the nine-month period, homes sold rose 15% to 3,950 and average resale price increased 23% to $303,000. Management attributed revenue growth to higher volume and resale prices, market expansion, deeper penetration, and favorable housing conditions.
- Unit economics: Q3 contribution margin after interest, a non-GAAP measure, was 7.0% (6.2% in Q3 2020), or $22,700 per home sold. Nine-month margin was 8.4% (2.5% in 2020), or $25,600 per home. These measures are management-defined and are not substitutes for GAAP results.
- Costs and margins: Q3 gross margin declined year over year, which management attributed mainly to a smaller spread between average resale and acquisition prices. Nine-month gross margin improved, reflecting higher resale prices. Q3 sales, marketing and operating expense was $38.7 million, including $13.3 million of advertising; nine-month advertising expense was $32.2 million.
- Cash flow: Nine-month operating cash flow was negative $704.8 million, mainly reflecting a $722.0 million increase in inventory. Investing cash flow was negative $11.6 million. Financing provided $802.3 million. Cash, cash equivalents and restricted cash ended at $136.7 million, including $116.6 million of unrestricted cash.
- Inventory and liquidity: Inventory was $902.1 million at September 30, versus $171.4 million at year-end 2020. Management reported $412.0 million of undrawn senior-facility capacity and $43.5 million of undrawn mezzanine capacity and stated it expected available cash, home-sale proceeds, and existing or new financing to meet obligations for at least 12 months from issuance of the financial statements.
- Debt: Net credit facilities and notes payable totaled $751.0 million, versus $181.7 million at December 31, 2020; all was classified as current at quarter-end because borrowings generally are repaid as homes sell. Senior secured facilities outstanding were approximately $613.0 million; related-party mezzanine facilities were $81.2 million and carry 13% interest. The company said it was in compliance with debt covenants.
Material changes and unusual items
- The business combination generated $284.0 million of gross proceeds: $34.0 million from the SPAC trust and operating accounts, $200.0 million from a PIPE investment, and $50.0 million under forward purchase agreements. Transaction costs were $51.2 million, and $63.4 million of debt and accrued interest was repaid at closing.
- The combination brought 21.8 million public and private warrants onto the balance sheet as liabilities. Their fair value increased by $13.2 million in the quarter, producing a non-cash expense and contributing to the quarterly net loss; warrant liabilities were $39.7 million at quarter-end.
- Interest expense rose to $5.5 million in Q3 from $1.3 million, principally because average debt outstanding increased with inventory growth. The company reported $9.7 million of interest expense for the nine months.
- Inventory impairments were $1.0 million in Q3 2021 versus $0.1 million in Q3 2020, and $1.3 million for the nine-month period versus $3.0 million in 2020.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings, or margin guidance. Management described plans to expand market share and markets, develop Flex and ancillary services, and grow inventory; it also expected working-capital needs to rise. Management cautioned that new markets may initially have lower margins and that public-company costs and interest expense may increase.
- Key risks include home-price and transaction-volume changes, inventory valuation and sell-through, renovation delays or cost overruns, seasonality, and concentration in a handful of markets.
- The business depends on asset-backed financing. A senior facility with $387.2 million outstanding matured in August 2022; management expected to renew or replace financing, but stated that access and terms were not assured. Variable-rate debt exposes results to higher interest rates.
- As of September 30, the company was under contract to purchase 415 homes for approximately $140.0 million. Other stated minimum commitments totaled $7.7 million.
- The company disclosed ordinary-course legal proceedings and did not expect any to materially affect its financial condition, results, or cash flows, while noting litigation outcomes are uncertain.
- The business combination created a dual-class structure. CEO Brian Bair’s Class B shares carried 10 votes per share under specified sunset conditions; the filing reported approximately 40.3% of voting power beneficially controlled by Mr. Bair as of September 30.
- Management said disclosure controls were effective and that a material weakness inherited from Supernova relating to warrant accounting had been remediated as of September 30, 2021.
Important facts for investors to verify
- Whether inventory turns, resale pricing, and gross and contribution margins remain sound as the substantially larger home portfolio is sold.
- Availability, renewal terms, maturity dates, borrowing capacity, covenants, and related-party terms of inventory financing, including the 13% mezzanine debt.
- How much of reported quarterly loss and future earnings volatility comes from warrant fair-value changes, and the potential dilution from 21.8 million warrants and equity plans.
- Whether cash generation and liquidity remain adequate after inventory investment, transaction costs, public-company expenses, and debt service.
- Whether market expansion, customer acquisition spending, and Flex or ancillary offerings improve returns without increasing inventory or execution risk.