Porch Group, Inc. (PRCH) FY 2021 MD&A

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:

●costs related to being a public company;

●litigation, complaints, and/or adverse publicity;

●privacy and data protection laws, privacy or data breaches, or the loss of data; and

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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Business Overview

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™, a developer of ERP and CRM software for home inspectors. In November 2018, we acquired HireAHelper™, 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.

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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:

​

​

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.

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The following table summarizes our monetized services and average revenue per monetized service for each of the quarterly periods indicated:

​

​

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.

Recent Developments

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:

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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.

COVID-19 Impact

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:

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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

Total Revenue

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 services. The Company generally invoices for managed services projects on a fixed fee or time and materials basis. The transaction price represents the contractually agreed upon price with the end customer for providing the respective service. Revenue is recognized as services are performed based on an output measure or progress, which is generally over a short duration (e.g., same day). Fees earned for providing managed services projects are non-refundable and there is generally no right of return.

Software and Service Subscription Revenue primarily relates to subscriptions to the Company’s home inspector software, marketing software and services, and other vertical software. The Company’s subscription arrangements for this revenue stream do not provide the customer with the right to take possession of the software supporting the cloud-based application services. The Company’s standard subscription contracts are monthly contracts in which pricing is based on a specified price per inspection completed through the software. Marketing software and services are primarily contractual monthly recurring billings. Fees earned for providing access to the subscription software are non-refundable

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and there is no right of return. Revenue is recognized based on the amount which the Company is entitled to for providing access to the subscription software during the monthly contract term.

Total Costs and Expenses

Operating expenses

Operating expenses are categorized into five categories:

The categories of operating expenses, except gains and losses on divestiture of businesses, include both, cash expenses and non-cash charges, such as stock-based compensation, depreciation and amortization. Depreciation and amortization are recorded in all operating expense categories, and consist of depreciation from property, equipment and software and intangible assets.

Cost of revenue primarily consists of third-party providers for moving labor and services under the Managed Services model, insurance claims losses and loss adjustment expenses including warranty claims, data costs related to marketing campaigns, certain call center costs, credit card processing and merchant fees and operational cost of SaaS businesses.

Selling and marketing expenses primarily consist of deferred policy acquisition costs (“DAC”) of new and renewal insurance contracts, third-party data leads, affiliate and partner leads, paid search and search engine optimization (“SEO”) and marketing (“SEM”) costs, payroll, employee benefits and stock-based compensation expense and other headcount related costs associated with sales efforts directed toward companies and consumers. Selling and marketing costs are classified as either fixed or variable.

The Company capitalizes DAC which consist primarily of commissions, premium taxes and policy underwriting and production expenses that are directly related to the successful acquisition by the Company’s insurance subsidiary of new or renewal insurance contracts. DAC are amortized to expense on a straight-line basis over the terms of the policies to which they relate, which is generally one year. DAC is also reduced by ceding commissions paid by reinsurance companies which represent recoveries of acquisition costs. DAC is periodically reviewed for recoverability and adjusted if necessary.

Product and technology development costs primarily consist of payroll, employee benefits, stock-based compensation expense, other headcount related costs associated with product development, net of costs capitalized as

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internally developed software, cloud computing, hosting and other technology costs, software subscriptions, professional services and amortization of internally development software.

General and administrative expenses primarily consist of expenses associated with functional departments for finance, legal, human resources and executive management expenses. The primary categories of expenses include payroll, employee benefits, stock-based compensation expense and other headcount related costs, rent for office space, legal and professional fees, taxes, licenses and regulatory fees, merger and acquisition transaction costs, and other administrative costs.

Loss on divestiture of businesses primarily consist of losses on the sale of two businesses in 2019. Gain on divestiture of businesses consists of gain on the sale of a business during the year ended December 31, 2020.

Critical Accounting Policies and Estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. These estimates and assumptions include, but are not limited to, estimated variable consideration for services performed, estimated lifetime value of the insurance agency commissions, current estimate for credit losses, depreciable lives for property and equipment, the valuation of and useful lives for acquired intangible assets, goodwill, the valuation allowance on deferred tax assets, assumptions used in stock-based compensation expense, unpaid losses for insurance claims and loss adjustment expenses, contingent consideration, earnout liabilities and private warrant liabilities, all of which are evaluated by management. Actual results could differ materially from those estimates and assumptions, and those differences could be material to the consolidated financial statements.

At least quarterly, we evaluate our estimates and assumptions and make changes accordingly. For information on our significant accounting policies, 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.

Certain accounting policies have a more significant impact on our financial statements due to the size of the financial statement elements and prevalence of their application. The following is a summary of some of the more critical accounting policies and estimates.

Revenue Recognition

Effective January 1, 2019, the Company’s revenue recognition policy is a critical policy due to the adoption of the guidance from ASC 606, Revenue from Contracts with Customers, and because of the variety of revenue generating transactions.

The Company determines revenue recognition through the following five-step framework:

The Company identifies performance obligations in its contracts with customers (excluding insurance contracts), which primarily include delivery of homeowner leads or the sale of insurance policies (Core Services Revenue),

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performance of home project and moving services (Managed Services Revenue), and providing access to the Company’s software platforms (Software Subscription Revenue). The transaction price is determined based on the amount which the Company expects to be entitled to in exchange for providing the promised services to the customer. The transaction price in the contract is allocated to each distinct performance obligation on a relative standalone selling price basis. Revenue is recognized when performance obligations are satisfied. In certain transactions the transaction price is considered variable and an estimate of the constrained transaction price is recorded by the Company. Changes in variable consideration may result in an increase or a decrease to revenue. Changes to the estimated variable consideration were not material for the periods presented.

Contract payment terms vary from due upon receipt to net 30 days. Collectability is assessed based on a number of factors including collection history and creditworthiness of the customer. If collectability of substantially all consideration to which the Company is entitled under the contract is determined to be not probable, revenue is not recorded until collectability becomes probable at a later date.

Stock-Based Compensation

Accounting for stock-based compensation is a critical accounting policy due to the broad-based equity awards provided to employees at all levels within the Company and the use of equity awards as part of the strategy to retain employees as a result of mergers and acquisitions. The Company issues stock-based compensation to employees and nonemployees in the form of stock options and restricted stock awards, including market-based restricted stock awards.

The fair value of stock options is based on the date of the grant using the Black-Scholes option pricing model. There are a variety of estimates in the Black-Scholes opinion pricing model, including the determination of the fair value of the Company’s common stock, expected volatility, term, dividends and risk-free rate. The awards are accounted for by recognizing the fair value of the related award over the requisite service period, which is generally the vesting period. The awards are generally expensed on a straight-line basis, except for awards with performance or market conditions which are expensed on a graded vesting basis. Forfeitures are accounted for when they occur.

The fair value of restricted stock awards is determined using the closing price of the Company’s common stock on the grant date. The value of market-based restricted stock units is determined using a Monte Carlo simulation model that utilizes significant assumptions, including volatility, that determine the probability of satisfying the market condition stipulated in the award to calculate the fair value of the award.

Business Combinations

The Company has engaged in mergers and acquisitions and intends to continue to make acquisitions a significant part of our growth strategy. The Company made acquisitions with cash and non-cash consideration totaling $346.3 million in 2021 and $17.6 million in 2020. The Company accounts for business acquisitions using the acquisition method of accounting and records any identifiable intangible assets separate from goodwill. Intangible assets are recorded at their fair value based on estimates as of the date of acquisition. Goodwill is recorded as the residual amount of the purchase price consideration less the fair value assigned to the individual identifiable assets acquired and liabilities assumed as of the date of acquisition. The accounting estimates associated with acquisitions are complex due to judgements and assumptions involved in determining (1) the total consideration paid because we have used cash, stock and earnouts and (2) the value of assets acquired and liabilities assumed. The Company allocates the purchase price of the acquisition to the assets acquired and liabilities assumed based on estimates of the fair value at the dates of the acquisitions. Contingent consideration, which represents an obligation of the Company to make additional payments or equity interests to the former owner as part of the purchase price if specified future events occur or conditions are met, is accounted for at the acquisition date fair value either as a liability or as equity depending on the terms of the acquisition agreement.

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Results of Operations

Comparison of Year Ended December 31, 2021 to Year Ended December 31, 2020

The net loss in 2021 of $106.6 million compared with the net loss in 2020 of $54.0 million was impacted by large stock-based compensation charges totaling $23.0 million related to employee and CEO earnout restricted stock in 2021, and 2021 losses on the remeasurement of earnout and private warrant liabilities that totaled $33.9 million.

The following table sets forth our historical operating results for the periods indicated, with fiscal year 2020 incorporating operating results of since-divested businesses:

​

NM — percentage calculated is not meaningful.

Year ended December 31, 2021 and 2020

Revenue

Total revenue increased by $120.1 million, or 166% from $72.3 million in 2020 to $192.4 million in 2021. The increase in revenue in 2021 is driven by acquisitions and organic growth in our insurance business, moving services, and inspection business which contributed an aggregate of $124.4 million of the revenue, offset in part by the revenue contributed by divested businesses in 2020 of $4.3 million.

Cost of Revenue

Cost of revenue increased by $41.2 million, or 234% from $17.6 million in 2020 to $58.7 million in 2021. The increase in the cost of revenue was primarily attributable to the acquisition of HOA and AHP, which increased cost of

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revenue by $18.3 million for insurance losses, loss adjustment expenses and warranty claims. The growth in the moving business was $7.5 million, the data costs associated with marketing campaigns increased $8.2 million, certain call center operating costs increased $2.7 million and all other $4.5 million. As a percentage of revenue, cost of revenue represented 31% of revenue in 2021 compared with 24% in 2020.

Selling and marketing

Selling and marketing expenses increased by $42.6 million, or 102% from $41.7 million in 2020 to $84.3 million in 2021. The increase is due to $40.7 million related to higher selling and marketing costs associated with the growth in our moving, inspection and insurance businesses, as well as the selling and marketing costs of our acquired businesses. The selling and marketing costs of the acquired business mainly relate to the underwriting and policy acquisition costs for HOA and additional selling and marketing expenses for V12, AHP, Floify and Rynoh. Additionally, there was an increase of $3.7 million in stock-based compensation expenses. This is offset in part by our divested businesses’ selling and marketing costs of $1.8 million in 2020 that did not recur in 2021. As a percentage of revenue, selling and marketing expenses represented 44% of revenue in 2021 compared with 58% in 2020. The improvement in selling and marketing expenses as a percentage of revenue is due to the growing economies of scale in the insurance, inspection and moving groups.

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Product and technology

Product and technology expenses increased by $18.5 million, or 65% from $28.5 million in 2020 to $47 million in 2021. The increase is due to investments in moving, insurance, and inspection groups due to the growth in these businesses, product and technology costs from our acquired businesses and $2.0 million higher stock-based compensation expense. The product and technology costs of the acquired businesses attributed to $14.6 million of the increase, most notably V12, Floify and Rynoh. As a percentage of revenue, product and technology expenses represented 24% of revenue in 2021 compared with 39% in 2020. The improvement in product and technology expenses as a percentage of revenue is due to the growing economies of scale in the overall business.

General and administrative

General and administrative expenses increased by $57.6 million, or 204% from $28.2 million in 2020 to $85.8 million in 2021. The increase is primarily due to an increase in stock-based compensation of $21.6 million, increased legal, accounting, and professional expenses of $10.1 million as a public company that we did not incur as a private company in 2020. In addition, in 2021 there were higher costs related to increased hiring of corporate resources and employer portion of taxes related to vesting of restricted stock awards and bonuses. There were several acquisitions that were not a part of the Company in 2020, this led to an overall increase of $27 million of G&A costs incurred by the acquired entities. Additionally, from March 2020 through August 2020, the Company reduced pay for certain employees and partially or fully furloughed certain employees therefore reducing compensation expense in 2020.

Stock-based compensation consists of expense related to (1) equity awards granted as compensation in the normal course of business operations, (2) employee earnout restricted stock (see Note 9 Stock-Based Compensation to the

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accompanying consolidated financial statements included in Item 8 of this Annual Report), and (3) a secondary market transaction (dollar amounts in thousands):

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In 2019 and 2020, the Company’s CEO and certain executives of the Company entered into a series of secondary market transactions related to Porch.com redeemable convertible preferred stock. Refer to “Item 8. Financial Statements and Supplementary Data” in the 2020 Annual Report on Form 10-K/A as filed with the SEC on May 19, 2021 for the description of 2019 Secondary Stock Transaction. In 2020, stock-based compensation expense of $1.6 million was recorded related to these awards. The remaining stock-based compensation expense of $1.9 million related to these awards was recognized in the first quarter of 2021.

Loss on divestiture of businesses

There were no divestitures of businesses in 2021. In 2020, the Company divested a business tied to the Company’s early direct-to-consumer marketplace strategy. The Company recorded a gain on divestiture of $1.4 million in 2020.

Interest expense, net

Interest expense decreased by $8.9 million, or 61% from $14.7 million in 2020 to $5.8 million in 2021. This was primarily due to the pay down of high-rate debt to lower average levels in the first nine months of 2021 and the ultimate payoff of the senior secured debt in September 2021, lower average effective rates in 2021 offset by the interest expense related to the $425 million of convertible debt borrowing in September 2021.

Change in fair value of earnout liability

Change in fair value of earnout liability was $18.5 million (loss) in 2021. During 2021, $54.9 million of the earnout liability was reclassified to additional paid in capital as a result of vesting events in 2021.

Change in fair value of private warrant liability

Change in fair value of private warrant liability was $15.4 million (loss) and $2.4 million (gain) in 2021. During 2021, $31.7 million was reclassified to additional paid in capital as a result of warrant exercises. There were no exercises during 2020.

Gain (loss) on extinguishment of debt

Gain on extinguishment of debt was $5.1 million and $5.7 million in 2021 and 2020, respectively. The $5.1 million gain in 2021 consists of the $8.2 million gain on extinguishment of the Porch PPP Loan, offset by the $3.1 million loss on repayment of all outstanding obligations under the Company’s senior secured term loans. The $5.7 million gain in the 2020 relates to the net impact of extinguishments of several Company’s legacy promissory notes.

Investment income and realized gains, net of investment expenses

Investment income and realized gains, net of investment expenses was $0.7 million in 2021. In April 2021, the Company acquired Homeowners of America Insurance Company that maintains a short-term and long-term investment portfolio that generated investment income for nine months in 2021. The Company did not have any material investments in 2020.

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Other income (expense), net

Other income (expense) was $0.3 million of income, net in 2021 compared to $6.9 million of expense, net in 2020. In 2020, the Company recorded $4.0 million of transaction costs related to the recapitalization, and a combined $3.5 million loss on the remeasurement and extinguishment of debt and Legacy Porch warrants.

Income tax benefit (expense)

Income tax benefit of $10.3 million was recognized in 2021 primarily due to the partial release of the Company’s valuation allowance as a result of deferred tax liabilities from acquisitions. Income tax benefit of $1.7 million was recognized in 2020 primarily due to the partial release of the Company’s valuation allowance as a result of deferred tax liabilities from acquisitions. The Company’s effective tax rate in both periods differs substantially from the statutory tax rate primarily due to a full valuation allowance related to the Company’s net deferred tax assets.

Comparison of Year Ended December 31, 2020 to Year Ended December 31, 2019

The net loss in 2020 of $54.0 million compared with the net loss in 2019 of $103.3 million was impacted by a large, one-time stock-based compensation charge of $33.2 million related to the Company’s CEO 2019 secondary stock sale transaction, 2019 losses on the remeasurement or extinguishment of debt and warrants that totaled $9.0 million, and a $5.0 million gain on a divestiture of a businesses in 2019.

The following table sets forth our historical operating results for the periods indicated, with fiscal year 2019 incorporating operating results of since-divested businesses:

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NM — percentage calculated is not meaningful.

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Year ended December 31, 2020 and 2019

Revenue

Total revenue decreased by $5.3 million, or 7% from $77.6 million in the year ended December 31, 2019 to $72.3 million in the year ended December 31, 2020. Revenue decreased by $17.7 million due to divested Porch businesses, offset by increase in revenue in 2020 primarily driven by the growth in our moving services and insurance businesses, which contributed $13.8 million of the revenue increase in 2020. As Porch has grown the number of companies that use our software and services, we have been able to grow our B2B2C (“Business to Business to Consumer”) and move related services revenues. This includes revenues related to moving, insurance, TV/Internet connections, and security.

Cost of Revenue

Cost of revenue decreased by $3.9 million, or 18% from $21.5 million in the year ended December 31, 2019 to $17.6 million in the year ended December 31, 2020. The decrease in the cost of revenue was mostly attributable to a $5.9 million of costs related to divested businesses, offset by growth in moving services. As a percentage of revenue, cost of revenue represented 24% of revenue in 2020 compared to 28% in 2019.

Selling and marketing

Selling and marketing expenses decreased by $14.5 million, or 26% from $56.2 million in the year ended December 31, 2019 to $41.7 million in the year ended December 31, 2020. The decrease is due to $6.8 million related to divested businesses, $7.6 million mainly related to savings in third party data leads and marketing costs. The spend on data leads was optimized by focusing on the most productive lead sources that reduced overall spend and generated higher revenue. As a percentage of revenue, selling and marketing expenses represented 58% of revenue in 2020 compared with 73% in 2019 due to the economies of scale.

Product and technology

Product and technology expenses decreased by $2.5 million, or 8% from $31 million in the year ended December 31, 2019 to $28.5 million in the year ended December 31, 2020. The $2.7 million decrease is due to divested businesses of $3.1 million, offset by growth in our moving group. As a percentage of revenue, product and technology expenses represented 39% of revenue in 2020 compared with 40% in 2019.

General and administrative

General and administrative expenses decreased by $23.8 million, or 46% from $52 million in the year ended December 31, 2019 to $28.2 million in the year ended December 31, 2020. primarily due to a significantly higher stock-based compensation charge related to the 2019 secondary market transaction as indicated in the table below, offset by higher stock-based compensation related to employee awards in 2020.

Stock-based compensation consists of expense related to (1) equity awards in the normal course of business operations and (2) a secondary market transaction as described below (dollar amounts in thousands):

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In May 2019, the Company’s CEO purchased a total of 16,091,277 legacy Porch.com shares of redeemable convertible preferred stock from a significant Porch stockholder at the time for an aggregate purchase price of approximately $4.0 million ($0.25 per legacy Porch.com share). The Company determined that the purchase price was below fair value of such shares and as result recorded compensation expense of approximately $33.2 million in general

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and administrative expense for the difference between the purchase price and fair value. This secondary stock transaction was a transaction negotiated by such significant Porch stockholder and the CEO, whereby the CEO transferred funds for the purchase to the selling shareholder and did not involve a grant of new shares by the Company to the CEO. Due to the unique circumstances, this stock-based compensation charge in 2019 attributable to the CEO purchasing stock from a shareholder is not expected to reoccur in future years.

In July 2019, the Company’s CEO and Founder subsequently sold 901,940 shares of legacy Porch.com redeemable convertible preferred stock as an incentive to eleven executives of the Company at the same price at which the shares were initially acquired in the May 2019 transaction. The Company has the right to repurchase such shares if certain service vesting conditions and performance conditions are not met. In December 2020, the performance vesting conditions were met, and compensation expense of $1.6 million was recorded in 2020 related to these awards. The remaining stock compensation related to the award will be recognized over the remaining service period.

Loss on divestiture of businesses

In each of 2020 and 2019, the Company divested a business tied to the Company’s early Direct to Consumer (“D2C”) marketplace strategy. The Company recorded a gain on divestiture of $1.4 million in 2020, and a loss on divestiture of $5.0 million in 2019.

Interest expense, net

Interest expense increased by $7.6 million, or 107% from $7.1 million in the year ended December 31, 2019 to $14.7 million in the year ended December 31, 2020. The increase was primarily due to higher average interest-bearing debt outstanding throughout 2020 compared to 2019. Over the course of the year, the Company borrowed more than $67 million of high-interest bearing debt which was mostly paid off upon the Merger, which resulted in higher interest payments and write offs of the related debt issuance costs.

Gain (loss) on extinguishment of debt

Gain (loss) on extinguishment of debt was $5.7 million (gain) and $0.5 million (loss) in 2020 and 2019, respectively. These gains and losses relate to the net impact of extinguishments of several Company’s legacy promissory notes.

Change in fair value of private warrant liability

Gain in fair value of private warrant liability was $2.4 million in the year ended December 31, 2020. Private warrant liability was established for private warrants issued in connection with the Merger on December 23, 2020. The change in fair value of private warrant liability in each period is presented as a non-cash gain or loss in the Company’s consolidated statements of operations.

Other income (expense), net

Other expense, net was a $6.9 million in the year ended December 31, 2020, compared to $7.5 million in the year ended December 31, 2019. Losses on the remeasurement of debt and warrants totaled $3.5 million and $8.2 million in 2020 and 2019, respectively. In 2020, the Company recorded $4.0 million in transaction costs related to the Merger.

Income tax benefit (expense)

The income tax benefit of $1.7 million in 2020 was due to the partial release of the Company’s valuation allowance as a result of deferred tax liabilities from acquisitions. The income tax expense was not material in 2019. The Company continues to recognize a full valuation allowance against substantially all of its net deferred tax assets.

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Segment Results of Operations

We operate our business as two reportable segments that are also our operating segments: Vertical Software and Insurance. For additional information about our segments, see Note 17 (Segment Information) to the accompanying consolidated financial statements included in Item 8 of this Annual Report.

Segment Revenue

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In 2021 the Vertical Software segment revenues were $137.1 million or 71% of total revenue. The Company acquired V12, Rynoh and Floify in January 2021, May 2021 and October 2021, respectively.

The Insurance segment revenues were $55.3 million or 29% of total revenue during the same period. The Company acquired Homeowners of America Insurance Company and American Home Protect in April 2021 and September 2021, respectively. In 2020, our insurance revenue was generated solely from third-party insurance carriers through EIG, which began its operations in early 2020.

Segment Adjusted EBITDA (Loss)

Segment Adjusted EBITDA (loss) is defined as revenue less operating expenses associated with our segments. Segment Adjusted EBITDA (loss) also excludes non-cash items, certain transactions that are not indicative of ongoing segment operating and financial performance and are not reflective of the Company’s core operations. See Note 17 (Segment Information) to the accompanying consolidated financial statements included in Item 8 of this Annual Report for additional information.

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(1) Includes costs that are not directly attributable to our reportable segments, as well as certain shared costs.

(2) See reconciliation of adjusted EBITDA (loss) to net loss below.

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Non-GAAP Financial Measures

This Annual Report includes non-GAAP financial measures, such as Adjusted EBITDA (loss), Adjusted EBITDA (loss) as a percent of revenue, average revenue per monetized service and contribution margin.

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Porch defines Adjusted EBITDA (loss) as net income (loss) adjusted for interest expense, net, income taxes, other expenses, net, depreciation and amortization, certain non-cash long-lived asset impairment charges, stock-based compensation expense and acquisition-related impacts, amortization of intangible assets, gains (losses) recognized on changes in the value of contingent consideration arrangements, if any, gain or loss on divestures and certain transaction costs. Adjusted EBITDA (loss) as a percent of revenue is defined as Adjusted EBITDA (loss) divided by GAAP total revenue. Average revenue per monetized services in quarter is the average revenue generated per monetized service

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performed in a quarterly period. When calculating average revenue per monetized service in a quarter, average revenue is defined as total quarterly service transaction revenues generated from monetized services.

Contribution margin is calculated as revenue less cost of revenue less variable selling and marketing costs. Variable selling and marketing costs consist of third-party leads, affiliates, paid search engine optimization (“SEO”) and search engine marketing (“SEM”), advertising costs and compensation for individuals in certain sales and marketing departments.

Porch management uses these non-GAAP financial measures as supplemental measures of Porch’s operating and financial performance, for internal budgeting and forecasting purposes, to evaluate financial and strategic planning matters, and to establish certain performance goals for incentive programs. Porch believes that the use of these non-GAAP financial measures provides investors with useful information to evaluate Porch’s operating and financial performance and trends and in comparing Porch’s financial results with competitors, other similar companies and companies across different industries, many of which present similar non-GAAP financial measures to investors. However, Porch’s definitions and methodology in calculating these non-GAAP measures may not be comparable to those used by other companies. In addition, Porch may modify the presentation of these non-GAAP financial measures in the future, and any such modification may be material.

You should not consider these non-GAAP financial measures in isolation, as a substitute to or superior to financial performance measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude specified income and expenses, some of which may be significant or material, that are required by GAAP to be recorded in Porch’s consolidated financial statements. Porch may also incur future income or expenses similar to those excluded from these non-GAAP financial measures, and Porch’s presentation of these measures should not be construed as an inference that future results will be unaffected by unusual or non-recurring items. In addition, these non-GAAP financial measures reflect the exercise of management judgment about which income and expense are included or excluded in determining these non-GAAP financial measures.

See the reconciliation tables below for more details regarding these non-GAAP financial measures, including the reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures.

Revenue Less Cost of Revenue and Contribution Margin

The following table reconciles revenue to contribution margin for the years ended December 31, 2021, 2020 and 2019, respectively (dollar amounts in thousands):

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Contribution margin increased by $53.0 million, or 236.4% from $22.4 million in the year ended December 31, 2020 to $75.4 million in the year ended December 31, 2021. The increase is comprised of $48.7 million contributed by our acquired businesses, with the remainder due to the growth in our vertical software and insurance segments.

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Adjusted EBITDA (loss)

The following table reconciles net loss to Adjusted EBITDA (loss) for the years ended December 31, 2021, 2020 and 2019, respectively (dollar amounts in thousands):

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Adjusted EBITDA (loss) for the year ended December 31, 2021 was $24 million, a $5.7 million decline from Adjusted EBITDA (loss) of $18.3 million for the year ended December 31, 2020. The increase in Adjusted EBITDA (loss) from 2020 to 2021 was mainly due to the weather-related loss impact of the HOA business, increased investments in our product, data platform and marketing channels, and higher general and administrative costs as a public company. This was offset by the growth in our vertical software and insurance segments and acquired businesses.

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Liquidity and Capital Resources

Since inception, as a private company, we have financed our operations primarily from the sales of redeemable convertible preferred stock and convertible promissory notes, and proceeds from senior secured loans. On December 23, 2020, the Company received approximately $269.5 million of aggregate cash proceeds from recapitalization, net of transactions costs.

During 2021, the Company raised $126.7 million from exercise of public warrants and $4.3 million for the exercise of stock options.

In September 2021, the Company completed a private offering of $425 million aggregate principal amounts of its 2026 Notes. The Company used a portion of the net proceeds from the 2026 Notes offering to repay all outstanding obligations under a Loan and Security Agreement, dated as of July 22, 2020 (as subsequently amended, the “Runway Loan Agreement”), among the Company’s wholly owned subsidiary Porch.com, Inc., as borrower representative, a syndicate of lenders party thereto, the other borrowers party thereto, the guarantors party thereto and Runway Growth Finance Corp (f/k/a Runway Growth Credit Fund Inc.), as administrative agent and collateral agent, pursuant to which there was a $40.4 million senior secured term loan outstanding (the “Senior Secured Term Loan”). The total repayment amount of $42.8 million consisted of outstanding principal, accrued interest, prepayment fees and related expenses. Concurrent with such repayment in full of all outstanding obligations under the Senior Secured Term Loan on September 16, 2021, the Runway Loan Agreement (and all commitments and liens thereunder) was terminated. A loss on extinguishment of $3.1 million was recorded.

As of December 31, 2021, the Company had cash and cash equivalents of $315.7 million and $9.1 million of restricted cash.

The Company has incurred losses since its inception, and has an accumulated deficit at December 31, 2021 and December 31, 2020 totaling $424.1 million and $317.5 million, respectively. As of December 31, 2021, and December 31, 2020 the Company had $425.6 million and $50.8 million aggregate principal amount outstanding on term loans and promissory notes, respectively.

Based on the Company’s current operating and growth plan, management believes cash and cash equivalents at December 31, 2021, are sufficient to finance the Company’s operations, planned capital expenditures, working capital requirements and debt service obligations for at least the next 12 months. As the Company’s operations evolve and continues its growth strategy, including through acquisitions, the Company may elect or need to obtain alternative sources of capital, and it may finance additional liquidity needs in the future through one or more equity or debt financings. The Company may not be able to obtain equity or additional debt financing in the future when needed or, if available, the terms may not be satisfactory to the Company or could be dilutive to its stockholders.

Porch Group, Inc. is a holding company that transacts a majority of its business through operating subsidiaries, including insurance subsidiaries. Consequently, the Company’s ability to pay dividends and expenses is largely dependent on dividends or other distributions from its subsidiaries. Porch’s insurance company subsidiaries are highly regulated and are restricted by statute as to the amount of dividends they may pay without the prior approval of their respective regulatory authorities. As of December 31, 2021, cash of $35.1 million and investments held by these companies was $67.6 million.

Insurance companies in the United States are also required by state law to maintain a minimum level of policyholder’s surplus. Insurance regulators in the states in which we operate have a risk-based capital standard designed to identify property and casualty insurers that may be inadequately capitalized based on inherent risks of the insurer’s assets and liabilities and its mix of net written premium. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action. As of December 31, 2021, the total adjusted capital of our U.S. insurance subsidiary was in excess of its respective prescribed risk-based capital requirements.

The Company has used the proceeds from debt and equity principally to fund general operations and acquisitions.

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In 2021 and 2020, the Company invested $256.4 million and $7.8 million (net of cash acquired) to acquire a number of companies, in transactions accounted for as business combinations.

The following table provides a summary of cash flow data for the years ended December 31, 2021 and 2020:

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NM — percentage calculated is not meaningful.

2021

Net cash used in operating activities was $34.8 million for the year ended December 31, 2021. Net cash used in operating activities consists of net loss of $106.6 million, adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments primarily include stock-based compensation expense of $38.6 million, depreciation and amortization of $16.4 million, gain on extinguishment of debt of $5.1 million, and fair value adjustments to earnout liability and private warrant liability of $18.5 million and $15.4 million, respectively. Net changes in working capital provided $15.7 million, primarily due to increases in insurance-related liabilities.

Investing Cash Flows

Net cash used in investing activities was $263.4 million for the year ended December 31, 2021. Net cash used in investing activities is primarily related to acquisitions, net of cash acquired of $256.4 million, purchases of investment of $24.0 million, investments to develop internal use software of $3.7 million purchases of property and equipment of $1.0 million. This was partly offset by the cash inflows related to maturities and sales of investments of $21.7 million.

Financing Cash Flows

Net cash provided by financing activities was $415.5 million for the year ended December 31, 2021. Net cash provided by financing activities is primarily related to the issuance of the 2026 Notes of $413.5 million, exercises of warrants of $126.7 million and exercises of options $4.3 million. This was partially offset by financing of the capped call transactions of $52.9 million, debt repayments of $47.0 million and income tax withholdings upon vesting of RSUs of $28.9 million.

The following table provides a summary of cash flow data for the years ended December 31, 2020 and 2019:

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NM — percentage calculated is not meaningful.

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2020

Net cash used in operating activities was $48.7 million for the year ended December 31, 2020. Net cash used in operating activities consists of net loss of $54.0 million, adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments include stock-based compensation expense of $11.3 million, depreciation and amortization of $6.6 million, fair value adjustments to debt, contingent consideration and warrants of $0.6 million, non-cash accrued and payment-in-kind interest of $7.5 million and gain from the sale of assets or divestiture of businesses of $1.4 million.

Net cash used in investing activities was $10.7 million for the year ended December 31, 2020. Net cash used in investing activities is primarily related to investments to develop internal use software of $2.6 million, acquisitions, net of cash acquired of $7.8 million and purchases of property and equipment of $0.3 million.

Net cash provided by financing activities was $259.6 million for the year ended December 31, 2020. Net cash provided by financing activities is primarily related to proceeds from the recapitalization of $269.5 million, debt financing of $66.2, net of loan repayments of $81.6 million, and redeemable convertible preferred stock financing of $4.7 million.

2019

Net cash used in operating activities was $29.3 million for the year ended December 31, 2019. Net cash used in operating activities consists of net loss of $103.3 million, adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments include stock-based compensation expense of $36.0 million, depreciation and amortization of $7.4 million, fair value adjustments to debt, contingent consideration and warrants of $8.7 million, non-cash accrued and payment-in-kind interest of $2.4 million and loss from the sale of assets or divestiture of businesses of $5.0 million. Net changes in working capital provided cash of $13.2 million, primarily due to increases in current liabilities.

Net cash used in investing activities was $5.2 million for the year ended December 31, 2019. Net cash used in investing activities is primarily related to investments to develop internal use software of $4.1 million, divestitures of $0.8 million and purchases of property and equipment of $0.5 million.

Net cash provided by financing activities was $34.5 million for the year ended December 31, 2019. Net cash provided by financing activities is primarily related to debt financing of $31.1 million, net of loan repayments of $0.2 million, and redeemable convertible preferred stock financing of $3.3 million.

Contractual Obligations and Commitments

Our principal commitments consist of obligations under leases for office space. For more information regarding our lease obligations, see Note 13 (Leases) to the accompanying consolidated financial statements included in Item 8 of this Annual Report. In addition, we have a substantial level of debt. For more information regarding our debt service obligations, see Note 7 (Debt) to the accompanying consolidated financial statements included in Item 8 of this Annual Report. We also have certain non-cancellable purchase commitments primarily for data purchases. As of December 31, 2021, our other contractual commitments associated with agreements that are enforceable and legally binding and that specify all significant terms were payments of $2.5 million due in the next 12 months and $3.2 million due thereafter. We expect to fund these obligations with cash flows from operations and cash on our balance sheet. We have also entered into a stock purchase agreement with Covéa Coopérations to acquire Civil Service Employee Insurance Company for $48.6 million in cash.

During fiscal 2022 and in future years, we have made and expect to continue to make additional investments in our infrastructure to scale our operations and increase productivity. We plan to enhance the consumer experience, our app and digital platform and integration of data platform across Porch, to invest in development of additional modules across all vertical software businesses and to enhance our corporate systems.

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Off-Balance Sheet Arrangements

Since the date of our incorporation, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Emerging Growth Company Status

The Company was an emerging growth company (“EGC”), as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). In accordance with the JOBS Act, the Company previously elected to delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company met certain thresholds for qualification as a “large accelerated filer” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. Therefore, the Company no longer has EGC status as of December 31, 2021. The impact of this change in filing status includes being subject to the requirements of large accelerated filers, which includes shortened filing timelines, no delayed adoption of certain accounting standards, presentation of three comparative periods, and attestation of the Company’s internal control over financial reporting by its independent auditor.

Recent Accounting Pronouncements

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, for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one, of their potential impact on our financial condition and our results of operations.