Porch Group, Inc. quarterly report, Q3 FY2022

Porch Group, Inc. — Q3 2022 Form 10-Q

Reporting period: Three and nine months ended September 30, 2022. Unaudited results; financial amounts below are in U.S. dollars. Porch operates Vertical Software and Insurance segments, serving home-services businesses and consumers.

Key financial results

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Revenue	$75.4 million	$62.8 million	$208.7 million	$140.9 million
Operating loss	$(84.9) million	$(12.6) million	$(141.0) million	$(65.0) million
Net loss	$(86.4) million	$(5.1) million	$(118.6) million	$(86.5) million
Adjusted EBITDA (non-GAAP)	$(13.0) million	$0.9 million	$(34.3) million	$(18.6) million
Operating cash flow	Not separately presented for the quarter	$(12.8) million	$(41.7) million

Q3 revenue grew 20%; nine-month revenue grew 48%. Growth reflected acquisitions, post-acquisition growth and organic growth. Insurance revenue was $30.9 million in Q3, up from $20.5 million; Vertical Software revenue was $44.5 million, up from $42.3 million.
Q3 revenue less cost of revenue was $42.1 million, or approximately 56% of revenue, versus $43.6 million, or approximately 69%, a year earlier. The company attributed the margin decline primarily to higher insurance claims costs and business mix. For the nine months, the measure was $125.7 million, approximately 60% of revenue, versus $96.3 million, approximately 68%.
Cash and cash equivalents were $260.2 million at September 30; restricted cash was $16.8 million. Cash, cash equivalents and restricted cash together fell $47.8 million from year-end 2021. Current assets were $645.9 million and current liabilities $503.6 million.
Debt principal totaled $440.5 million: $425.0 million of 0.75% convertible notes due 2026 and approximately $15.5 million of other debt, including variable-rate facilities. Debt carrying value was $431.3 million. The $5.0 million line of credit matured November 16, 2022; management said it intended to extend it. The company reported covenant compliance at quarter-end.
Stockholders’ equity was $115.1 million, down from $217.0 million at December 31, 2021; accumulated deficit was $542.7 million. Basic and diluted Q3 loss per share was $0.88.

Material changes and unusual items

Operating results included $57.1 million of impairment charges: $39.4 million of Insurance goodwill and $17.7 million of Vertical Software intangible assets. Management cited a sustained share-price decline, inflationary cost pressure and deterioration in housing and real estate conditions.
Insurance claims were elevated, including from volatile weather events and Hurricane Ian; inflation also increased claims costs. Q3 Insurance segment Adjusted EBITDA was a $2.3 million loss, compared with $5.5 million income a year earlier. Vertical Software segment Adjusted EBITDA was $5.0 million, down from $7.7 million.
Q3 2022 net loss was substantially affected by impairment charges. For the nine months, gains from changes in fair value of earnout and private warrant liabilities benefited reported results; these are non-cash valuation items.
Operating cash use improved year over year, but working-capital movements included a $75.6 million increase in reinsurance balances due, partly offset by increases in deferred revenue and insurance reserves. Investing cash use was $46.4 million, including $37.0 million for acquisitions net of cash acquired. Financing provided $11.5 million.
Porch acquired Residential Warranty Services (RWS) in April for stated aggregate consideration of $39.0 million. The planned CSE acquisition agreement was terminated in August 2022.

Outlook, risks and contingencies

Management stated that quarter-end cash was sufficient for operations, planned capital expenditures, working capital and debt service for at least the next 12 months, based on its current operating and growth plan. No specific financial guidance or quantified forecast is provided in the filing.
Management cited a weakening housing market: existing home sales were down more than 22% year over year in Q3, alongside higher interest rates, limited inventory and affordability challenges. It also warned that sustained inflation may raise costs, reduce consumer spending and pressure margins.
Insurance concentration and reinsurance are relevant risks: two reinsurers accounted for 44% of the insurance subsidiary’s reinsurance balance due in aggregate. The insurance business is subject to state regulation, and subsidiary distributions to the holding company may be restricted.
Disclosure controls and procedures were reported ineffective at September 30, 2022, due to previously identified material weaknesses in internal control over financial reporting. Management described remediation efforts but cautioned that remediation may be costly and success is not assured.
Twelve TCPA-related proceedings remained in litigation; the company said the outcome and potential loss range could not be estimated. A separate wage-and-hour class settlement was finalized. The company stated that it believed no current legal proceeding would individually or collectively have a material adverse effect.
After quarter-end, the board authorized up to $15 million for repurchases of common stock or convertible notes from November 10, 2022 through June 30, 2023. The program does not obligate the company to make purchases.

Important facts for investors to verify

Whether insurance claims severity, reinsurance recoveries and catastrophe exposure affect subsequent loss reserves and cash needs.
Whether the company extends or repays the $5.0 million line of credit that matured in November 2022, and how it manages the $425.0 million convertible notes due 2026.
Progress and evidence of remediation for the material weaknesses in internal controls.
Whether housing-market pressure, acquisitions and integration, and operating costs improve or worsen segment profitability and Adjusted EBITDA.
The assumptions behind the $57.1 million impairment, including valuation inputs and potential further impairment; and the potential dilution from equity awards and convertible securities.