Porch Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. Amounts below are in U.S. dollars. Porch operates a home-services software and services platform and, following its April 5 acquisition of Homeowners of America (HOA), also owns an insurance carrier and managing general agency.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $51.3 million | $17.1 million | $78.1 million | $32.2 million |
| Operating loss | $(22.9) million | $(5.0) million | $(52.6) million | $(18.4) million |
| Net loss | $(16.3) million | $(6.3) million | $(81.4) million | $(24.6) million |
| Adjusted EBITDA loss | $(10.3) million | $(2.1) million | $(19.9) million | $(12.9) million |
Q2 revenue increased 200% year over year; six-month revenue increased 143%. Core services, managed services, and software/subscription revenue were $28.7 million, $9.7 million, and $13.0 million, respectively, in Q2. Management attributed growth to acquisitions and organic expansion in moving, inspection, and insurance, partly offset by divested-business revenue.
Q2 cost of revenue was $19.5 million, or 38% of revenue, versus $3.8 million, or 22%, a year earlier. The implied gross margin before other operating expenses was about 62%, versus 78%. Selling and marketing was $23.1 million; product and technology was $11.1 million; general and administrative was $20.6 million. Expenses increased with business growth, acquisitions, public-company costs, hiring, and higher stock compensation. Q2 stock-based compensation was $6.6 million, compared with $0.4 million.
Q2 net loss included a $7.7 million income-tax benefit and $8.3 million gain on debt extinguishment, partly offset by $4.0 million earnout-liability remeasurement expense and $4.3 million private-warrant remeasurement expense. For the first half, fair-value remeasurement losses on earnout and private warrant liabilities totaled $43.0 million. These items make GAAP net loss comparisons less indicative of operating performance; Adjusted EBITDA is a company-defined non-GAAP measure.
For the six months, operating cash use was $30.8 million, investing cash use was $131.3 million (including $127.9 million of acquisitions, net of acquired cash), and financing cash provided was $107.0 million, primarily from warrant exercises. Cash, cash equivalents, and restricted cash declined $55.0 million to $152.4 million; this included $150.2 million cash and cash equivalents and $2.2 million restricted cash at June 30. Investments totaled approximately $67.4 million.
At June 30, total assets were $777.6 million and total liabilities were $548.9 million. Debt principal was $46.7 million; reported debt carrying value was $43.9 million. The senior secured term loan bears an 8.55% variable rate and matures in 2024; the company reported compliance with debt covenants. Current assets of $500.4 million and current liabilities of $417.0 million include substantial insurance-related balances, including $308.0 million reinsurance balance due, $115.5 million gross loss reserves, $106.2 million other current insurance liabilities, and $162.6 million deferred revenue, mostly unearned premiums and ceding commissions.
Changes, outlook, and risks
- Acquisitions and financing: Porch spent $127.9 million net cash on acquisitions and issued $22.9 million of stock consideration during the first half. Key acquisitions included V12 Data, HOA, and Rynoh. Public-warrant exercises generated $126.8 million in cash and increased shares outstanding. Outstanding common shares were 96.3 million at June 30, versus 81.7 million at year-end 2020.
- Management outlook: No specific revenue, earnings, or other quantitative guidance is provided. Management said cash and available senior secured borrowing were expected to fund operations, planned capital expenditures, working capital, and debt service for at least 12 months. Management also noted possible future need for additional capital.
- Insurance exposure: HOA expanded Porch into underwriting and claims liabilities. The company relies on reinsurance, and reports that reinsurance may not fully protect it against catastrophe losses, reserve inadequacy, or reinsurer nonpayment. HOA loss reserves are estimates and actual claims could differ. Weather-related losses contributed to the deterioration in first-half Adjusted EBITDA.
- Other risks and contingencies: COVID-19’s future impact remains uncertain; the business is seasonal and exposed to housing and consumer conditions, competition, acquisition integration, and insurance regulation. Fourteen TCPA-related proceedings remain unresolved, with potential losses not estimable; other earnout and wage-and-hour matters are also described. No quantified loss range is provided for the TCPA cases.
- Controls: Management concluded disclosure controls were not effective at June 30 because of previously reported material weaknesses in internal control over financial reporting. Remediation was underway, with no assurance it would succeed. Porch expected to lose emerging-growth-company status at year-end 2021, increasing reporting and audit requirements.
Investor verification priorities
- Check organic growth and acquisition contributions separately, including whether the acquired businesses and integration deliver expected benefits.
- Assess insurance underwriting results, weather-related claims, reserve adequacy, reinsurance recoverability, and the concentration of insurance-related working-capital balances.
- Reconcile reported cash and investments with operating cash burn, acquisition spending, debt obligations, and management’s 12-month liquidity assessment.
- Track stock-based compensation, earnout and warrant fair-value charges, share-count dilution, and the distinction between GAAP results and Adjusted EBITDA.
- Monitor remediation of the material weaknesses, the TCPA and other legal proceedings, and any updates to insurance or other contingent liabilities.