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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
FORM 10-Q
___________________________________________________________
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to
Commission File Number: 001-39142
___________________________________________________________
Porch Group, Inc.
(Exact name of registrant as specified in its charter)
___________________________________________________________
| | | | | |
Delaware | 83-2587663 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
411 1st Avenue S., Suite 501, Seattle, WA 98104
(Address of Principal Executive Offices) (Zip Code)
(855) 767-2400
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
___________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of Each Class | | Trading symbol | | Name of Exchange on which registered |
Common Stock, par value $0.0001 per share | | PRCH | | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | |
Large accelerated filer | o | Accelerated filer | x | | |
Non-accelerated filer | o | Smaller reporting company | x | Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of outstanding shares of the registrant’s common stock as of November 1, 2024, was 119,543,583. This includes 18,312,208 shares of common stock held by Homeowners of America Insurance Company, the registrant’s subsidiary.
Table of Contents
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
PORCH GROUP, INC.
Condensed Consolidated Balance Sheets (Unaudited)
(all numbers in thousands unless otherwise stated, except per share data)
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 206,728 | | | $ | 258,418 | |
Accounts receivable, net | 21,318 | | | 24,288 | |
Short-term investments | 31,843 | | | 35,588 | |
Reinsurance balance due | 103,429 | | | 83,582 | |
Prepaid expenses and other current assets | 17,027 | | | 13,214 | |
Deferred policy acquisition costs | 16,575 | | | 27,174 | |
Restricted cash and cash equivalents | 9,950 | | | 38,814 | |
Total current assets | 406,870 | | | 481,078 | |
Property, equipment, and software, net | 21,141 | | | 16,861 | |
| | | |
Goodwill | 191,907 | | | 191,907 | |
Long-term investments | 165,935 | | | 103,588 | |
Intangible assets, net | 73,273 | | | 87,216 | |
| | | |
Other assets | 8,138 | | | 18,743 | |
Total assets | $ | 867,264 | | | $ | 899,393 | |
| | | |
Liabilities and Stockholders' Deficit | | | |
Current liabilities | | | |
Accounts payable | $ | 5,145 | | | $ | 8,761 | |
Accrued expenses and other current liabilities | 46,946 | | | 59,396 | |
Deferred revenue | 251,777 | | | 248,683 | |
Refundable customer deposits | 13,126 | | | 17,980 | |
Current debt | 150 | | | 244 | |
Losses and loss adjustment expense reserves | 100,610 | | | 95,503 | |
Other insurance liabilities, current | 73,753 | | | 31,585 | |
Total current liabilities | 491,507 | | | 462,152 | |
Long-term debt | 398,882 | | | 435,495 | |
| | | |
| | | |
| | | |
| | | |
Other liabilities | 53,918 | | | 37,429 | |
Total liabilities | 944,307 | | | 935,076 | |
Commitments and contingencies (Note 14) | | | |
Stockholders' deficit | | | |
Common stock, $0.0001 par value: | 10 | | | 10 | |
Authorized shares – 400 million and 400 million, at September 30, 2024, and December 31, 2023, respectively | | | |
Issued and outstanding shares – 118.9 million (1) and 97.1 million, at September 30, 2024, and December 31, 2023, respectively | | | |
Additional paid-in capital | 709,364 | | | 690,223 | |
Accumulated other comprehensive loss | (1,058) | | | (3,860) | |
Accumulated deficit | (785,359) | | | (722,056) | |
Total stockholders' deficit | (77,043) | | | (35,683) | |
Total liabilities and stockholders' deficit | $ | 867,264 | | | $ | 899,393 | |
______________________________________
(1)Includes 18.3 million shares of common stock held by Homeowners of America Insurance Company as of September 30, 2024.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
PORCH GROUP, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
(all numbers in thousands unless otherwise state, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Revenue | $ | 111,200 | | $ | 129,556 | | $ | 337,487 | | $ | 315,690 |
Operating expenses: | | | | | | | |
Cost of revenue | 47,076 | | 52,961 | | 214,566 | | 185,566 |
Selling and marketing | 27,233 | | 40,135 | | 94,378 | | 107,357 |
Product and technology | 14,559 | | 14,446 | | 43,210 | | 43,891 |
General and administrative | 24,875 | | 28,659 | | 75,504 | | 77,267 |
Provision for (recovery of) doubtful accounts | (39) | | (6,844) | | (520) | | 42,111 |
Impairment loss on intangible assets and goodwill | — | | — | | — | | 57,232 |
Total operating expenses | 113,704 | | 129,357 | | 427,138 | | 513,424 |
Operating income (loss) | (2,504) | | | 199 | | | (89,651) | | | (197,734) | |
Other income (expense): | | | | | | | |
Interest expense | (10,645) | | | (10,267) | | (31,758) | | (21,230) | |
Change in fair value of private warrant liability | 50 | | 260 | | 1,076 | | 620 |
Change in fair value of derivatives | (1,048) | | | 510 | | (7,772) | | (2,440) |
Gain on extinguishment of debt | 22,545 | | — | | 27,436 | | 81,354 |
Investment income and realized gains, net of investment expenses | 3,787 | | 2,485 | | 10,957 | | 4,492 |
Other income, net | 2,014 | | 1,185 | | 27,092 | | 3,525 | |
Total other income (expense) | 16,703 | | (5,827) | | 27,031 | | 66,321 |
Income (loss) before income taxes | 14,199 | | | (5,628) | | | (62,620) | | | (131,413) | |
Income tax benefit (provision) | 183 | | | (116) | | | (683) | | (34) | |
Net income (loss) | $ | 14,382 | | | $ | (5,744) | | | $ | (63,303) | | | $ | (131,447) | |
Other comprehensive income (loss): | | | | | | | |
Change in net unrealized loss, net of tax | 3,840 | | (1,567) | | 2,802 | | (1,472) |
Comprehensive income (loss) | $ | 18,222 | | | $ | (7,311) | | | $ | (60,501) | | | $ | (132,919) | |
| | | | | | | |
Net income (loss) per share - basic | $ | 0.14 | | | $ | (0.06) | | | $ | (0.64) | | | $ | (1.37) | |
Net income (loss) per share - diluted | $ | 0.12 | | | $ | (0.06) | | | $ | (0.64) | | | $ | (1.37) | |
| | | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
PORCH GROUP, INC.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)
(all numbers in thousands unless otherwise stated, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity (Deficit) |
| Shares | | Amount | | | | |
Balances as of June 30, 2024 | 100,025 | | $ | 10 | | | $ | 702,720 | | | $ | (799,741) | | | $ | (4,898) | | | $ | (101,909) | |
Net income | — | | — | | | — | | | 14,382 | | | — | | | 14,382 | |
Other comprehensive income, net of tax | — | | — | | | — | | | — | | | 3,840 | | | 3,840 | |
Stock-based compensation | 598 | | — | | | 6,735 | | | — | | | — | | | 6,735 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Income tax withholdings | (51) | | — | | | (91) | | | — | | | — | | | (91) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balances as of September 30, 2024 | 100,572 | | $ | 10 | | | $ | 709,364 | | | $ | (785,359) | | | $ | (1,058) | | | $ | (77,043) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity (Deficit) |
| Shares | | Amount | | | | |
Balances as of June 30, 2023 | 98,169 | | $ | 10 | | | $ | 683,151 | | | $ | (713,827) | | | $ | (6,076) | | | $ | (36,742) | |
Net loss | — | | — | | | — | | | (5,744) | | | — | | | (5,744) | |
Other comprehensive loss, net of tax | — | | — | | | — | | | — | | | (1,567) | | | (1,567) | |
Stock-based compensation | 372 | | — | | | 6,979 | | | — | | | — | | | 6,979 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Exercise of stock options | 7 | | — | | | 2 | | | — | | | — | | | 2 | |
Income tax withholdings | (66) | | — | | | (108) | | | — | | | — | | | (108) | |
Balances as of September 30, 2023 | 98,482 | | $ | 10 | | | $ | 690,024 | | | $ | (719,571) | | | $ | (7,643) | | | $ | (37,180) | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
PORCH GROUP, INC.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited) – Continued
(all numbers in thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity (Deficit) |
| Shares | | Amount | | | | |
Balances as of December 31, 2023 | 97,061 | | $ | 10 | | | $ | 690,223 | | | $ | (722,056) | | | $ | (3,860) | | | $ | (35,683) | |
Net loss | — | | — | | | — | | | (63,303) | | | — | | | (63,303) | |
Other comprehensive income, net of tax | — | | — | | | — | | | — | | | 2,802 | | | 2,802 | |
Stock-based compensation | 3,523 | | — | | | 19,208 | | | — | | | — | | | 19,208 | |
| | | | | | | | | | | |
Exercise of stock options | 328 | | — | | | 1,027 | | | — | | | — | | | 1,027 | |
Income tax withholdings | (340) | | — | | | (1,094) | | | — | | | — | | | (1,094) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balances as of September 30, 2024 | 100,572 | | 10 | | $ | 709,364 | | | $ | (785,359) | | | $ | (1,058) | | | $ | (77,043) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity (Deficit) |
| Shares | | Amount | | | | |
Balances as of December 31, 2022 | 98,206 | | $ | 10 | | | $ | 670,537 | | | $ | (585,023) | | | $ | (6,171) | | | $ | 79,353 | |
Net loss | — | | — | | | — | | | (131,447) | | | — | | | (131,447) | |
Other comprehensive loss, net of tax | — | | — | | | — | | | — | | | (1,472) | | | (1,472) | |
Stock-based compensation | 2,295 | | — | | | 20,277 | | | — | | | — | | | 20,277 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Exercise of stock options | 12 | | — | | | 10 | | | — | | | — | | | 10 | |
Income tax withholdings | (635) | | — | | | (991) | | | — | | | — | | | (991) | |
Repurchases of common stock | (1,396) | | — | | | — | | | (3,101) | | | — | | | (3,101) | |
Proceeds from sale of common stock | — | | — | | | 191 | | | — | | | — | | | 191 | |
Balances as of September 30, 2023 | 98,482 | | $ | 10 | | | $ | 690,024 | | | $ | (719,571) | | | $ | (7,643) | | | $ | (37,180) | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
PORCH GROUP, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(all numbers in thousands)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2024 | | 2023 |
Cash flows from operating activities: | | | |
Net loss | $ | (63,303) | | | $ | (131,447) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities | | | |
Depreciation and amortization | 18,568 | | | 18,501 | |
Provision for (recovery of) doubtful accounts | (520) | | | 42,111 | |
Impairment loss on intangible assets and goodwill | — | | | 57,232 | |
Gain on extinguishment of debt | (27,436) | | | (81,354) | |
Loss on divestiture of business | 5,331 | | | — | |
Change in fair value of private warrant liability | (1,076) | | | (620) | |
Change in fair value of contingent consideration | (158) | | | (3,597) | |
Change in fair value of derivatives | 7,772 | | | 2,440 | |
Stock-based compensation | 19,208 | | | 20,277 | |
Non-cash interest expense | 27,624 | | | 20,214 | |
Gain on settlement of contingent consideration | (14,930) | | | — | |
Other | (2,956) | | | 1,002 | |
Change in operating assets and liabilities, net of acquisitions and divestitures | | | |
Accounts receivable | (1,675) | | | (1,344) | |
Reinsurance balance due | (18,456) | | | 159,368 | |
Deferred policy acquisition costs | 10,599 | | | (23,746) | |
| | | |
Accounts payable | (3,616) | | | 2,778 | |
Accrued expenses and other current liabilities | (12,153) | | | (9,323) | |
Losses and loss adjustment expense reserves | 5,107 | | | 29,143 | |
Other insurance liabilities, current | 42,168 | | | (7,527) | |
Deferred revenue | 2,777 | | | (4,696) | |
Refundable customer deposits | (4,948) | | | (12,248) | |
| | | |
Other assets and liabilities, net | 6,993 | | | (2,266) | |
Net cash provided by (used in) operating activities | (5,080) | | | 74,898 | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (331) | | | (776) | |
Capitalized internal use software development costs | (8,590) | | | (6,923) | |
Purchases of short-term and long-term investments | (98,148) | | | (59,851) | |
Maturities, sales of short-term and long-term investments | 43,990 | | | 35,321 | |
Proceeds from sale of business | 10,870 | | | — | |
Acquisitions, net of cash acquired | — | | | (1,974) | |
Net cash used in investing activities | (52,209) | | | (34,203) | |
Cash flows from financing activities: | | | |
| | | |
Proceeds from advance funding | — | | | 319 | |
Repayments of advance funding | — | | | (2,962) | |
Proceeds from issuance of debt | — | | | 116,667 | |
Repayments of principal | (23,199) | | | (10,150) | |
Cash paid for debt issuance costs | — | | | (4,650) | |
| | | |
| | | |
| | | |
| | | |
Repurchase of stock | — | | | (5,608) | |
Other | (66) | | | (1,202) | |
Net cash provided by (used in) financing activities | (23,265) | | | 92,414 | |
Net change in cash and cash equivalents & restricted cash and cash equivalents | $ | (80,554) | | | $ | 133,109 | |
Cash and cash equivalents & restricted cash and cash equivalents, beginning of period | $ | 297,232 | | | $ | 228,605 | |
Cash and cash equivalents & restricted cash and cash equivalents, end of period | $ | 216,678 | | | $ | 361,714 | |
| | | |
Supplemental schedule of non-cash investing and financing activities | | | |
Non-cash reduction of convertible notes | $ | 28,180 | | | $ | — | |
Non-cash reduction in advanced funding arrangement obligations | $ | 94 | | | $ | 11,530 | |
Supplemental disclosures | | | |
Cash paid for interest | $ | 12,513 | | | $ | 2,155 | |
Income tax refunds paid (received) | $ | 546 | | | $ | (2,380) | |
| | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
PORCH GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all numbers in thousands, except share amounts and unless otherwise stated)
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Porch Group, Inc., together with its consolidated subsidiaries, (“Porch Group,” “Porch,” the “Company,” “we,” “our,” “us”) is a leading homeowners insurance and vertical software platform and is positioned to be one of the best partners to help homebuyers move, maintain, and fully protect their homes. We offer differentiated products and services, with homeowners insurance at the center of this relationship.
We differentiate and look to win in the massive and growing homeowners insurance opportunity by 1) providing the best services for homebuyers, 2) led by advantaged underwriting in insurance, 3) to protect the whole home.
As a leader in the home services software-as-a-service (“SaaS”) space, we’ve built deep relationships with approximately 28 thousand companies that are key to the home-buying transaction, such as home inspectors, mortgage companies, and title companies. These relationships provide us with early insights to United States (“U.S.”) homebuyers. In partnership with these companies, we have the ability to help simplify the move for consumers with services such as insurance, warranty, moving and more.
We have two reportable segments that are also our operating segments: Vertical Software and Insurance. See Note 16, Segment Information, for additional information on our reportable segments.
Through our vertical software products we have unique insights into the majority of U.S. properties. This data helps feed our insurance underwriting models, better understand risk, and create competitive differentiation in underwriting.
We provide full protection for the home by including a variety of home warranty products alongside homeowners insurance. We are able to fill the gaps of protection for consumers, minimize surprises, and deepen our relationships and value proposition.
Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements include the accounts of Porch Group, Inc., and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, these unaudited condensed consolidated financial statements and notes should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 15, 2024. The information as of December 31, 2023, included in the unaudited condensed consolidated balance sheets was derived from our audited consolidated financial statements. Certain prior period amounts have been reclassified to conform to the current year’s presentation.
The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q (this “Quarterly Report”) were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which are of a normal recurring nature) considered necessary to present fairly our financial position, results of operations, comprehensive loss, stockholders’ equity (deficit), and cash flows for the periods and dates presented. The results of operations for the three and nine months ended September 30, 2024, are not necessarily indicative of the results that may be expected for the year ending December 31, 2024, or any other interim period or future year due to various factors such as management estimates and the seasonal nature of some portions of our insurance business.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported of certain assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results may differ from those estimates and assumptions.
Concentrations
Financial instruments which potentially subject us to credit risk consist principally of cash, money market accounts on deposit with financial institutions, money market funds, certificates of deposit and fixed-maturity securities, as well as receivable balances in the course of collection.
Our insurance carrier subsidiary has exposure and remains liable in the event of insolvency of its reinsurers. Management and its reinsurance intermediary regularly assess the credit quality and ratings of its reinsurer counterparties. As of September 30, 2024, three reinsurers represented more than 10% individually, and 68% in the aggregate, of total reinsurance balance due on the Condensed Consolidated Balance Sheets.
Substantially all revenues in the Insurance segment are derived from customers in Texas (which represent approximately 71% of Insurance segment revenues in the nine months ended September 30, 2024), South Carolina, North Carolina, Virginia, Arizona, and Illinois, which could be adversely affected by economic conditions, an increase in competition, local weather events, or environmental impacts and changes.
No individual customer represented more than 10% of total consolidated revenue for the three and nine months ended September 30, 2024 or 2023. As of September 30, 2024, and December 31, 2023, no individual customer accounted for 10% or more of total accounts receivable, net, on the Condensed Consolidated Balance Sheets.
As of September 30, 2024, we held approximately $205.1 million of cash with five U.S. commercial banks.
Cash, Cash Equivalents and Restricted Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. We maintain cash balances that may exceed the insured limits by the Federal Deposit Insurance Corporation. The following table provides the components of restricted cash and cash equivalents on the unaudited Condensed Consolidated Balance Sheets:
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Held as collateral by captive reinsurer for benefit of HOA (1) | $ | 1,062 | | | $ | 28,341 | |
Pledged to state departments of insurance (2) | 1,201 | | | 1,340 | |
Held for payment of possible warranty claims (3) | 6,687 | | | 7,273 | |
Other | 1,000 | | | 1,860 | |
Restricted cash and cash equivalents | $ | 9,950 | | $ | 38,814 |
______________________________________
(1)Held by our captive reinsurance business as collateral for the benefit of Homeowners of America Insurance Company (“HOA”).
(2)Pledged to the Department of Insurance in certain states as a condition of our Certificate of Authority for the purpose of meeting obligations to policyholders and creditors.
(3)Required under regulatory guidelines in 22 states and 19 states as of September 30, 2024 and December 31, 2023, respectively.
The reconciliation of cash, cash equivalents, and restricted cash and cash equivalents to amounts presented in the unaudited Condensed Consolidated Statements of Cash Flows are as follows:
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Cash and cash equivalents | $ | 206,728 | | $ | 258,418 |
Restricted cash and cash equivalents | 9,950 | | 38,814 |
Cash, cash equivalents, and restricted cash and cash equivalents | $ | 216,678 | | $ | 297,232 |
Accounts Receivable and Long-term Insurance Commissions Receivable
Accounts receivable consist principally of amounts due from enterprise customers, other corporate partnerships, and individual policyholders. We estimate allowances for uncollectible receivables based on the creditworthiness of our customers, historical trend analysis, and macro-economic conditions. Consequently, an adverse change in those factors could affect our estimate of allowance for doubtful accounts. The allowance for uncollectible receivables at September 30, 2024, and December 31, 2023, was $0.9 million and $0.6 million, respectively.
Long-term insurance commissions receivable consists of the estimated commissions from policy renewals expected to be collected. We record the amount of renewal insurance commissions expected to be collected in the next twelve months as current accounts receivable.
Goodwill
We test goodwill for impairment for each reporting unit on an annual basis or more frequently when events or changes in circumstances indicate the fair value of a reporting unit is below its carrying value. We have the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If we can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, we would not need to perform a quantitative impairment test. If we cannot support such a conclusion or we do not elect to perform the qualitative assessment, then we perform a quantitative assessment. If a quantitative goodwill impairment assessment is performed, we utilize a combination of market and income valuation approaches. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the reporting unit is less than its carrying value. We have selected October 1 as the date to perform annual impairment testing.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions to evaluate the impact of operating and macroeconomic changes on each reporting unit. The fair value of each reporting unit was estimated using a combination of income and market valuation approaches using publicly traded company multiples in similar businesses. Such fair value measurements are based predominately on Level 3 inputs. This analysis requires significant judgments including an estimate of future cash flows which is dependent on internally developed forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital, which is risk-adjusted to reflect the specific risk profile of the reporting unit being tested.
Impairment of Long-Lived Assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Events that trigger a test for recoverability include a significant decrease in the market price for a long-lived asset, significant negative industry or economic trends, an accumulation of costs significantly in excess of the amount originally expected for the acquisition, a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset, or a sustained decrease in share price. When a triggering event occurs, a test for recoverability is performed, comparing projected undiscounted future cash flows to the carrying value of the asset group. If the test for recoverability identifies a possible impairment, the asset group’s fair value is measured relying primarily on an income approach. An impairment charge is recognized for the amount by which the carrying value of the asset group exceeds its estimated fair value. Management identifies the asset group that includes the potentially impaired long-lived asset, at the lowest level at which there are separate, identifiable cash flows.
We estimate the fair value of an asset group using the income approach. Such fair value measurements are based predominately on Level 3 inputs. Inherent in our development of cash flow projections are assumptions and estimates derived from a review of our operating results, business plan forecasts, expected growth rates, and cost of capital, similar to those a market participant would use to assess fair value. We also make certain assumptions about future economic conditions and other data. Many of these factors used in assessing fair value are outside the control of management and these assumptions and estimates may change in future periods.
Deferred Policy Acquisition Costs
We capitalize deferred policy acquisitions costs (“DAC”) which consist primarily of commissions, premium taxes and policy underwriting and production expenses that are directly related to the successful acquisition by our insurance company subsidiary of new or renewal insurance contracts. DAC are amortized 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. Future investment income is considered in determining the recoverability of DAC. Amortized deferred acquisition costs included in selling and marketing expense, amounted to $8.2 million and $15.7 million, for the three months ended September 30, 2024 and 2023, respectively, and $31.3 million and $34.3 million, for the nine months ended September 30, 2024 and 2023, respectively.
Expected Credit Losses
We regularly review our individual investment securities for factors that may indicate that a decline in fair value of an investment has resulted from an expected credit loss, including:
•the financial condition and near-term prospects of the issuer, including any specific events that may affect its operations or earnings;
•the extent to which the market value of the security is below its cost or amortized cost;
•general market conditions and industry or sector specific factors;
•nonpayment by the issuer of its contractually obligated interest and principal payments; and
•our intent and ability to hold the investment for a period of time sufficient to allow for the recovery of costs.
Fair Value of Financial Instruments
Fair value principles require disclosures regarding the manner in which fair value is determined for assets and liabilities and establishes a three-tiered fair value hierarchy into which these assets and liabilities must be grouped, based upon significant levels of inputs as follows:
Level 1 Observable inputs, such as quoted prices (unadjusted) in active markets for identical assets or liabilities at the measurement date;
Level 2 Observable inputs, other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. Management’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.
Other Insurance Liabilities, Current
The following table details the components of other insurance liabilities, current, on the unaudited Condensed Consolidated Balance Sheets:
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Ceded reinsurance premiums payable | $ | 41,889 | | $ | 10,500 |
Commissions payable, reinsurers and agents | 8,141 | | 4,650 |
Advance premiums | 18,244 | | 5,975 |
Funds held under reinsurance treaty | 4,339 | | 9,820 |
General and accrued expenses payable | 1,140 | | 640 |
Other insurance liabilities, current | $ | 73,753 | | $ | 31,585 |
Accounting Standards Not Yet Adopted
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting--Improvements to Reportable Segment Disclosures, which requires incremental disclosures about a public entity’s reportable segments but does not change the definition of a segment or the guidance for determining reportable segments. The new guidance requires disclosure of significant segment expenses that are (1) regularly provided to (or easily computed from information regularly provided to) the chief operating decision maker and (2) included in the reported measure of segment profit or loss. The new standard also allows companies to disclose multiple measures of segment profit or loss if those measures are used to assess performance and allocate resources. The guidance will first be effective in our annual disclosures for the year ending December 31, 2024, and will be adopted retrospectively unless impracticable. Early adoption is permitted. We are in the process of assessing the impact of ASU 2023-07 on our disclosures.
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which requires disaggregated information about our effective tax rate reconciliation as well as information on income taxes paid. The new guidance will first be effective in our annual disclosures for the year ending December 31, 2025, and should be applied on a prospective basis with the option to apply retrospectively. Early adoption is permitted. We are in the process of assessing the impact of ASU 2023-09 on our disclosures.
In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures, which requires that public entities disclose, on an annual and interim basis, disaggregated information about specific expense categories (including employee compensation, depreciation, and amortization) presented on the face of the income statement. The guidance will first be effective in our annual disclosures for the year ending December 31, 2027. Early adoption is permitted. We are in the process of assessing the impact of ASU 2024-03 on our disclosures.
Note 2. Revenue
Disaggregation of Revenue
The following table provides detail of total revenue:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Vertical Software segment | | | | | | | |
Software and service subscriptions | $ | 18,582 | | | $ | 17,307 | | | $ | 53,771 | | | $ | 51,640 | |
Move-related transactions | 8,311 | | | 12,488 | | | 24,289 | | | 32,503 | |
Post-move transactions | 4,359 | | | 4,533 | | | 13,280 | | | 13,247 | |
Total Vertical Software segment revenue | 31,252 | | | 34,328 | | | 91,340 | | | 97,390 | |
| | | | | | | |
Insurance segment | | | | | | | |
Insurance and warranty premiums, commissions and policy fees(1) | 79,948 | | | 95,228 | | | 246,147 | | | 218,300 | |
Total Insurance segment revenue | 79,948 | | | 95,228 | | | 246,147 | | | 218,300 | |
| | | | | | | |
Total revenue | $ | 111,200 | | | $ | 129,556 | | | $ | 337,487 | | | $ | 315,690 | |
______________________________________
(1)Revenue recognized during the three months ended September 30, 2024 and 2023, includes revenue of $73.6 million and $88.2 million, respectively, which is accounted for separately from the revenue from contracts with customers. Revenue accounted separately from the revenue from contracts with customers for the nine months ended September 30, 2024 and 2023, was $229.5 million and $193.2 million, respectively.
Disclosures Related to Contracts with Customers
Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to contracts with customers. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. To the extent a contract exists, as defined by ASC Topic 606, Revenue from Contracts with Customers, (“ASC 606”) these liabilities are classified as deferred revenue. To the extent that a contract does not exist, as defined by ASC 606, these liabilities are classified as refundable customer deposits.
Insurance Commissions Receivable
A summary of the activity impacting the contract assets during the nine months ended September 30, 2024, is presented below:
| | | | | |
| Contract Assets |
Balance at December 31, 2023 | $ | 17,393 | |
Estimated lifetime value of commissions on insurance policies sold by carriers | 1,056 | |
Cash receipts | (381) | |
Value of commissions sold with business disposition (Note 15) | (16,982) | |
Balance at September 30, 2024 | $ | 1,086 | |
As of September 30, 2024, and December 31, 2023, $0.2 million and $4.0 million, respectively, of contract assets were expected to be collected within the immediately following 12 months and therefore were included in accounts receivable, net, on the unaudited Condensed Consolidated Balance Sheets. The remaining $0.9 million and $13.4 million as of September 30, 2024, and December 31, 2023, respectively, of contract assets are expected to be collected after the immediately following 12 months and were included in other assets on the unaudited Condensed Consolidated Balance Sheets.
Deferred Revenue
A summary of the activity impacting Vertical Software segment deferred revenue balances during the nine months ended September 30, 2024, is presented below:
| | | | | |
Balance at December 31, 2023 | $ | 3,715 | |
Revenue recognized | (14,639) | |
Additional amounts deferred | 14,816 | |
Balance at September 30, 2024 | $ | 3,892 | |
Revenue recognized for performance obligations satisfied during the nine month ended September 30, 2024, includes $3.7 million that was included in the deferred revenue balances as of December 31, 2023.
Deferred revenue on the unaudited condensed consolidated balance sheet as of September 30, 2024, and December 31, 2023, includes $247.9 million and $245.0 million, respectively, of deferred revenue related to the Insurance segment. The portion of insurance premiums related to the unexpired term of policies in force as of the end of the reporting period and to be earned over the remaining term of these policies is deferred and reported as deferred revenue.
Remaining Performance Obligations
The amount of the transaction price allocated to performance obligations to be satisfied at a later date, which is not recorded in the unaudited condensed consolidated balance sheets, is immaterial as of September 30, 2024, and December 31, 2023.
We have applied the practical expedients not to present unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts with variable consideration that is allocated entirely to unsatisfied performance obligations or to a wholly unsatisfied promise accounted for under the series guidance, and (iii) contracts for which we recognize revenue at the amount which it has the right to invoice for services performed.
Warranty Revenue and Related Balance Sheet Disclosures
Payments received in advance of warranty services provided are included in refundable customer deposits or deferred revenue based upon the cancellation and refund provisions within the respective agreement. The following table provides balances as of the dates shown.
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Refundable customer deposits | $ | 13,054 | | | $ | 17,911 | |
Deferred revenue | $ | 4,404 | | | $ | 3,887 | |
Non-current deferred revenue (1) | $ | 2,539 | | | $ | 2,856 | |
____________________________________
(1)Non-current deferred revenue is included in other liabilities in Condensed Consolidated Balance Sheets.
For the three months ended September 30, 2024 and 2023, we incurred $2.2 million and $1.6 million, respectively, in expenses related to warranty claims. For the nine months ended September 30, 2024 and 2023, we incurred $5.5 million and $4.1 million, respectively, in expenses related to warranty claims.
Note 3. Investments
The following table summarizes investment income and realized gains and losses on investments during the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Investment income, net of investment expenses | $ | 3,645 | | | $ | 2,515 | | | $ | 10,884 | | | $ | 4,618 | |
Realized gains on investments | 172 | | | 61 | | | 213 | | | 72 | |
Realized losses on investments | (30) | | | (91) | | | (140) | | | (198) | |
Investment income and realized gains, net of investment expenses | $ | 3,787 | | | $ | 2,485 | | | $ | 10,957 | | | $ | 4,492 | |
The following tables summarize the amortized cost, fair value, and unrealized gains and losses of investment securities.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 |
| Amortized Cost | | Gross Unrealized | | Fair Value |
| | Gains | | Losses | |
U.S. Treasuries | $ | 28,000 | | | $ | 130 | | | $ | (214) | | | $ | 27,916 | |
Obligations of states, municipalities and political subdivisions | 16,021 | | | 152 | | | (611) | | | 15,562 | |
Corporate bonds | 75,723 | | | 1,047 | | | (1,281) | | | 75,489 | |
Residential and commercial mortgage-backed securities | 66,445 | | | 724 | | | (751) | | | 66,418 | |
Other loan-backed and structured securities | 12,474 | | | 97 | | | (178) | | | 12,393 | |
Total investment securities | $ | 198,663 | | | $ | 2,150 | | | $ | (3,035) | | | $ | 197,778 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Amortized Cost | | Gross Unrealized | | Fair Value |
| | Gains | | Losses | |
U.S. Treasuries | $ | 43,931 | | | $ | 95 | | | $ | (330) | | | $ | 43,696 | |
Obligations of states, municipalities and political subdivisions | 18,281 | | | 100 | | | (961) | | | 17,420 | |
Corporate bonds | 51,678 | | | 430 | | | (2,067) | | | 50,041 | |
Residential and commercial mortgage-backed securities | 25,452 | | | 153 | | | (1,004) | | | 24,601 | |
Other loan-backed and structured securities | 3,694 | | | 13 | | | (289) | | | 3,418 | |
Total investment securities | $ | 143,036 | | | $ | 791 | | | $ | (4,651) | | | $ | 139,176 | |
The amortized cost and fair value of securities at September 30, 2024, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | | | | | | | | | | | | |
| | September 30, 2024 |
Remaining Time to Maturity | | Amortized Cost | | Fair Value |
Due in one year or less | | $ | 24,618 | | | $ | 24,592 | |
Due after one year through five years | | 46,019 | | | 45,972 | |
Due after five years through ten years | | 35,226 | | | 34,659 | |
Due after ten years | | 13,881 | | | 13,744 | |
Residential and commercial mortgage-backed securities | | 66,445 | | | 66,418 | |
Other loan-backed and structured securities | | 12,474 | | | 12,393 | |
Total | | $ | 198,663 | | | $ | 197,778 | |
Investments as of September 30, 2024, include $31.8 million of investments held by our captive reinsurance businesses as collateral for the benefit of HOA. Of this amount, $6.1 million is classified as short-term investments, and $25.7 million is classified as long-term investments.
Securities with gross unrealized loss position, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than Twelve Months | | Twelve Months or Greater | | Total |
As of September 30, 2024 | | Gross Unrealized Loss | | Fair Value | | Gross Unrealized Loss | | Fair Value | | Gross Unrealized Loss | | Fair Value |
U.S. Treasuries | | $ | (177) | | | $ | 3,737 | | | $ | (37) | | | $ | 296 | | | $ | (214) | | | $ | 4,033 | |
Obligations of states, municipalities and political subdivisions | | (531) | | | 6,518 | | | (80) | | | 1,201 | | | (611) | | | 7,719 | |
Corporate bonds | | (1,089) | | | 17,070 | | | (192) | | | 3,745 | | | (1,281) | | | 20,815 | |
Residential and commercial mortgage-backed securities | | (466) | | | 9,314 | | | (285) | | | 2,524 | | | (751) | | | 11,838 | |
Other loan-backed and structured securities | | (172) | | | 3,237 | | | (6) | | | 51 | | | (178) | | | 3,288 | |
Total securities | | $ | (2,435) | | | $ | 39,876 | | | $ | (600) | | | $ | 7,817 | | | $ | (3,035) | | | $ | 47,693 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than Twelve Months | | Twelve Months or Greater | | Total |
As of December 31, 2023 | | Gross Unrealized Loss | | Fair Value | | Gross Unrealized Loss | | Fair Value | | Gross Unrealized Loss | | Fair Value |
U.S. Treasuries | | $ | (280) | | | $ | 12,345 | | | $ | (50) | | | $ | 515 | | | $ | (330) | | | $ | 12,860 | |
Obligations of states, municipalities and political subdivisions | | (813) | | | 8,445 | | | (148) | | | 1,639 | | | (961) | | | 10,084 | |
Corporate bonds | | (1,698) | | | 21,104 | | | (369) | | | 4,677 | | | (2,067) | | | 25,781 | |
Residential and commercial mortgage-backed securities | | (621) | | | 8,673 | | | (383) | | | 3,072 | | | (1,004) | | | 11,745 | |
Other loan-backed and structured securities | | (281) | | | 2,790 | | | (8) | | | 52 | | | (289) | | | 2,842 | |
Total securities | | $ | (3,693) | | | $ | 53,357 | | | $ | (958) | | | $ | 9,955 | | | $ | (4,651) | | | $ | 63,312 | |
At September 30, 2024, and December 31, 2023, there were 345 and 410 securities, respectively, in an unrealized loss position. Of these securities, 68 had been in an unrealized loss position for 12 months or longer as of September 30, 2024.
We believe there were no fundamental issues such as credit losses or other factors with respect to any of our available-for-sale securities. The unrealized losses on investments in fixed-maturity securities were caused primarily by interest rate changes. We expect that the securities will not be settled at a price less than par value of the investments. Because the declines in fair value are attributable to changes in interest rates or market conditions and not credit quality, and because we have the ability and intent to hold our available-for-sale investments until a market price recovery or maturity, we do not consider any of our investments to have any decline in fair value due to expected credit losses at September 30, 2024.
Note 4. Fair Value
The following tables summarize the fair value measurements of assets and liabilities that are measured at fair value on a recurring basis.
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurement as of September 30, 2024 |
| Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
Assets | | | | | | | |
Money market mutual funds | $ | 116,890 | | | $ | — | | | $ | — | | | $ | 116,890 | |
Debt securities: | | | | | | | |
U.S. Treasuries | 27,916 | | | — | | | — | | | 27,916 | |
Obligations of states, municipalities and political subdivisions | — | | | 15,562 | | | — | | | 15,562 | |
Corporate bonds | — | | | 75,489 | | | — | | | 75,489 | |
Residential and commercial mortgage-backed securities | — | | | 66,418 | | | — | | | 66,418 | |
Other loan-backed and structured securities | — | | | 12,393 | | | — | | | 12,393 | |
| $ | 144,806 | | | $ | 169,862 | | | $ | — | | | $ | 314,668 | |
Liabilities | | | | | | | |
Contingent consideration - business combinations (1) | $ | — | | | $ | — | | | $ | 3,367 | | | $ | 3,367 | |
Private warrant liability (2) | — | | | — | | | 75 | | | 75 | |
Embedded derivatives (2) | — | | | — | | | 35,903 | | | 35,903 | |
| $ | — | | | $ | — | | | $ | 39,345 | | | $ | 39,345 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurement as of December 31, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
Assets | | | | | | | |
Money market mutual funds | $ | 165,744 | | | $ | — | | | $ | — | | | $ | 165,744 | |
Debt securities: | | | | | | | |
U.S. Treasuries | 43,696 | | | — | | | — | | | 43,696 | |
Obligations of states, municipalities and political subdivisions | — | | | 17,420 | | | — | | | 17,420 | |
Corporate bonds | — | | | 50,041 | | | — | | | 50,041 | |
Residential and commercial mortgage-backed securities | — | | | 24,601 | | | — | | | 24,601 | |
Other loan-backed and structured securities | — | | | 3,418 | | | — | | | 3,418 | |
| $ | 209,440 | | | $ | 95,480 | | | $ | — | | | $ | 304,920 | |
Liabilities | | | | | | | |
Contingent consideration - business combinations (3) | $ | — | | | $ | — | | | $ | 18,455 | | | $ | 18,455 | |
Private warrant liability (4) | — | | | — | | | 1,151 | | | 1,151 | |
Embedded derivatives (4) | — | | | — | | | 28,131 | | | 28,131 | |
| $ | — | | | $ | — | | | $ | 47,737 | | | $ | 47,737 | |
______________________________________
(1)The Condensed Consolidated Balance Sheets include $1.4 million in accrued expenses and other current liabilities and $2.0 million in other liabilities as of September 30, 2024, for contingent consideration related to business combinations.
(2)Private warranty liability and embedded derivatives balances are included in other liabilities in the Condensed Consolidated Balance Sheets.
(3)The Condensed Consolidated Balance Sheets include $14.8 million in accrued expenses and other current liabilities and $3.7 million in other liabilities as of December 31, 2023, for contingent consideration related to business combinations.
(4)Private warranty liability and embedded derivatives balances are included in other liabilities in the Condensed Consolidated Balance Sheets.
Financial Assets
Money market mutual funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. As the funds are generally maintained at a net asset value which does not fluctuate, cost approximates fair value. These are included as a Level 1 measurement in the table above. The fair values for available-for-sale fixed-maturity securities are based upon prices provided by an independent pricing service. We have reviewed these prices for reasonableness and have not adjusted any prices received from the independent provider. Level 2 securities represent assets whose fair value is determined using observable market information such as previous day trade prices, quotes from less active markets or quoted prices of securities with similar characteristics. There were no transfers between Level 1 and Level 2.
Contingent Consideration – Business Combinations
As part of the acquisition of Floify, LLC (“Floify”) in October 2021, we issued shares as partial closing consideration to the sellers of Floify and guaranteed that the value of those shares would equal or exceed 200% of such price on or prior to December 31, 2024 (the “True-Up Obligation”). The True-Up Obligation could be settled at our option in cash, Porch common stock, or a combination thereof. On March 27, 2024, we entered into a settlement agreement and mutual release of claims with the sellers of Floify to settle a post-closing dispute. As part of the of this agreement, the sellers of Floify agreed to terminate the True-Up Obligation in full and released from restriction approximately $0.9 million of escrowed cash to us. We estimated the fair value of the True-Up Obligation as of the settlement date using the Monte Carlo simulation method. The fair value is based on the simulated market price of our common stock over the maturity date of the True-Up Obligation. As of March 27, 2024, the key inputs used to determine the fair value of $14.9 million included the stock price of $4.13, strike price of $36.00, discount rate of 23.6% and volatility of 95%. Subsequent to the valuation, we recognized a gain on settlement in other income, net, in the Condensed Consolidated Statements of Operations and Comprehensive Loss equal to the fair value of $14.9 million. As of December 31, 2023, the key inputs used in the determination of the fair value of $14.0 million included the stock price of $3.08, strike price of $36.00, discount rate of 27.9% and volatility of 90%.
We estimated the fair value of the business combination contingent consideration based on specific metrics related to the acquisition of Residential Warranty Services (“RWS”) in April 2022, using the discounted cash flow method. The fair value is based on a percentage of revenue of the contingent consideration through the maturity date of August 2026. As of September 30, 2024, the key inputs used to determine the fair value of $3.4 million were management’s cash flow estimates and the discount rate of 16%. As of December 31, 2023, the key inputs used to determine the fair value of $4.4 million were management’s cash flow estimates and the discount rate of 17%.
Private Warrants
We estimated the fair value of the private warrants using the Black-Scholes-Merton option pricing model. As of September 30, 2024, the key inputs used to determine the fair value included exercise price of $11.50, expected volatility of 93%, remaining contractual term of 1.23 years, and stock price of $1.54. As of December 31, 2023, the key inputs used to determine the fair value included exercise price of $11.50, expected volatility of 95%, remaining contractual term of 1.98 years, and stock price of $3.08.
Embedded Derivatives
In connection with the issuance of senior secured convertible notes in April 2023 (see Note 7) and in accordance with Accounting Standards Codification 815-15, Derivatives and Hedging – Embedded Derivatives, certain features of the senior secured convertible notes were bifurcated and accounted for separately from the notes. The following features are recorded as derivatives.
•Repurchase option. If more than $30 million aggregate principal amount of the 2026 Notes remains outstanding on June 14, 2026, the 2028 Note holders have the right to require us to repurchase for cash on June 15, 2026, all or any portion of their 2028 Notes, in principal amounts of one thousand dollars or an integral number thereof, at a repurchase price equal to 106.5% of the principal amount of the 2028 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date.
•Fundamental change option. If we undergo a fundamental change, as defined in the indenture governing the 2028 Notes and subject to certain conditions, holders of the 2028 Notes have the right to require us to repurchase for cash all or any portion of their 2028 Notes, in principal amounts of one thousand dollars or an integral multiple thereof, at a repurchase price equal to 105.25% of the principal amount of the 2028 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date. A fundamental change includes events such as a change in control, recapitalization, liquidation, dissolution, or delisting.
•Asset sale repurchase option. If we sell assets and receive net cash proceeds of $2.5 million in excess of the Asset Sale Threshold (as defined below) (such excess net cash proceeds, the “Excess Proceeds”), we must
offer to all holders of 2028 Notes to repurchase their 2028 Notes for an aggregate amount of cash equal to 50% of such Excess Proceeds at a repurchase price per 2028 Note equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the relevant purchase date, if any. “Asset Sale Threshold” means $20.0 million in the aggregate, provided that on and after the date on which the cumulative net cash proceeds received by the Company and its restricted subsidiaries from the sale of assets after April 20, 2023, exceeds $20.0 million in the aggregate, the “Asset Sale Threshold” means $0. As of September 30, 2024, our remaining Asset Sale Threshold was $9.1 million (See Note 15).
The inputs for determining fair value of the embedded derivatives are classified as Level 3 inputs. Level 3 fair value is based on unobservable inputs based on the best information available. These inputs include the probabilities of a repurchase, a fundamental change, and qualifying asset sales, ranging from 1% to 49%.
Level 3 Rollforward
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value, and such changes could result in a significant increase or decrease in the fair value.
The changes for Level 3 items measured at fair value on a recurring basis using significant unobservable inputs are as follows:
| | | | | | | | | | | | | | | | | |
| Contingent Consideration - Business Combinations | | Embedded Derivatives | | Private Warrant Liability |
Fair value as of December 31, 2023 | $ | 18,455 | | | $ | 28,131 | | | $ | 1,151 | |
| | | | | |
Settlements | (14,930) | | | — | | | — | |
Change in fair value, loss (gain) included in net loss(1) | (158) | | | 7,772 | | | (1,076) | |
Fair value as of September 30, 2024 | $ | 3,367 | | | $ | 35,903 | | | $ | 75 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Contingent Consideration - Earnout | | Contingent Consideration - Business Combinations | | Embedded Derivatives | | Private Warrant Liability |
Fair value as of December 31, 2022 | $ | 44 | | | $ | 24,546 | | | $ | — | | | $ | 707 | |
Additions | — | | | — | | | 23,870 | | | — | |
Settlements | — | | | (420) | | | — | | | — | |
Change in fair value, loss (gain) included in net loss(1) | — | | | (3,597) | | | 2,440 | | | (620) | |
Fair value as of September 30, 2023 | $ | 44 | | | $ | 20,529 | | | $ | 26,310 | | | $ | 87 | |
______________________________________
(1)Changes in fair value of contingent consideration related to business combinations are included in general and administrative expenses in the unaudited condensed consolidated statements of operations. Changes in fair value of the private warrant liability and embedded derivatives are included in other income, net, in the unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Fair Value of Fixed Rate Debt
As of September 30, 2024, and December 31, 2023, the fair value of the 2026 Notes (see Note 7) was $83.0 million and $73.1 million, respectively. As of September 30, 2024, and December 31, 2023, the fair value of the 2028 Notes (see Note 7) was $185.0 million and $196.7 million, respectively. The fair value of the other notes approximate the unpaid principal balance. All debt, other than the convertible notes which are Level 2, is considered a Level 3 measurement.
Note 5. Property, Equipment, and Software
Property, equipment, and software, net, consists of the following:
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
Software and computer equipment | $ | 8,361 | | | $ | 8,340 | |
Furniture, office equipment, and other | 1,341 | | | 1,573 | |
Internally developed software | 31,733 | | | 24,526 | |
Leasehold improvements | 928 | | | 1,176 | |
| 42,363 | | | 35,615 | |
Less: Accumulated depreciation and amortization | (21,222) | | | (18,754) | |
Property, equipment, and software, net | $ | 21,141 | | | $ | 16,861 | |
Depreciation and amortization expense related to property, equipment, and software was $1.5 million and $1.4 million for the three months ended September 30, 2024 and 2023, respectively, and $4.6 million and $3.8 million for the nine months ended September 30, 2024 and 2023, respectively.
Note 6. Intangible Assets and Goodwill
Intangible Assets
Intangible assets are stated at cost or acquisition-date fair value less accumulated amortization and impairment. The following tables summarize intangible asset balances.
| | | | | | | | | | | | | | | | | | | | | | | |
As of September 30, 2024 | Weighted Average Useful Life (in years) | | Intangible Assets, gross | | Accumulated Amortization And Impairment | | Intangible Assets, Net |
Customer relationships | 9.0 | | $ | 69,024 | | | $ | (30,471) | | | $ | 38,553 | |
Acquired technology | 5.0 | | 28,001 | | | (18,947) | | | 9,054 | |
Trademarks and tradenames | 11.0 | | 23,443 | | | (8,208) | | | 15,235 | |
Non-compete agreements | 5.0 | | 301 | | | (173) | | | 128 | |
| | | | | | | |
Renewal rights | 6.0 | | 9,734 | | | (4,391) | | | 5,343 | |
Insurance licenses | Indefinite | | 4,960 | | | — | | | 4,960 | |
Total intangible assets | | | $ | 135,463 | | | $ | (62,190) | | | $ | 73,273 | |
| | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2023 | Weighted Average Useful Life (in years) | | Intangible Assets, gross | | Accumulated Amortization And Impairment | | Intangible Assets, Net |
Customer relationships | 8.0 | | $ | 69,504 | | $ | (24,153) | | | $ | 45,351 |
Acquired technology | 5.0 | | 36,041 | | (22,358) | | | 13,683 |
Trademarks and tradenames | 11.0 | | 23,443 | | (6,701) | | | 16,742 |
Non-compete agreements | 3.0 | | 616 | | (455) | | | 161 |
Value of business acquired | 1.0 | | 400 | | (400) | | | — |
Renewal rights | 6.0 | | 9,734 | | (3,415) | | | 6,319 |
Insurance licenses | Indefinite | | 4,960 | | — | | 4,960 |
Total intangible assets | | | $ | 144,698 | | $ | (57,482) | | | $ | 87,216 |
The aggregate amortization expense related to intangibles was $4.5 million and $4.9 million for the three months ended September 30, 2024 and 2023, respectively, and $13.9 million and $14.7 million for the nine months ended September 30, 2024 and 2023, respectively.
Goodwill
The goodwill balance at September 30, 2024, and December 31, 2023, was $191.9 million and is entirely included in our Vertical Software segment. We had no changes in the carrying amount of goodwill for the nine months ended September 30, 2024.
Note 7. Debt
The following tables summarize outstanding debt as of September 30, 2024, and December 31, 2023.
| | | | | | | | | | | | | | | | | |
| Principal | | Unamortized Debt Issuance Costs & Discount | | Carrying Value |
Convertible senior notes, due 2026 | $ | 173,771 | | | $ | (1,850) | | | $ | 171,921 | |
Convertible senior notes, due 2028 | 333,334 | | | (106,370) | | | 226,964 | |
| | | | | |
Other notes | 150 | | | (3) | | | 147 | |
Balance as of September 30, 2024 | $ | |