# Blend Labs, Inc. (BLND) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Blend Labs, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1855747/000185574723000016/blnd-20221231.htm
Accession: 0001855747-23-000016
Filing date: 2023-03-16
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/BLND/
All MD&A years: /company/BLND/mda/
Previous year: /company/BLND/mda/fy2021/ (FY 2021)
Next year: /company/BLND/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based upon current plans, expectations, and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. You should review the section titled “Special Note Regarding Forward-Looking Statements” for a discussion of forward-looking statements and the section titled “Risk Factors” for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

This section of this Annual Report on Form 10-K generally discusses fiscal years 2022 and 2021 items and year-to-year comparisons between fiscal years 2022 and 2021. Discussions of fiscal year 2021 items and year-to-year comparisons between fiscal years 2021 and 2020 that are not included in this Annual Report on Form 10-K can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which was filed with the SEC on March 31, 2022.

Overview

Blend Labs, Inc. was founded in 2012, with a vision to bring simplicity and transparency to financial services, so everyone can gain access to the capital they need to lead better lives. To realize this vision, we have built a market-leading cloud-based software platform and suite of products for financial services firms that is designed to power the end-to-end consumer journey for any banking product. Our software platform was built in an extensible, modular, and configurable fashion to support continued product expansion. We have technology, data, and service providers on our software platform, including an extensive marketplace of insurance carriers, realtors, and settlement agencies. Our products and marketplaces provide multiple opportunities for us to serve financial services firms and consumers and drive revenue growth.

The development of our business reflects continued product innovation as we continue to attract financial services firms to our software platform and grow with them as they serve consumers. Financial services firms have been shifting for years to a digital-first approach to acquiring consumers, delivering products, and deepening existing consumer relationships. This imperative to compete through digital-first consumer experiences creates a compelling opportunity for Blend. We believe there is a large, untapped opportunity to provide additional product offerings and drive increased transaction volume for financial institutions and consumers using our software platform.

We are continually seeking to enhance the end-to-end banking journeys we power through our software platform. To accelerate the adoption of innovations in our mortgage and home equity products, on June 30, 2021 we acquired 90.1% ownership of Title365, a leading title insurance agency that offers title, escrow and other trustee services.

We recently introduced Composable Origination, which gives our customers the ability to easily configure or build custom workflows from a pre-built set of components, all while leveraging existing infrastructure. Financial services firms can experience Composable Origination by building custom solutions using our Blend Builder Platform, or with pre-built solutions such as Instant Home Equity, Deposit Accounts, Credit Cards and more.

Our Business Model

Our success-based business model is designed to align our growth with the interests of our customers. We offer our products through software-as-a-service agreements where fees are assessed based on completed transactions, such as a funded loan, new account opening, or API call. For those products that involve a loan or deposit account application, we do not charge for abandoned applications or rejected applications, even though they cause us to incur costs. Our customers have the ability to access our platform, including Blend Builder Platform, our configurable platform, under subscription arrangements in which customers commit to (a) a minimum number of completed transactions at specified prices over the contract term, (b) usage-based arrangements, in which customers pay in arrears a variable amount for completed transactions at a specified price, or (c) a fixed price platform fee, allowing the use of multiple products and services. Completed transaction fees are determined by the number and type of software platform components that are needed to support each product offering. Completed transaction fees are not impacted by the dollar size of transactions; however, we provide volume-based discounts to customers as they complete a higher volume of transactions on our software platform. Customers also have the opportunity to secure discounts by agreeing to contractual minimums. We may earn additional overage fees if the number of completed transactions exceeds contractual minimums for customers who elect to enter into subscription agreements in which a minimum number of transactions are

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completed at specified prices. Other than our usage-based arrangements pursuant to which customers pay for a variable amount of completed transactions, our subscription agreements are generally non-cancelable during the contract term. Our usage-based arrangements generally can be terminated at any time by the customer. With our success-based business model, we are focused on driving revenue growth by enabling our customers to more efficiently process and complete transactions using our software platform.

We focus on customer success to drive transaction volumes and opportunities for follow-on sales. Our products are sold through a direct sales force that continues to manage customer relationships on an ongoing basis post-sale. Customers often complete an initial deployment for one or two products and then add more products over time. The length of the sales cycle for our products generally declines for the second and subsequent products we sell to a financial services firm, highlighting our high customer satisfaction.

We also earn revenue through commissions or service fees when consumers use our integrated marketplaces to select a real estate agent, property and casualty insurance carrier, or our software-enabled title and settlement services entity, which excludes traditional title revenue from Title365. These commissions or service fees are generated from consumers and are incremental to what we earn from our financial services firm customers on completed transactions. Our marketplaces are intended to provide greater consumer choice and flexibility and to help financial services firms by providing them with a more complete offering in partnership with Blend. As we drive adoption of our software platform, we expect these commissions and service fees to comprise a larger part of our revenue.

The acquisition of Title365 has enabled our customers to streamline the title, settlement, and closing process at scale for mortgages, home equity lines of credit, and home equity loans, and we plan to continue to invest in improving and integrating settlement services into those banking products. In performing title search services, Title365 serves as an agent to place and bind title insurance policies with third-party underwriters. Title365 escrow, closing and settlement services are primarily associated with managing the closing of real estate transactions, including the processing of funds on behalf of the transaction participants, gathering and recording the required closing documents, and providing notary and other real estate or title-related activities. Title365 also provides title services in connection with a borrower default and with the issuance of home equity lines of credit and home equity loans.

Recent Developments

Industry Trends

The mortgage market is heavily influenced by government policies and overall economic conditions. The real estate environment, including interest rates and the general economic environment, typically impact the demand for mortgage and mortgage related products. Recent changes in these areas have impacted our results of operations. Purchase volume and refinance activity were strong in 2021 and 2020 relative to historical averages over the preceding decade; however, an increase in interest rates due to efforts by the Federal Reserve to manage rising inflation, combined with ongoing supply constraints, have resulted in a decline in mortgage origination activity for 2022 and could bring further reductions in future periods. In their latest published update, the Mortgage Bankers Association (“MBA”) indicated that overall mortgage originations, including refinancing loans, are expected to continue declining in 2023 before recovering in 2024. As a large portion of our revenue is driven by mortgage and mortgage related transaction volumes, declines in the mortgage origination volumes have had, and are likely to continue to have, adverse effects on our business.

For the year ended December 31, 2022, we have seen a 3.9% decrease in total reported banking transactions and a 31.9% decrease in mortgage transactions, particularly refinance transactions, on our software platform compared to the year ended December 31, 2021. We attribute the majority of this decrease to rapidly rising interest rates, decreased housing affordability, and uncertain worldwide political and economic conditions. Overall industry origination volumes, as reported by the MBA, have decreased by 56% over the same period.

Workforce Reduction Plans

We have implemented certain workforce actions as part of our broader efforts to improve cost efficiency and better align our operating structure with our business activities. The focus of such workforce actions is on streamlining our title operations as well as our general and administrative functions.

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In 2022, we executed the 2022 Workforce Reduction Plans, which eliminated an aggregate of approximately 440 positions across the Company. The charges incurred in connection with such workforce actions amounted to approximately $15.3 million for the year ended December 31, 2022, and consisted primarily of cash expenditures for compensation and severance payments, employee benefits, payroll taxes and related facilitation costs.

In January 2023, we committed to the January Plan, which was in addition to the 2022 Workforce Reduction Plans. The January Plan further streamlines our title operations, as well as our corporate operations in R&D, sales and marketing, and general and administrative functions. The January Plan eliminated approximately 340 positions across the Company. We have incurred approximately $11.0 million in charges in the first quarter of 2023 in connection with the January Plan and expect to incur additional charges of approximately $3.0 million in the upcoming months. We expect that the execution of the January Plan, including cash payments, will be substantially complete in the first half of 2023. The eliminated positions represent annualized compensation expenses of approximately $43.4 million.

We may incur other charges or cash expenditures not currently contemplated due to unanticipated events that may occur as a result of or in connection with the implementation of any of the Workforce Reduction Plans described above. Our implementation of the plans and related initiatives is subject to risks and uncertainties, including the possibility that there are impediments to our ability to execute the plans or related initiatives as currently contemplated, the actual charges in implementing the plans or related initiatives are higher than anticipated, there are changes to the assumptions on which the estimated charges associated with the plans or related initiatives are based, we are unable to achieve our projected cost savings in connection with the plans or related initiatives, or there are unintended consequences from the Plans or related initiatives that impact our business.

Impairment of Intangible Assets and Goodwill

Due to a continued decline in economic and market conditions, including a decline in our market capitalization and current and projected declines in the operating results of the Title365 segment, we determined that triggering events that indicate the assets should be evaluated for impairment existed as of June 30, 2022 and performed an interim quantitative impairment analysis, which resulted in a partial impairment of goodwill and customer relationship intangible assets. Subsequently, based on further deterioration in market conditions in the third quarter of 2022, such as continued increases in interest rates, we determined that triggering events also existed as of September 30, 2022, and performed another interim quantitative impairment analysis, which resulted in a full impairment of the remaining goodwill and customer relationship intangible assets.

We determined the fair value of the Title365 reporting unit utilizing an income approach derived from a discounted cash flow methodology. The excess of the carrying value over the fair value is recognized as an impairment loss and allocated to assets for which the carrying value exceeds the respective asset’s fair value. Certain assets, such as property and equipment and operating lease right-of-use assets, were not allocated any impairment as the values of such assets approximated their respective carrying amounts. For customer relationships intangible asset, the fair value was also determined under an income approach derived from a discounted cash flow methodology. We also estimated the fair value of the Blend Platform reporting unit and reconciled the aggregate fair values of our reporting units to our market capitalization adjusted for an estimated control premium. In estimating the fair value of the reporting units and intangible assets, we considered a number of factors, including business plans, economic projections, anticipated future cash flows, comparable transactions and other market data. There are inherent uncertainties related to these factors and management's judgment in applying them in the impairment tests of goodwill and intangible assets.

Based on the results of these analyses, we determined that the carrying values of goodwill and customer relationship intangible assets exceeded their respective estimated fair values and recorded impairment charges of $287.2 million and $162.5 million, respectively, which resulted in the full write off of the goodwill and customer relationship intangible assets. Refer to Note 5, “Goodwill and Intangible Assets,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information.

Key Factors Affecting Our Performance

Transaction Volume

Our success-based business model results in our revenue growing as we increase our transaction volume on our software platform and declining as transaction volume on our software platform decreases. As a result, our success is in part based on our ability to address the evolving needs of our customers and increase their usage of our software platform and by attracting new customers and growing our relationships with existing customers.

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Because our revenue growth is dependent on transaction volume growth, when our transaction volume declines for any reason, our revenue declines accordingly. The transaction volumes could decline for reasons including but not limited to, reduced demand for our products and services, insufficient growth in the number of financial services firms that utilize our products and services or the lack of expansion of products and services within our existing customer base, transaction volume and mix, particularly with our significant customers, increased competition, or a decrease in the growth or reduction in size of our overall market. In 2022, we have seen industry mortgage transaction volumes decline 56% year-over-year, which impacted both of our segments due to the factors listed above as well as factors outside of our control. The mortgage market is heavily influenced by government policies and overall economic conditions. The real estate environment, including interest rates and general economic activity, also typically impacts demand for mortgage and mortgage-related products. The industry estimates forecast a continued decline in total market transaction volume in the next 12 months. In our Title365 segment, we have experienced lower than anticipated title transaction volume since the closing of the acquisition and may experience further reductions in the future.

In order to address the evolving needs of our customers and increase their usage of our software platform, under our “Customer First” model, we focus on building successful long-term relationships and aligning revenue growth with value delivery. We invest in our customers’ success, beginning with an initial onboarding and rollout plan for each customer. We also monitor utilization rates by customers on our software platform to manage expanded use over time. Our proven ability to grow transaction volume in the past was and we believe in the future will be a function of product depth, technological excellence, and the ability of our sales and marketing teams to match our solutions with the strategic objectives of our customers. Our software platform enables customers to process transaction volumes more effectively and create a better consumer experience.

By increasing transaction volume on our software platform, we also enable and drive our marketplace business. Our curated set of integrated marketplaces enable consumers to shop for products and services at the precise moment of need as they apply for loans and other products. These marketplaces enable consumers to find real estate agents, insurance carriers, and automobiles for sale online by quickly locating service providers and compare the rates. As we enable a greater volume and diversity of transactions on our software platform, we can help a greater number of consumers locate competitive service providers and build trust with the Blend brand. Revenue from our marketplace business is driven by our transaction volume and success of matching consumers with service providers.

Investments in Growth

Our ability to maintain a differentiated platform and offering is dependent upon our speed of innovation as we operate in industries characterized by rapidly changing technology, evolving industry standards, and frequent new product introductions. We will invest in our software platform to drive innovation and maintain our position as a leading provider of software for financial services firms for any banking product. To drive adoption and increase penetration within our customer base, we will continue to rapidly introduce new products and features. While we focus today on consumer banking, we believe we can rapidly expand our library of modular components to support commercial banking products as well. In addition, our low-code, drag-and-drop design tools will enable our customers to bring new, innovative products to market quickly and positions us with what we believe is a market-leading combination of platform capabilities and out-of-the-box product offerings. We believe that investment in research and development will contribute to our long-term growth but will also negatively impact our short-term profitability.

Additionally, as our existing platform components mature, we will need to successfully integrate new products on our platform, including by achieving interoperability between such new products and our existing products, as well as upgrading the decisioning, verification, and automation components of our existing platform in order to continue to help our customers adapt quickly to constantly changing market conditions all of which requires significant investment.

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Key Business Metrics

In addition to the measures presented in our consolidated financial statements, we use the following key business metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.

Blend Platform - Number of Transactions

Our success in the Blend Platform segment depends in part on increasing the volume of mortgage and consumer banking transactions that take place on our software platform. This occurs as we add new customers and complete more transactions with existing customers, including when our existing customers adopt additional products. Our software platform is built to be extensible, modular, and configurable, so that our customers can easily utilize our pre-built workflow technology, our marketplaces, and our integrations with technology, data, and service providers. We design our new offerings to be highly complementary to existing ones in order to increase the speed of adoption and efficiently scale our revenue. We believe this increasing attachment will increase our revenue.

Title365 - Closed Orders

In our Title365 segment, closed orders represent the number of orders for title insurance or escrow services that were successfully fulfilled in each period with the issuance of a title insurance policy or provision of escrow services. The volume of closed orders is affected by the overall level of real estate activity, which is cyclical in nature and is affected by a number of factors, including the availability of mortgage credit, the cost of real estate, interest rate volatility, consumer confidence, employment and family income levels, and general economic conditions.

We believe that the continued growth in commercial use of the internet will lead to the continued migration of traditional offline markets and industries online. In June 2022, we completed the migration of our largest Title365 customer from traditional title to our software-enabled title solution. In connection with the migration, during the third quarter of 2022, we changed the composition of our reporting segments to align with a change in how our Chief Operating Decision Maker (“CODM”) reviews financial information in order to allocate resources and assess performance. As a result of this change, the Blend Platform segment now includes the software-enabled title component. Prior to the migration, title orders related to our software-enabled title component were not significant and were included in the Title365 segment. We expect the continued migration of the Title365 legacy business to our software-enabled platform over time, and as a result, we expect the Title365 closed orders within the Title365 segment to decrease in future periods and the volume of software-enabled title, escrow, and settlement orders within the Blend Platform segment to increase.

The following table sets forth our key business metrics:

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[[/GREPCENT_TABLE]]

Components of Results of Operations

Revenue

Blend Platform

In our Blend Platform segment, we generate revenue from fees paid by customers to access our platform. Fees are assessed based on completed transactions, such as a funded loan, new account opening, or closing transaction. Completed transaction fees are determined by the number and type of software platform components that are needed to support each product offering.

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We do not charge for abandoned or rejected applications, even though they cause us to incur costs related to these applications. Arrangements with our customers do not provide the contractual right to take possession of our software at any point in time. Revenue is recognized when access to our platform is provisioned to our customers for an amount that reflects the consideration we expect to be entitled to in exchange for those services. To a lesser extent, we generate revenue from professional services related to the deployment of our platform, premium support services, and consulting services. We also earn revenue through commissions or service fees when consumers use our Blend Platform integrated marketplaces to select a property and casualty insurance carrier, title and settlement services entity, or real estate agent.

Starting in the third quarter of 2022, the revenue in the Blend Platform segment includes revenue from our software-enabled title solution. This revenue is similar to the revenue earned in the Title365 segment further described below, with the distinction that software-enabled technology automates the flow of the title orders from the customer’s loan origination software and passes the orders through the Blend Platform. Refer to Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information.

Our customers have the ability to access our platform under subscription arrangements, in which customers commit to a minimum number of completed transactions at specified prices over the contract term, or under usage-based arrangements, in which customers pay in arrears a variable amount for completed transactions at specified prices. Our subscription arrangements are generally noncancelable, and we may also earn additional overage fees if the number of completed transactions exceeds the contractual amounts. Our usage-based arrangements generally can be terminated at any time by the customer. We recognize revenue ratably for our subscription arrangements because the customer receives and consumes the benefits of our platform throughout the contract period. We recognize fees for usage-based arrangements as the completed transactions are processed using our platform. Over the last several quarters, we have seen a shift towards usage-based arrangements in our customer contracts. Revenue from usage-based arrangements represented 51%, 29% and 12% of our Blend Platform segment revenue for the years ended December 31, 2022, 2021 and 2020, respectively.

Title365

In our Title365 segment, we earn revenue from title search services for title insurance policies, escrow and other closing and settlement services. In performing title search services, we act as an agent to place and bind title insurance policies with third-party underwriters that ultimately provide the title insurance policy to our customers. Revenue related to title insurance is recognized net of the amount of consideration paid to the third-party insurance underwriters. Our revenues from escrow, closing and settlement services are primarily associated with managing the closing of real estate transactions, including the processing of funds on behalf of the transaction participants, gathering and recording the required closing documents, and providing notary and other real estate or title-related activities. Revenue related to these services is recognized at the closing of the underlying real estate transaction. We also offer title services in connection with a borrower default and with the issuance of a home equity lines of credit and home equity loans. Revenue for default title services and home equity services is recognized at the time of delivery of the title report.

In June 2022, we completed the migration of our largest Title365 customer from traditional title to our software-enabled title solution. In connection with the migration, during the three months ended September 30, 2022, we changed our reporting segments to align with a change in how our CODM reviews financial information in order to allocate resources and assess performance. As a result of this change, revenue from our software-enabled title solution is presented within the Blend Platform segment, resulting in a decrease in revenue within the Title365 segment. Refer to Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information.

We expect that rising mortgage interest rates in the near term will continue to drive down transaction volume, especially refinance transactions volume, which will adversely affect both Blend Platform and Title365 revenue. While we believe that the Blend Platform segment will continue to deliver positive growth overall, we expect that the title insurance and other services revenue within the Title365 segment will face significant headwinds to growth, and a decline due to the ongoing mortgage industry origination volume decline as described above within Recent Developments. We are continuing to evaluate the rapid changes within the mortgage industry and the impact to our segments and their projected operating results.

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Cost of Revenue

Blend Platform

In our Blend Platform segment, cost of revenue consists primarily of costs of subscribed hosting, support, and professional services. Costs of subscribed hosting services and support revenue consist primarily of expenses related to hosting our services, third-party fees related to platform connectivity services, which include verification of income, assets, and employment, software licenses and expenses related to providing support to our customers. Starting in the third quarter of 2022, the cost of revenue in the Blend Platform segment includes cost of revenue related to our software-enabled title solution, which consists primarily of personnel-related expenses as well as the cost of services provided by external vendors. Costs of professional services consist primarily of personnel-related expenses, including stock-based compensation expense, expenses associated with delivering implementation and other services, travel expenses, and allocated overhead costs. For each application submission, we incur third-party costs as described above, including costs for incomplete transactions for which we do not charge fees to our customers. The timing of those costs may not be aligned with the revenue recognized. We expect our cost of revenue to continue to increase in dollar amounts as we grow our business and revenue and decrease as a percentage of our revenue over the long term as we achieve greater scale in our business, although the percentage may fluctuate from period to period.

Title365

In our Title365 segment, cost of revenue consists of costs of traditional title, escrow and other trustee services, which represent primarily personnel-related expenses of our Title365 segment as well as title abstractor, notary, and the cost of recording services provided by external vendors. In future periods, we expect that cost of revenue as a percentage of revenue will increase in the near term primarily due to the anticipated decline in revenue driven by the decrease in projected mortgage industry origination volume caused by increased interest rates.

Operating Expenses

Research and Development

Research and development expenses consist primarily of personnel-related expenses, including stock-based compensation expense, associated with our engineering personnel responsible for the design, development, and testing of new products and features, professional and outside services fees, software and hosting costs, and allocated overhead costs.

Research and development costs are expensed as incurred. We expect that our research and development expenses will increase in dollar amount as our business grows but will decrease as a percentage of our revenue over the long term as we work towards achieving greater scale in our business, although the percentage may fluctuate from period to period depending on the timing and extent of our research and development activities.

Sales and Marketing

Sales and marketing expenses consist primarily of personnel-related expenses, including stock-based compensation expense, costs of general marketing activities and promotional activities, travel-related expenses, and allocated overhead costs. Sales commissions that are incremental costs of acquiring a contract with a customer as well as associated payroll taxes, are deferred and amortized on a straight-line basis over the estimated period of benefit, which we have determined to be three years. Sales commissions that are not incremental costs of acquiring a contract with a customer are expensed in the period incurred.

We plan to increase the dollar amount of our investment in sales and marketing for the foreseeable future, primarily for increased headcount for our direct sales organization and investment in brand and product marketing efforts. We expect, however, that our sales and marketing expenses will decrease as a percentage of our revenue over time as we achieve greater scale in our business, although the percentage may fluctuate from period to period depending on fluctuations in the timing and extent of our sales and marketing activities.

General and Administrative

General and administrative expenses consist primarily of personnel-related expenses, including stock-based compensation expense for our finance, accounting, legal and compliance, human resources, and other administrative teams, certain executives, as well as stock-based compensation expense related to the stand-alone stock option award granted to our Co-Founder and Head of Blend in March 2021, and professional fees, including audit, legal and compliance, and recruiting services.

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Following our IPO, which was completed in July 2021, we have incurred, and expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to publicly listed companies and costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC. As a public company, we have incurred, and expect to continue to incur increased expenses in the areas of insurance, investor relations, internal audit, and professional services. In addition, general and administrative expenses have increased, and we expect will continue to increase as a result of integrating and operating Title365. As a result, the dollar amount of our general and administrative expenses has increased, but we have taken action to manage further increases in the foreseeable future. We expect, however, that these expenses will decrease as a percentage of our revenue as we achieve greater scale in our business, although the percentage may fluctuate from period to period depending on the timing and extent of our general and administrative activities.

Amortization of acquired intangible assets

Amortization of acquired intangible assets relates to customer relationships acquired in connection with the Title365 business combination, which are amortized over the estimated useful life on a straight-line basis.

Impairment of intangible assets and goodwill

Impairment of intangible assets and goodwill assets relates to charges recorded based on the results of the interim quantitative impairment analyses performed in response to certain triggering events, such as a continued decline in economic and market conditions, decline in our market capitalization, and current and projected declines in the operating results of the Title365 reporting unit. Refer to Note 5, “Goodwill and Intangible Assets,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information.

Restructuring

In 2022, we executed the 2022 Workforce Reduction Plans as part of our broader efforts to improve cost efficiency and better align our operating structure with our business activities, with the focus on streamlining our title operations as well as our general and administrative functions. The charges related to these plans, under which we eliminated approximately 440 positions, comprised of cash expenditures for compensation and severance payments, employee benefits, payroll taxes and related facilitation costs in the year ended December 31, 2022. Refer to Note 14, “Restructuring,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income earned from our investment portfolio, adjustments to carrying value of investment in non-marketable equity securities and net foreign currency transaction gains or losses.

Interest Expense

Interest expense relates primarily to debt financing used to fund our acquisition of Title365 and includes interest payable under the terms of the Credit Agreement entered into in connection with the closing of the acquisition of Title365 and amortization of debt discounts and debt issuance costs.

Income Taxes

Provision for income taxes consists primarily of U.S. state income taxes and adjustments to the valuation allowance. We maintain a full valuation allowance on our net federal and state deferred tax assets as we have concluded that it is not more likely than not that such net deferred tax assets will be realized.

Results of Operations

The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue:

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[[/GREPCENT_TABLE]]

(1)Includes stock-based compensation as follows:

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[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2022","","2021","","2020"],["","","","","","(as a % of revenue)*"],["Revenue","","","","","100","%","","100","%","","100","%"],["Cost of revenue","","","","","62","","","51","","","36"],["Gross margin","","","","","38","","","49","","","64"],["Operating expenses:"],["Research and development","","","","","59","","","39","","","58"],["Sales and marketing","","","","","36","","","36","","","54"],["General and administrative","","","","","59","","","55","","","31"],["Amortization of acquired intangible assets","","","","","4","","","3","","","\u2014"],["Impairment of intangible assets and goodwill","","","","","191","","","\u2014","","","\u2014"],["Restructuring","","","","","6","","","\u2014","","","\u2014"],["Total operating expenses","","","","","355","","","134","","","143"],["Loss from operations","","","","","(317)","","","(84)","","","(78)"],["Interest expense","","","","","(11)","","","(5)","","","\u2014"],["Other income (expense), net","","","","","2","","","\u2014","","","1"],["Loss before income taxes","","","","","(326)","","","(89)","","","(78)"],["Income tax benefit (expense)","","","","","1","","","17","","","\u2014"],["Net loss","","","","","(325)","%","","(72)","%","","(78)","%"]]
[[/GREPCENT_TABLE]]

____________

*Certain percentages may not foot due to rounding

68

Comparison of the Years Ended December 31, 2022 and 2021

Revenue and Cost of Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","$ Change","","% Change"],["","(In thousands)"],["Segment revenue:"],["Blend Platform:"],["Mortgage Banking","$","83,391","","","$","108,264","","","$","(24,873)","","","(23","%)"],["Consumer Banking and Marketplace","44,227","","","23,120","","","21,107","","","91","%"],["Professional Services","4,396","","","4,178","","","218","","","5","%"],["Total Blend Platform","132,014","","","135,562","","","(3,548)","","","(3","%)"],["Title365","103,187","","","98,933","","","4,254","","","4","%"],["Total revenue","$","235,201","","","$","234,495","","","$","706","","","\u2014","%"],["Segment cost of revenue:"],["Blend Platform","$","61,924","","","$","49,917","","","$","12,007","","","24","%"],["Title365","83,626","","","68,589","","","15,037","","","22","%"],["Total cost of revenue","$","145,550","","","$","118,506","","","$","27,044","","","23","%"],["Segment gross profit:"],["Blend Platform","$","70,090","","","$","85,645","","","$","(15,555)","","","(18","%)"],["Title365","19,561","","","30,344","","","(10,783)","","","(36","%)"],["Total gross profit","$","89,651","","","$","115,989","","","$","(26,338)","","","(23","%)"]]
[[/GREPCENT_TABLE]]

Revenue increased $0.7 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to an increase of $4.3 million, or 4%, in revenue from Title365 offset by a decrease in Blend Platform revenue of $3.5 million, or 3%. The increase in Title365 revenue was primarily due to the inclusion of $70.9 million of revenue from Title365 in the first half of 2022, while the comparative period only included the results of Title365 from the acquisition date of June 30, 2021. In the second half of 2022, Title365 revenue decreased by $66.6 million as compared to the second half of 2021, which was primarily due to a $56.4 million decrease driven by the lower volume of title orders and a $10.2 million decrease due to the migration of the software-enabled title solution to the Blend Platform segment.

Within Blend Platform revenue, Mortgage Banking revenue decreased $24.9 million, or 23%, primarily due to the lower volume of mortgage banking transactions, particularly refinance transactions, with our customers, and Consumer Banking and Marketplace revenue increased $21.1 million, or 91%, primarily due to the inclusion of $10.2 million software-enabled title revenue related to the customers that migrated from the Title365 segment and an increase in the volume of transactions related to our integrated software solutions outside of mortgage, including ancillary products and marketplace offerings.

Cost of revenue increased $27.0 million, or 23%, for the year ended December 31, 2022 compared to the year ended December 31, 2021, driven by an increase in Blend Platform cost of revenue of $12.0 million, or 24%, and an increase in Title365 cost of revenue of $15.0 million, or 22%. The increase in Blend Platform cost of revenue was primarily due to the inclusion of the $11.0 million software-enabled title cost of revenue related to the customers that migrated from the Title365 segment. The increase in Title365 cost of revenue was primarily due to the inclusion of $57.3 million of cost of revenue from Title365 in the first half of 2022, while the comparative period only included the results of Title365 from the acquisition date of June 30, 2021. Title365 cost of revenue decreased by $42.3 million in the second half of 2022 as compared to the second half of 2021, which was primarily due to a $31.3 million decrease driven by the lower volume of title orders and a $11.0 million decrease due to the migration of the software-enabled title solution to the Blend Platform segment.

69

Operating Expenses

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","$ Change","","% Change"],["","(In thousands)"],["Operating expenses:"],["Research and development","$","138,094","","","$","92,216","","","$","45,878","","","50","%"],["Sales and marketing","85,248","","","84,077","","","1,171","","","1","%"],["General and administrative","139,120","","","128,802","","","10,318","","","8","%"],["Amortization of acquired intangible assets","8,411","","","8,136","","","275","","","3","%"],["Impairment of intangible assets and goodwill","449,680","","","\u2014","","","449,680","","","100","%"],["Restructuring","15,275","","","\u2014","","","15,275","","","100","%"],["Total operating expenses","$","835,828","","","$","313,231","","","$","522,597","","","167","%"]]
[[/GREPCENT_TABLE]]

Research and Development

Research and development expenses increased $45.9 million, or 50%, for the year ended December 31, 2022 compared to the year ended December 31, 2021, driven primarily by a $34.1 million increase in stock-based compensation expense and an $11.7 million increase in personnel expenses attributable to an increase in research and development headcount dedicated to ongoing investment in our products.

Sales and Marketing

Sales and marketing expenses increased $1.2 million, or 1%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. Excluding an increase of $2.1 million due to costs associated with the operations of Title365, sales and marketing expenses decreased $0.9 million. The decrease in Blend Platform sales and marketing costs was primarily due to a $1.5 million decrease in commissions, a $2.1 million decrease in personnel and related expenses attributable to decreased sales and marketing headcount, and a $1.6 million decrease in advertising and promotion expenses, partially offset by a $4.5 million increase in stock-based compensation expense.

General and Administrative

General and administrative expenses increased $10.3 million, or 8% for the year ended December 31, 2022 compared to the year ended December 31, 2021. Excluding an increase of $23.0 million due to costs associated with the operations of Title365, general and administrative expenses decreased $12.7 million. The decrease in Blend Platform general and administrative costs was primarily due to a $9.8 million decrease in transaction and integration costs incurred in 2021 in connection with the Title365 acquisition, a $3.9 million decrease in professional and other consulting services, a $3.5 million decrease in stock-based compensation driven by $19.2 million decrease in expense recognized for the non-Plan stock options awarded to our Co-Founder and Head of Blend, offset by a $15.7 million increase in expense recognized for other employees’ stock-based awards, partially offset by $2.8 million increase in insurance costs.

Amortization of acquired intangible assets

Amortization of acquired intangible assets remained consistent for the year ended December 31, 2022 compared to the year ended December 31, 2021. Amortization expense for the year ended December 31, 2021 represents amortization of Title365 customer relationships intangible asset from the acquisition date of June 30, 2021. Amortization expense in the third quarter of 2022 was based on a lower carrying value of the customer relationships intangible asset resulting from an impairment charge recognized as of June 30, 2022. There was no amortization expense in the fourth quarter of 2022 as the customer relationships intangible asset was fully written off as of September 30, 2022.

Impairment of intangible assets and goodwill

Impairment of intangible assets and goodwill increased $449.7 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, due to the impairment charges recorded in connection with the interim quantitative impairment reviews of the intangible assets and goodwill within the Title365 reporting unit performed as of June 30, 2022 and September 30, 2022.

70

Restructuring

Restructuring expenses increased $15.3 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 due to the execution of the 2022 Workforce Reduction Plans. The restructuring charges included cash expenditures for compensation and severance payments, employee benefits, payroll taxes and related facilitation costs. There were no restructuring charges in 2021.

Interest Expense

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","$ Change","","% Change"],["","(In thousands)"],["Interest expense","$","24,790","","","$","11,279","","","13,511","","","120","%"]]
[[/GREPCENT_TABLE]]

Interest expense increased $13.5 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. We entered into a $225.0 million Term Loan under the Credit Agreement on June 30, 2021, and incurred interest expense for the six months in the year ended December 31, 2021 and the twelve months for the year ended December 31, 2022. The borrowings under the Credit Agreement accrue interest at a floating rate which can be, at our option, either (i) an adjusted Term SOFR rate for a specified interest period plus an applicable margin of 7.50% or (ii) a base rate plus an applicable margin of 6.50%. The effective interest rate on our Term Loan was approximately 13.43% and 10.20% at December 31, 2022 and 2021, respectively.

Other Income (Expense), net

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","$ Change","","% Change"],["","(In thousands)"],["Other income (expense), net","$","4,916","","","$","493","","","4,423","","","897","%"]]
[[/GREPCENT_TABLE]]

Other income (expense), net increased $4.4 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to an increase of $2.0 million in interest income from our investment portfolio and a $2.9 million gain on investment in equity securities without readily determinable fair value.

Income Taxes

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","$ Change","","% Change"],["","(In thousands)"],["Income tax benefit","$","2,241","","","$","38,886","","","(36,645)","","","(94","%)"]]
[[/GREPCENT_TABLE]]

Income tax benefit decreased $36.6 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. For the year ended December 31, 2022 we recognized an income tax benefit of $2.2 million, consisting of a $2.9 million deferred tax benefit resulting from a partial release of the valuation allowance due to changes in U.S. tax law requiring capitalization and amortization of research and development costs for tax purposes and a current tax expense of $0.6 million consisting of state and foreign income taxes. For the year ended December 31, 2021, we recognized an income tax benefit of $38.9 million, primarily related to $39.3 million partial release of our historical valuation allowance resulting from the recognition of a deferred tax liability in connection with the Title365 acquisition.

Liquidity and Capital Resources

As of December 31, 2022, our principal sources of liquidity were cash, cash equivalents, marketable securities of $354.1 million, and availability of credit under our $25.0 million senior secured revolving credit facility. Cash and cash equivalents are comprised of bank deposits and money market funds. Marketable securities are comprised of U.S. treasury and agency securities, commercial paper, and corporate debt securities. Most of our cash and cash equivalents are held in the United States. Since our inception, we have financed our operations primarily through proceeds from the issuance of our stock and warrants and cash generated from the sale of our product offerings.

71

We have generated significant losses from operations and negative cash flows from operating activities in the past as reflected in our accumulated deficit of $1,162.9 million as of December 31, 2022. We expect to continue to incur operating losses for the foreseeable future due to the investments that we intend to make in our business and decline in revenue due to the macroeconomic environment and, as a result, we may require additional capital resources to grow our business.

Credit Agreement

In connection with our acquisition of Title365, on June 30, 2021, we entered into a credit agreement that provides for a $225.0 million term facility and a $25.0 million revolving facility. The term facility was funded on July 1, 2021 and was fully drawn upon to provide, in part, the acquisition consideration being paid in connection with the purchase of a 90.1% interest in Title365. The revolving facility is currently available and undrawn.

There is no amortization of the outstanding principal amount under our credit facility; all principal amounts thereunder are payable on the maturity date, which is the fifth anniversary of the closing of the credit facility.

The obligations under our credit facility are guaranteed by all of our domestic subsidiaries (other than Title365 and its direct and indirect subsidiaries, and subject to certain thresholds and other exceptions), and secured by a lien on substantially all of our and our subsidiaries’ assets (other than the equity issued by, and the assets of, Title365 and its direct and indirect subsidiaries and subject to certain thresholds and other exceptions).

Our credit facility subjects us to certain affirmative and negative covenants, financial reporting obligations, and a minimum liquidity threshold that is tested quarterly. It also requires mandatory prepayment of all or a portion of the outstanding debt thereunder in certain circumstances.

Material Cash Requirements

Our material cash requirements arising from known contractual and other obligations primarily relate to our obligations under our Credit Agreement, leases for our office locations, and purchase commitments. As of December 31, 2022, our principal contractual cash obligations consisted of the following:

[[GREPCENT_TABLE]]
[["","Total","","Next 12 Months","","Beyond 12 Months"],["","(In thousands)"],["Term Loan - principal","$","225,000","","","$","\u2014","","","$","225,000"],["Term Loan - interest(1)","93,273","","","26,660","","","66,613"],["Term Loan - exit fee","4,500","","","\u2014","","","4,500"],["Operating lease obligations","17,789","","","5,074","","","12,715"],["Purchase commitments","14,692","","","6,225","","","8,467"],["Total","$","355,254","","","$","37,959","","","$","317,295"],["(1) Interest on Term Loan is based on rates effective and amounts borrowed as of December 31, 2022. Since the contractual rate for our Term Loan is variable, actual cash payments may differ from the estimates provided."]]
[[/GREPCENT_TABLE]]

In 2022, we committed to and executed the 2022 Workforce Reduction Plans as part of our broader efforts to improve cost efficiency and better align our operating structure with our business activities, with the focus on streamlining our title operations as well as our general and administrative functions. These plans eliminated approximately 440 positions across the Company. We incurred approximately $15.3 million in charges in connection with these plans, consisting of cash expenditures for severance payments, employee benefits, payroll taxes and related facilitation costs for the year ended December 31, 2022.

In January 2023, we committed to the January Plan, which further streamlines our title operations, as well as our corporate operations in R&D, sales and marketing, and general and administrative functions. The January Plan eliminated approximately 340 positions across the Company. We estimate to incur approximately $14.0 million in charges in connection with the January Plan and expect that the execution of the January Plan, including cash payments, will be substantially complete in the first half of 2023. The eliminated positions represent annualized compensation expenses of approximately $43.4 million.

72

We believe that current cash, cash equivalents, marketable securities, and the availability of credit under our revolving credit facility will be sufficient to fund our operations for at least the next 12 months. Our future capital requirements, however, will depend on continued growth in our customer base, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and features, the continuing market adoption of Blend’s software platform, and the effectiveness of our efforts to improve cost efficiency. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. In the event that additional financing is required from outside sources, we may seek to raise additional funds at any time through equity, equity-linked arrangements, and debt. If we are unable to raise additional capital when desired and at reasonable rates, our business, results of operations, and financial condition would be adversely affected. See the section titled “Risk Factors—Risks Related to Our Business—Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies in the future could reduce our ability to compete successfully and harm our results of operations.”

Cash Flows

The following table summarizes our cash flows for the periods indicated:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","(In thousands)"],["Net cash used in operating activities","$","(190,418)","","","$","(127,504)","","","$","(65,013)"],["Net cash provided by (used in) investing activities","99,431","","","(633,908)","","","(7,917)"],["Net cash provided by financing activities","2,220","","","933,573","","","90,756"],["Effect of exchange rates on cash, cash equivalents and restricted cash","(116)","","","(9)","","","\u2014"],["Net (decrease) increase in cash, cash equivalents, and restricted cash","$","(88,883)","","","$","172,152","","","$","17,826"]]
[[/GREPCENT_TABLE]]

Cash Used in Operating Activities

Our largest source of operating cash is cash collections from our customers, and our primary uses of cash in operations are for employee-related expenditures, sales and marketing expenses, and third-party hosting costs.

Net cash used in operating activities for the years ended December 31, 2022 and 2021 was $190.4 million and $127.5 million, respectively. The increase in cash used in operations reflects an increase in our net loss adjusted for noncash items, including charges associated with the impairments of goodwill and intangible assets, stock-based compensation, depreciation and amortization, change in deferred taxes, amortization of deferred contract costs, amortization of operating lease right-of-use assets, gain on investment in equity securities, and amortization of debt discount and issuance costs on our long-term debt, and changes in operating assets and liabilities. Fluctuations in operating assets and liabilities are affected primarily by changes in trade and other receivables, prepaid expenses and other current assets, accrued compensation, deferred revenue, accounts payable, and other liabilities.

Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities during the year ended December 31, 2022 was $99.4 million, which was primarily due to maturities of marketable securities of $247.0 million, partially offset by $145.5 million used in purchases of marketable securities, and property and equipment purchases of $2.1 million.

Net cash used in investing activities during the year ended December 31, 2021 was $633.9 million, which was primarily due to $400.0 million cash used in connection with our acquisition of Title365, $351.6 million used in purchases of marketable securities, partially offset by maturities of marketable securities of $125.1 million, an investment via issuance of note receivable of $3.0 million, and an investment in non-marketable equity securities of $2.5 million.

Cash Provided by Financing Activities

Net cash provided by financing activities for the year ended December 31, 2022 was $2.2 million, primarily reflecting proceeds from the exercises of stock options, net of repurchases, of $2.6 million.

73

Net cash provided by financing activities for the year ended December 31, 2021 was $933.6 million, reflecting net proceeds from our initial public offering of $366.8 million, net proceeds from debt financing of $218.8 million, net proceeds from issuance of Series G convertible preferred stock of $309.7 million, proceeds from the exercise of convertible preferred stock warrants of $10.2 million, proceeds from the exercises of stock options of $25.2 million, and proceeds from the repayment of an employee promissory note of $2.9 million.

Contingent Obligations

We administer escrow and trust deposits held at third-party financial institutions representing funds received under real estate contracts, escrowed funds received under escrow agreements, and/or undisbursed amounts received for settlement of mortgage and home equity loans. Cash held for these purposes was approximately $5.0 million net of outstanding checks in transit of $42.8 million as of December 31, 2022. These funds are not considered assets of ours and, therefore, are not included in our consolidated balance sheet; however, we are contingently liable for the disposition of these funds on behalf of consumers. As of December 31, 2022, we did not have any other relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other purposes.

Critical Accounting Estimates

Our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K are prepared in accordance with the U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows could be affected.

We believe that of our significant accounting policies, which are described further in Note 2 “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K, the following accounting estimates involve a greater degree of judgment and complexity. Accordingly, these are the estimates we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition

In our Blend Platform segment, we generate revenue from fees paid by our customers to access our platform, from our software-enabled title solution, and, to a lesser extent, from professional services. In our Title365 segment, we generate revenue from traditional title insurance services, where we earn fees for placing and binding title insurance policies with third-party underwriters, and from escrow and other trustee services where we earn fees from managing the closing of real estate transactions.

In the Blend Platform segment, our customers have the ability to access our platform under subscription arrangements or under usage-based arrangements. We recognize fees for subscription arrangements ratably over the non-cancelable contract term and for usage-based arrangements as the completed transactions are processed using our platform. In our subscription arrangements, the customers commit to a minimum number of completed transactions at specified prices over the contract term. We believe the area we apply the most critical judgment in our revenue recognition relates to determination of the transaction price, and specifically, the estimation of variable consideration in our subscription arrangements.

The variable consideration relates to the estimated overage fees we expect to earn over the non-cancelable contract term, which is included in the transaction price at contract inception to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. In estimating overage fees in subscription arrangements, we consider our historical experience and other external factors that may impact the expectation of future completed transactions beyond a customer’s contracted minimum number of completed transactions.

The estimated variable consideration is sensitive to the inputs, judgements, and assumptions made by us. Although we believe that our approach to developing estimates of variable consideration is reasonable, actual results could differ, and we may be exposed to increases or decreases in revenue that could be material.

74

Business Combinations

On June 30, 2021, we completed our acquisition of 90.1% ownership of Title365. We account for acquisitions in accordance with ASC 805, Business Combinations. We believe the area we applied the most critical judgment when accounting for the Title365 acquisition relates to the valuation of acquired intangible assets and the redeemable non-controlling interest. We estimated the fair value of customer relationships intangible asset using the multi-period excess earnings method, where significant assumptions included our estimated annual net cash flows expected to be generated from the acquired customer portfolio (including appropriate revenue and profit attributable to the asset, attrition curve, tax rate, contributory asset charges, among other factors) and the discount rate. We estimated the fair value of redeemable non-controlling interest using a Monte Carlo simulation whereby a range of possible scenarios of future EBITDA of the acquired business was considered. For each scenario we performed an analysis to determine the optimal decision on the timing for us to exercise the call option. Based on the optimal decision in each simulation, the payoff was discounted to the acquisition date and the average of the discounted payoff across the simulation paths was determined to represent the fair value of the noncontrolling interest. The excess of the purchase price over the fair value of the net identifiable assets acquired was allocated to goodwill.

Impairment Assessment of Goodwill and Intangible Assets

During the year ended December 31, 2022, we performed two interim quantitative impairment reviews of our goodwill and acquired customer relationships intangible asset. These reviews were triggered by a decline in economic and market conditions, including a decline in our market capitalization and current and projected declines in the operating results of the Title365 segment. The environment in which we operate is heavily influenced by government policies and overall economic conditions. Recent rises in interest rates have resulted in a decline in mortgage origination activity, including refinance activity, which had an adverse effect on our business, specifically within the Title365 segment.

We performed our goodwill impairment analysis at the reporting unit level, which aligns with our reporting structure and availability of discrete financial information. Our reporting units are the same as our operating segments. We performed our long-lived assets impairment analysis at the asset group level.

We determined the fair value of the acquired customer relationship intangible asset using the discounted cash flow method, where significant assumptions included the estimated annual net cash flows expected to be generated from the Title365 customer portfolio, including revenue, long-term growth rates, EBITDA margins, and the discount rate. Based on the results of our two interim impairment analyses, we recorded an impairment charge of $162.5 million for the year ended December 31, 2022, representing a full write off of the customer relationships carrying amount.

In evaluating goodwill for impairment, we compared the fair value of the Title365 reporting unit to its associated carrying value after the write off of the customer relationship intangible asset. We also estimated the fair value of the Blend Platform reporting unit and reconciled the aggregate fair values of our reporting units to our market capitalization adjusted for an estimated control premium. Based on the results of our two interim impairment analyses, we recorded an impairment charge of $287.2 million for the year ended December 31, 2022, representing a full write off of the goodwill carrying amount.

Stock-Based Compensation

We measure and recognize our stock-based compensation based on estimated fair values for all stock awards, which include stock options and RSUs. We recognize stock-based compensation expense for stock options and RSUs that vest only based upon the satisfaction of a service condition on a straight-line basis over the requisite service period, which is generally the vesting period. We account for forfeitures as they occur.

We believe the area we apply the most critical judgment in recognition of our stock-based compensation relates to the valuation of stock option awards. We use the Black-Scholes-Merton option pricing model to determine the grant date fair value of the stock options granted. The Black-Scholes option pricing model requires the input of highly subjective assumptions, such as the fair value of the underlying common stock for pre-IPO awards. The assumptions used to determine the fair value of the option awards represent our estimates, which involve inherent uncertainties and the application of management’s judgment.

Certain stock options granted to our Co-Founder and Head of Blend vest upon the satisfaction of a service condition, liquidity event-related performance condition and performance-based market conditions. The first tranche of the award, which vested upon completion of the IPO, was valued using the Black-Scholes-Merton option pricing model. The remaining tranches were valued using a Monte Carlo simulation model, and will vest upon achievement of performance goals tied to our stock price hurdles with specified expiration dates for each tranche.

75

Recent Accounting Pronouncements

Refer to Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.