EverQuote, Inc. (EVER) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Overview
EverQuote makes insurance shopping easy, efficient and personal, saving consumers and insurance providers time and money.
We operate a leading online marketplace for insurance shopping, connecting consumers with insurance providers. Our mission is to empower insurance shoppers to better protect life’s most important assets—their family, health, property, and future. Our vision is to become the largest online source of insurance policies by using data, technology and knowledgeable advisors to make insurance simpler, more affordable and personalized, ultimately reducing cost and risk. Our results-driven marketplace, powered by our proprietary data and technology platform, is reshaping the insurance shopping experience for consumers and improving the way insurance providers attract and connect with consumers shopping for insurance.
Finding the right insurance product is often challenging for consumers, who face limited online options, complex, variable and opaque pricing, and myriad coverage configurations. We present consumers with a single starting point for a comprehensive and cost-effective insurance shopping experience. Our marketplace reduces the time consumers spend searching across multiple sites by delivering broader and more relevant results than consumers may find on their own. In addition to our marketplace, we operate a direct to consumer, or DTC, insurance agency. Our DTC agents bind policies for consumers, further streamlining the consumer shopping experience. Our services are free for consumers, and we derive our revenue from sales of consumer referrals to insurance providers and directly from commissions on sales of policies.
Insurance providers, which we view as including carriers, our own DTC agents, and third-party agents, operate in a highly competitive and regulated industry and typically specialize in pre-determined subsets of consumers. As a result, not every consumer is a good match for every provider, and some providers can struggle to reach the segments that are most desirable for their business models. Traditional offline and online advertising channels reach broad audiences but lack the fine-grained consumer acquisition capabilities needed for optimally matching consumers to specific insurance products. We connect providers to a large volume of high-intent, pre-validated consumer referrals that match the insurers’ specific requirements. The transparency of our marketplace, as well as the campaign management tools we offer, make it easy for insurance carriers and third-party agents to evaluate the performance of their marketing spend on our platform and manage their own return on investment.
Since 2011, our core mission has been to make finding insurance easy and more personal, saving consumers and insurance providers time and money. We are working to build the largest and most trusted online insurance marketplace in the world. In pursuing this goal, we have consistently innovated through our disruptive data driven approach. Highlights of our history of innovation include:
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In 2011, we launched the EverQuote marketplace for auto insurance.
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In 2013, we launched EverQuote Pro, our provider portal, for carriers.
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In 2015, we launched EverQuote Pro for agents.
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In 2016, we added home and life insurance in our marketplace.
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In 2019, we added health and renters insurance in our marketplace.
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In 2020, we launched our DTC insurance offerings in our life vertical and in our health vertical via the acquisition of Crosspointe Insurance & Financial Services, LLC, which we later renamed Eversurance.
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In 2021, we launched our DTC insurance offerings in our auto and home and renters verticals via the acquisition of Policy Fuel LLC and its affiliates, or PolicyFuel.
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In the years ended December 31, 2022, 2021 and 2020, our total revenue was $404.1 million, $418.5 million and $346.9 million, respectively, representing a year-over-year decrease of 3.4% from 2021 to 2022 and a year-over-year increase of 20.6% from 2020 to 2021. We had net losses of $24.4 million, $19.4 million and $11.2 million for the years ended December 31, 2022, 2021 and 2020, respectively, and had $5.9 million, $14.6 million and $18.4 million in adjusted EBITDA for these same periods, respectively. See the section titled “—Non-GAAP Financial Measure” for information regarding our use of adjusted EBITDA and its reconciliation to net income (loss) determined in accordance with generally accepted accounting principles in the United States, or GAAP.
COVID-19
Uncertainty remains as to the duration and severity of business disruptions related to the COVID-19 pandemic, as well as with respect to the full impact of the pandemic on the global economy and consumer confidence. As a result, we are unable to accurately predict the full impact that COVID-19 will have on our insurance provider customers or our users, or on our operating results, financial condition, liquidity and cash flows. To support the health and well-being of our employees, customers, partners and communities, a majority of our employees continue to work remotely, however our offices are open for use. While disruptions related to COVID-19 have not had a material adverse impact on our financial results through December 31, 2022, such disruptions may impact consumer insurance shopping behavior. We continue to monitor and are managing our operations for the ongoing impact of COVID-19.
Factors Affecting Our Performance
We believe that our performance and future growth depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section titled “Risk Factors.”
Auto insurance industry risk
We derive a significant portion of our revenue from auto insurance providers and our financial results depend on the performance of the auto insurance industry. For example, in 2016, the U.S. commercial auto insurance industry experienced its worst underwriting performance in 15 years, with higher loss ratios that were driven by both adverse claim severity and frequency trends. As a result, our auto insurance carrier customers reduced marketing spend and cost per sale targets the following year, ultimately impacting our revenue growth in the auto insurance vertical in 2017. More recently, and specifically starting in the third quarter of 2021, the auto insurance industry has experienced similar challenges, which is impacting our financial performance in the auto insurance vertical. Auto insurance carriers experienced a sudden rise in the severity of claims caused by inflationary increases in the cost to repair and replace vehicles and settle medical and injury claims. The increase in claims severity has reduced underwriting performance for auto insurance carriers, causing them to implement policy premium increases and reduce spending on new customer acquisition. The reduction in new customer acquisition spending by auto insurance carriers has had a negative impact on the pricing and demand for consumer referrals in our marketplace.
The state of the auto insurance market remains dynamic. In August 2022, we began to see the first major carrier return to more normalized historical spending patterns. However, Hurricane Ian, which made landfall in Florida in September 2022, put incremental, downward pressure on carrier marketing spend. While we believe we have started to see some improvement in spending patterns, a recovery could be prolonged by further cost inflation, increased claim severity and frequency, or insufficient policy premium increases.
Expanding consumer traffic
Our success depends in part on the growth of our consumer traffic. We have historically increased consumer traffic to our marketplace by expanding existing advertising channels and adding new channels such as by engaging with consumers through our verified partner network. We plan to continue to increase consumer traffic by leveraging the features and growing data assets of our platform. While we plan to increase consumer traffic over the long term, we also have the ability to decrease advertising, if we believe the revenue associated with such consumer traffic does not result in incremental profit to our business. We have also increased the number of quote requests acquired from our verified partner network. While we plan to continue to increase the number of quote requests we acquire from our verified partner network, our ability to acquire quote requests in significant volume, at prices that are attractive, and that represent high-intent shoppers that insurance providers will purchase referrals for will impact our profitability.
Increasing the number of insurance providers and their respective spend in our marketplace
Our success also depends on our ability to retain and grow our insurance provider network. Historically, we have generally expanded both the number of insurance providers and the spend per provider on our platform.
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Key Business Metrics
We regularly review a number of metrics, including GAAP operating results and the key metrics listed below, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make operating and strategic decisions. Some of these metrics are non-financial metrics or are financial metrics that are not defined by GAAP.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss), adjusted to exclude: stock-based compensation expense, depreciation and amortization expense, acquisition-related costs, one-time severance charges, interest income and the provision for (benefit from) income taxes. Adjusted EBITDA is a non-GAAP financial measure that we present in this Annual Report on Form 10-K to supplement the financial information we present on a GAAP basis. We monitor and present Adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, to establish budgets and to develop operational goals for managing our business. Adjusted EBITDA should not be considered in isolation from, or as an alternative to, measures prepared in accordance with GAAP. Adjusted EBITDA should be considered together with other operating and financial performance measures presented in accordance with GAAP. Also, Adjusted EBITDA may not necessarily be comparable to similarly titled measures presented by other companies. For further explanation of the uses and limitations of this measure and a reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income (loss), please see “—Non-GAAP Financial Measure”.
Variable Marketing Margin
We define variable marketing margin, or VMM, as revenue, as reported in our consolidated statements of operations and comprehensive loss, less advertising costs (a component of sales and marketing expense, as reported in our consolidated statements of operations and comprehensive loss). We use VMM to measure the efficiency of individual advertising and consumer acquisition sources and to make trade-off decisions to manage our return on advertising. We do not use VMM as a measure of profitability.
Key Components of Our Results of Operations
Revenue
We generate our revenue primarily by selling consumer referrals to insurance provider customers, consisting of carriers and agents, as well as to indirect distributors. To simplify the quoting process for the consumer and improve performance for the provider, we are able to provide consumer-submitted quote request data along with each referral. We recognize revenue from consumer referrals at the time of delivery. We support three secure consumer referral formats:
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Clicks: An online-to-online referral, with a handoff of the consumer to the provider’s website.
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Data: An online-to-offline referral, with quote request data transmitted to the provider for follow-up.
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Calls: An online-to-offline referral for outbound calls and an offline-to-offline referral for inbound calls, with the consumer and provider connected by phone.
We also generate revenue from commissions paid to us by insurance carriers for the sale of policies, primarily in our health and automotive verticals. Commission revenue represented approximately 13% of total revenue in the year ended December 31, 2022, and less than 10% of total revenue in the years ended December 31, 2021 and 2020. Commission revenue is recognized upon satisfaction of our performance obligation, which we consider to be submission of the policy application to the insurance carrier. We recognize revenue based on our constrained estimate of commission payments we expect to receive over the lifetime of the policies sold, which we refer to as constrained lifetime values, or constrained LTVs, of commission payments.
For the periods presented, our total revenue consisted of revenue generated from our automotive and other insurance verticals, which includes home and renters, life and health insurance verticals, as follows:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||||||
| (in thousands) | |||||||||||
| Automotive | $ | 324,417 | $ | 330,928 | $ | 283,236 | |||||
| Other | 79,710 | 87,587 | 63,699 | ||||||||
| Total Revenue | $ | 404,127 | $ | 418,515 | $ | 346,935 |
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We expect an overall increase in revenue in 2023 as we anticipate increased spending from our carrier partners. We expect revenue to fluctuate from quarter to quarter and, in particular, for our commission revenue to be positively impacted during the open and annual enrollment periods in our health vertical.
Cost and Operating Expenses
Our cost and operating expenses consist of cost of revenue, sales and marketing, research and development, general and administrative expenses and acquisition-related costs.
We allocate certain overhead expenses, such as rent, utilities, office supplies and depreciation and amortization of general office assets, to cost of revenue and operating expense categories based on headcount. As a result, an overhead expense allocation is reflected in cost of revenue and each operating expense category. Personnel-related costs included in cost of revenue and each operating expense category include wages, fringe benefit costs and stock-based compensation expense.
Cost of Revenue
Cost of revenue is comprised primarily of the costs of operating our marketplace and delivering consumer referrals to our customers. These costs consist primarily of technology service costs including hosting, software, data services, and third-party call center costs. In addition, cost of revenue includes depreciation and amortization of our platform technology assets and personnel-related costs.
Sales and Marketing
Sales and marketing expense consists primarily of advertising and marketing expenditures as well as personnel-related costs for employees engaged in sales, marketing, data analytics and consumer acquisition functions and amortization of sales and marketing-related intangible assets. Advertising expenditures consist of variable costs that are related to attracting consumers to our marketplace, generating consumer quote requests, including the cost of quote requests we acquire from our verified partner network, and promoting our marketplace to carriers and agents. Advertising costs are expensed as incurred. Marketing costs consist primarily of content and creative development, public relations, memberships, and event costs. In order to continue to grow our business and brand awareness, we expect that we will continue to commit substantial resources to our sales and marketing efforts. We expect our sales and marketing expense will increase in the near term. In the longer term, we expect sales and marketing expense to decrease as a percentage of revenue due to efficiencies of scale and improvements in our marketplace technology.
Research and Development
Research and development expense consists primarily of personnel-related costs for software development and product management. We have focused our research and development efforts on improving ease of use and functionality of our existing marketplace platform and developing new offerings and internal tools. We primarily expense research and development costs. Direct development costs related to software enhancements that add functionality are capitalized and amortized as a component of cost of revenue. We expect that research and development expense will increase as we continue to enhance and expand our platform technology.
General and Administrative
General and administrative expense consists of personnel-related costs and related expenses for executive, finance, legal, human resources, technical support and administrative personnel as well as the costs associated with professional fees for external legal, accounting and other consulting services, insurance premiums and payment processing and billing costs. We expect that general and administrative expense will increase in the near term due primarily to increases in personnel-related costs.
Acquisition-related
Acquisition-related costs include expenses associated with third-party professional services we utilize for the evaluation and execution of acquisitions as well as changes in the fair value of our contingent consideration liabilities recorded as the result of our Eversurance and PolicyFuel acquisitions.
Other Income (Expense)
Other income (expense) consists of interest income and other income (expense). Interest income consists of interest earned on invested cash balances. Other income (expense) consists of miscellaneous income (expense) unrelated to our core operations.
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Income Taxes
Income tax expense is based on our estimate of taxable income, applicable income tax rates, net research and development tax credits, net operating loss carrybacks, changes in valuation allowance estimates and deferred income taxes.
Non-GAAP Financial Measure
To supplement our consolidated financial statements presented in accordance with GAAP and to provide investors with additional information regarding our financial results, we present in this Annual Report on Form 10-K adjusted EBITDA as a non-GAAP financial measure. Adjusted EBITDA is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similarly titled measures presented by other companies.
Adjusted EBITDA. We define adjusted EBITDA as our net income (loss), excluding the impact of stock-based compensation expense; depreciation and amortization expense; acquisition-related costs; one-time severance charges; interest income; and our provision for (benefit from) income taxes. The most directly comparable GAAP measure to adjusted EBITDA is net income (loss). We monitor and present in this Annual Report on Form 10-K adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, to establish budgets and to develop operational goals for managing our business. In particular, we believe that excluding the impact of these expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core operating performance.
We use adjusted EBITDA to evaluate our operating performance and trends and make planning decisions. We believe adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in the calculation of adjusted EBITDA. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects.
Adjusted EBITDA is not prepared in accordance with GAAP and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the most directly comparable financial measure calculated and presented in accordance with GAAP. Some of these limitations are:
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adjusted EBITDA excludes stock-based compensation expense as it has recently been, and will continue to be for the foreseeable future, a significant recurring non-cash expense for our business;
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adjusted EBITDA excludes depreciation and amortization expense and, although this is a non-cash expense, the assets being depreciated and amortized may have to be replaced in the future;
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adjusted EBITDA excludes acquisition-related costs that affect cash available to us and the change in fair value of non-cash contingent consideration;
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adjusted EBITDA excludes severance charges incurred and paid in the fourth quarter of 2021 related to our reduction in non-marketing operating expenses that affected cash available to us;
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adjusted EBITDA does not reflect the cash received from interest income on our investments, which affects the cash available to us;
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adjusted EBITDA does not reflect income tax expense (benefit) that affects cash available to us; and
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the expenses and other items that we exclude in our calculation of adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from adjusted EBITDA when they report their operating results.
In addition, other companies may use other measures to evaluate their performance, all of which could reduce the usefulness of adjusted EBITDA as a tool for comparison.
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The following table reconciles adjusted EBITDA to net income (loss), the most directly comparable financial measures calculated and presented in accordance with GAAP.
Reconciliation of Net Loss to Adjusted EBITDA:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Net loss | $ | (24,416 | ) | $ | (19,434 | ) | $ | (11,202 | ) | |||
| Stock-based compensation | 28,986 | 30,020 | 24,179 | |||||||||
| Depreciation and amortization | 5,848 | 5,072 | 3,350 | |||||||||
| Acquisition-related costs | (4,135 | ) | 1,065 | 2,258 | ||||||||
| Severance under a plan | — | 440 | — | |||||||||
| Interest income | (349 | ) | (37 | ) | (189 | ) | ||||||
| Benefit from income taxes | — | (2,510 | ) | — | ||||||||
| Adjusted EBITDA | $ | 5,934 | $ | 14,616 | $ | 18,396 |
Results of Operations
The following tables set forth our results of operations for the periods shown:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Statement of Operations Data: | ||||||||||||
| Revenue(1) | $ | 404,127 | $ | 418,515 | $ | 346,935 | ||||||
| Cost and operating expenses(2): | ||||||||||||
| Cost of revenue | 23,980 | 23,949 | 21,373 | |||||||||
| Sales and marketing | 349,255 | 354,990 | 284,880 | |||||||||
| Research and development | 31,713 | 35,732 | 29,662 | |||||||||
| General and administrative | 28,102 | 24,703 | 20,444 | |||||||||
| Acquisition-related costs | (4,135 | ) | 1,065 | 2,258 | ||||||||
| Total cost and operating expenses | 428,915 | 440,439 | 358,617 | |||||||||
| Loss from operations | (24,788 | ) | (21,924 | ) | (11,682 | ) | ||||||
| Other income (expense): | ||||||||||||
| Interest income | 349 | 37 | 189 | |||||||||
| Other income (expense), net | 23 | (57 | ) | 291 | ||||||||
| Total other income (expense), net | 372 | (20 | ) | 480 | ||||||||
| Loss before income taxes | (24,416 | ) | (21,944 | ) | (11,202 | ) | ||||||
| Benefit from income taxes | — | 2,510 | — | |||||||||
| Net loss | $ | (24,416 | ) | $ | (19,434 | ) | $ | (11,202 | ) | |||
| Other Financial and Operational Data: | ||||||||||||
| Variable marketing margin | $ | 128,258 | $ | 129,553 | $ | 108,642 | ||||||
| Adjusted EBITDA(3) | $ | 5,934 | $ | 14,616 | $ | 18,396 |
(1)
Comprised of revenue from the following distribution channels:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| Direct channels | 86 | % | 90 | % | 92 | % | ||||||
| Indirect channels | 14 | % | 10 | % | 8 | % | ||||||
| 100 | % | 100 | % | 100 | % |
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(2)
Includes stock-based compensation expense as follows:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||||||
| (in thousands) | |||||||||||
| Cost of revenue | $ | 281 | $ | 363 | $ | 361 | |||||
| Sales and marketing | 11,018 | 12,405 | 10,246 | ||||||||
| Research and development | 10,328 | 9,551 | 7,751 | ||||||||
| General and administrative | 7,359 | 7,701 | 5,821 | ||||||||
| $ | 28,986 | $ | 30,020 | $ | 24,179 |
(3) See “—Non-GAAP Financial Measure” for information regarding our use of adjusted EBITDA as a non-GAAP financial measure and a reconciliation of adjusted EBITDA to its comparable GAAP financial measure.
Comparison of the Years Ended December 31, 2022 and 2021
Revenue
| Year Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Revenue | $ | 404,127 | $ | 418,515 | $ | (14,388 | ) | -3.4 | % |
Revenue decreased by $14.4 million from $418.5 million for the year ended December 31, 2021 to $404.1 million for the year ended December 31, 2022. The decrease in revenue was due to decreases of $7.9 million and $6.5 million in our other insurance and automotive verticals, respectively. The decrease in revenue from our other insurance verticals was due to a decrease of $16.9 million in carrier spend for referrals, partially offset by an increase in commission revenue of $9.1 million. The decrease in revenue from our automotive vertical was primarily due to a decrease of $21.1 million in carrier spend for referrals, partially offset by an increase in commission revenue of $14.6 million.
Cost of Revenue
| Year Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Cost of revenue | $ | 23,980 | $ | 23,949 | $ | 31 | 0.1 | % | ||||||||
| Percentage of revenue | 5.9 | % | 5.7 | % |
Cost of revenue increased slightly from $23.9 million for the year ended December 31, 2021 to $24.0 million for the year ended December 31, 2022. Cost of revenue increased primarily due to increased personnel-related costs of $1.3 million as a result of shifting call referrals from third-party call centers to employees and to increased amortization of intangible assets of $0.4 million, partially offset by decreases in technology service costs of $2.0 million, primarily due to decreased hosting costs, third-party call center costs and other technology service costs.
Sales and Marketing
| Year Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Sales and marketing expense | $ | 349,255 | $ | 354,990 | $ | (5,735 | ) | -1.6 | % | |||||||
| Percentage of revenue | 86.4 | % | 84.8 | % |
Sales and marketing expenses decreased by $5.7 million from $355.0 million for the year ended December 31, 2021 to $349.3 million for the year ended December 31, 2022. The decrease in sales and marketing expense was primarily due to a decrease in advertising expenditures of $13.1 million, partially offset by an increase in personnel-related costs of $5.5 million. The decrease in advertising expenditures primarily related to decreased carrier spend for referrals, which impacted our advertising expenditures. The
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increase in personnel-related costs was primarily due to an increase in headcount, a significant portion of which was in DTC agency. Agent license fees and office and occupancy costs related to DTC also increased by $0.8 million and $0.5 million, respectively.
Research and Development
| Year Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Research and development expense | $ | 31,713 | $ | 35,732 | $ | (4,019 | ) | -11.2 | % | |||||||
| Percentage of revenue | 7.8 | % | 8.5 | % |
Research and development expenses decreased by $4.0 million from $35.7 million for the year ended December 31, 2021 to $31.7 million for the year ended December 31, 2022. The decrease in research and development expense was primarily due to a decrease in personnel-related costs of $4.1 million and a decrease in consulting costs of $0.4 million, partially offset by an increase in technology service costs of $0.8 million.
General and Administrative
| Year Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| General and administrative expense | $ | 28,102 | $ | 24,703 | $ | 3,399 | 13.8 | % | ||||||||
| Percentage of revenue | 7.0 | % | 5.9 | % |
General and administrative expenses increased by $3.4 million from $24.7 million for the year ended December 31, 2021 to $28.1 million for the year ended December 31, 2022. The increase in general and administrative expenses was primarily due to an increase in personnel-related costs of $1.2 million, an increase in consulting fees of $0.9 million and an increase in bad debt expense of $0.7 million. Credit card fees also increased by $0.3 million.
Acquisition-related Costs
Acquisition-related costs for the years ended December 31, 2022 and 2021 were $(4.1) million and $1.1 million, respectively. We recorded a credit to acquisition-related costs for the year ended December 31, 2022 of $4.1 million related to the decrease in the fair value of our contingent consideration liabilities. The decrease was related to our future revenue forecasts and to a lesser extent, changes in market value of our Class A common stock. Acquisition-related costs for the year ended December 31, 2021 included costs for third-party professional services we utilized for the evaluation and execution of our completed acquisitions of $0.9 million and changes in the fair value of our contingent consideration liabilities recorded as the result of our acquisitions.
Other Income (Expense)
Other income (expense) included interest income of $0.3 million for the year ended December 31, 2022 as compared to less than $0.1 million for the year ended December 31, 2021, due to higher interest rates. Other income (expense), net was not significant for either of the years ended December 31, 2022 or 2021.
Income Taxes
We generated taxable income during the year ended December 31, 2022 related primarily to capitalized research and development costs due to the new requirement to capitalize research and development costs under Section 174 of the Internal Revenue Code of 1986. We offset our taxable income with net operating loss carryforwards and therefore did not record income tax expense for the year ended December 31, 2022. We recorded an income tax benefit of $2.5 million for the year ended December 31, 2021 due to the release of a portion of our valuation allowance as a result of the PolicyFuel acquisition. The net deferred tax liability recorded for the PolicyFuel acquisition primarily relates to the intangible assets recognized in purchase accounting which are non-deductible for tax purposes and result in a deferred tax liability.
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Variable Marketing Margin
| Year Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | % | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Revenue | $ | 404,127 | $ | 418,515 | $ | (14,388 | ) | -3.4 | % | |||||||
| Less: total advertising expense (a component of sales and marketing expense) | 275,869 | 288,962 | ||||||||||||||
| Variable marketing margin | $ | 128,258 | $ | 129,553 | $ | (1,295 | ) | -1.0 | % | |||||||
| Percentage of revenue | 31.7 | % | 31.0 | % |
The decrease in variable marketing margin was due primarily to decreases in referral revenue, partially offset by increases in commission revenue.
Comparison of the Years Ended December 31, 2021 and 2020
For a discussion of our results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Comparison of the Years Ended December 31, 2021 and 2020 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents of $30.8 million as of December 31, 2022 and availability of up to $45.0 million under our revolving line of credit and term loan, each of which were amended in July 2022. On July 15, 2022, we entered into the Loan and Security Modification Agreement, which amended our existing Loan and Security Agreement, or the 2020 Loan Agreement, with Western Alliance Bank, or the Lender, to extend the maturity date of the revolving line of credit to July 15, 2025, to increase the revolving line of credit available thereunder from $25.0 million to $35.0 million, and to provide us with access to a term loan of up to $10.0 million. We refer to the 2020 Loan Agreement, as amended by the Loan and Security Modification Agreement, as the Amended Loan Agreement.
Pursuant to the Amended Loan Agreement, borrowings under the revolving line of credit cannot exceed 85% of eligible accounts receivable balances, bear interest at the greater of 4.25% or the prime rate as published in the Wall Street Journal and mature on July 15, 2025. The term loan may be drawn through December 31, 2023 and borrowings bear interest at 0.25% plus the greater of 4.25% or the prime rate as published in the Wall Street Journal. Borrowings under the term loan of the Amended Loan Agreement are repayable in monthly interest-only payments through December 31, 2023. Commencing on January 1, 2024, the term loan is payable in 42 equal monthly installments of the then outstanding principal and accrued interest through June 2027. We may prepay all, but not less than all, of any outstanding principal with respect to advances made under the term loan provided that such outstanding principal is paid in full along with any accrued but unpaid interest to date plus any fees that become payable under the Amended Loan Agreement. In an event of default, as defined in the Amended Loan Agreement, and until such event is no longer continuing, the annual interest rate to be charged would be the annual rate otherwise applicable to borrowings under the Amended Loan Agreement plus 5.00%.
Borrowings are collateralized by substantially all of our assets and property. Under the Amended Loan Agreement, we agreed to affirmative and negative covenants to which we will remain subject until maturity. The covenants include limitations on our ability to incur additional indebtedness and engage in certain fundamental business transactions, such as mergers or acquisitions of other businesses. In addition, under the Amended Loan Agreement and through December 31, 2023, we are required to maintain a minimum asset coverage ratio of 1.5 to 1 calculated as the sum of unrestricted cash held at the Lender and eligible accounts receivable divided by all borrowings outstanding under the Amended Loan Agreement. Commencing December 31, 2023, we are required to maintain, and test on a quarterly basis, a fixed charge coverage ratio and a leverage ratio. The fixed charge coverage ratio is measured as the ratio of (i) our trailing twelve-month adjusted “EBITDA” (as defined in the Amended Loan Agreement) less capital expenditures, less cash taxes, to (ii) our trailing twelve-month interest and principal payments to the Lender, of at least 1.25 to 1.00. The leverage ratio is measured as the ratio of (i) our outstanding obligations owing to the Lender, to (ii) our trailing twelve-month adjusted EBITDA (as defined in the Amended Loan Agreement), of not more than 3.00 to 1.00. As of December 31, 2022, we were in compliance with these covenants.
Since our inception, we have incurred operating losses and may continue to incur losses in the foreseeable future. We anticipate that our operating expenses and capital expenditures will increase in the near term as we hire additional employees and improve our technology and infrastructure capabilities. Additionally, a significant portion of the commission revenue we record will be collected over a multi-year time frame as policyholders renew their policies, and we are paid commissions on those renewals. As of December 31, 2022, $33.4 million of our $46.9 million commissions receivable contract asset was classified as long-term. We believe our
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existing cash and cash equivalents will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next 12 months, without considering the borrowing availability under our credit facility. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on business initiatives, purchases of capital equipment to support our growth, the expansion of sales and marketing activities, expansion of our business through acquisitions or our investments in complementary offerings, technologies or businesses, market acceptance of our platform and overall economic conditions. If we do not achieve our revenue goals as planned, we believe that we can reduce our operating costs. If we need additional funds and are unable to obtain funding on a timely basis, we may need to significantly curtail our operations in an effort to provide sufficient funds to continue our operations, which could adversely affect our business prospects.
Cash Flows
The following table shows a summary of our cash flows:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Net cash provided by (used in) operating activities | $ | (15,791 | ) | $ | 7,189 | $ | 10,668 | |||||
| Net cash used in investing activities | (4,290 | ) | (18,817 | ) | (18,752 | ) | ||||||
| Net cash provided by financing activities | 15,842 | 3,615 | 4,907 | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (27 | ) | (6 | ) | (7 | ) | ||||||
| Net decrease in cash, cash equivalents and restricted cash | $ | (4,266 | ) | $ | (8,019 | ) | $ | (3,184 | ) |
Net cash provided by operating activities
Operating activities used $15.8 million of cash during the year ended December 31, 2022 and provided $7.2 million of cash during the year ended December 31, 2021. Cash used by operating activities in the year ended December 31, 2022 resulted from our net loss of $24.4 million and net cash used by changes in our operating assets and liabilities of $22.8 million, partially offset by net non-cash charges of $31.4 million. Net cash used by changes in our operating assets and liabilities consisted primarily of a $24.2 million increase in commissions receivable, a $2.1 million increase in prepaid expenses and other current assets and a $1.3 million decrease in accounts payable and accrued expenses and other current liabilities, partially offset by a $5.4 million decrease in accounts receivable.
Cash provided by operating activities in the year ended December 31, 2021 primarily resulted from the offset of net non-cash charges of $32.8 million to our net loss of $19.4 million, partially offset by net cash used by changes in our operating assets and liabilities of $6.1 million. Net cash used by changes in our operating assets and liabilities consisted primarily of a $16.9 million increase in commissions receivable and a $1.3 million decrease in accounts payable and accrued expenses and other current liabilities, partially offset by a $10.5 million decrease in accounts receivable and a $1.8 million decrease in prepaid expenses and other current assets.
Changes in accounts receivable, accounts payable and accrued expenses and other current liabilities were generally due to growth in our business, timing of customer and vendor invoicing and payments. Collection of commissions receivable depends upon the timing of our receipt of commission payments from insurance carriers. A significant portion of our commissions receivable asset is classified as long term.
Net cash used in investing activities
Net cash used in investing activities was $4.3 million and $18.8 million for the years ended December 31, 2022 and 2021, respectively. Cash used in investing activities for the years ended December 31, 2022 and 2021 consisted of cash used to acquire property and equipment, which included the capitalization of software development costs. During the years ended December 31, 2022 and 2021, we capitalized $3.6 million and $2.3 million, respectively, of software development costs. Net cash used in investing activities for the year ended December 31, 2021 included cash paid of $16.0 million to purchase PolicyFuel.
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Net cash provided by financing activities
During the years ended December 31, 2022 and 2021, net cash provided by financing activities was $15.8 million and $3.6 million, respectively. Net cash provided by financing activities during the year ended December 31, 2022 consisted primarily of $15.0 million of proceeds from the issuance and sale of shares of common stock in a private placement with Recognition Capital, LLC, an entity which is owned and controlled by David Blundin, Chairman of the Board of Directors and co-founder of the Company, and $0.9 million from the exercise of common stock options. Net cash provided by financing activities during the year ended December 31, 2021 consisted of proceeds of $3.6 million received from the exercise of common stock options.
For a discussion of our cash flows for the year ended December 31, 2020, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Flows included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Contractual Obligations and Commitments
Our cash flows are dependent on a number of factors in addition to our operational expenditures, including our contractual and other obligations. As a result, our liquidity and capital resources in future periods should be analyzed in conjunction with such factors.
We lease office space in Cambridge, Massachusetts under a non-cancelable operating lease that expires in September 2024. We lease office space at various other locations under non-cancelable operating leases that expire at varying dates through 2030. As of December 31, 2022, we were obligated to make total minimum lease payments of $6.8 million under such leases, of which $3.2 million is payable in 2023.
We have outstanding agreements with various vendors for hosting and other technical services. We believe that we will be able to fund these obligations through our existing cash and cash equivalents.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 to our audited consolidated financial statements, appearing in Part II of Item 8 of this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Goodwill and Acquired Intangible Assets
We record goodwill when consideration paid in a business acquisition exceeds the value of the net assets acquired. Our estimates of fair value are based upon assumptions believed to be reasonable at that time but that are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events or circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results. During the measurement period, which extends no later than one year from the acquisition date, we may record certain adjustments to the carrying value of the assets acquired and liabilities assumed with the corresponding offset to goodwill. After the measurement period, all adjustments are recorded in the consolidated statements of operations and comprehensive loss as operating expenses or income.
Goodwill is not amortized, but rather is tested for impairment annually, or more frequently if facts and circumstances warrant a review, such as significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. We have determined that there is a single reporting unit for the purpose of conducting our goodwill impairment assessment. We assess both the existence of potential impairment and the amount of impairment loss by comparing the fair value of the reporting unit with its carrying amount, including goodwill. Intangible assets are recorded at their estimated fair values at the date of acquisition. We amortize acquired intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis. To date, we have not recorded any impairments of goodwill or acquired intangible assets.
Valuation of Contingent Consideration
In connection with our acquisitions of Eversurance and PolicyFuel we agreed to issue shares of Class A common stock to the former owners upon the achievement of certain revenue targets. Achievement of revenue targets that will result in the issuance of a variable number of shares of Class A common stock are accounted for as a liability. We estimated the fair value of the shares of Class
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A common stock issuable upon achievement of the targets as of the acquisition date. We remeasure the fair value of the shares of Class A common stock issuable at each subsequent reporting date until the liability is fully settled. We use Monte Carlo simulation models in our estimates. The estimated fair value of the contingent consideration is based upon available information and certain assumptions, known at the time of our estimates, which management believes are reasonable. Changes in the fair value of contingent consideration related to updated assumptions and estimates are recognized as acquisition-related costs.
We used a Monte Carlo simulation model in our estimates of the fair value of the contingent consideration related to the PolicyFuel acquisition that will be settled based on achievement at varying levels of three annual targets. The most significant assumptions and estimates utilized in the model include forecasted revenue (an acquisition specific input) and the market value of our Class A common stock (an observable input). Other assumptions utilized in the model include equity volatility, revenue volatility and discount rate. In December 2022, we issued 58,754 shares of Class A common stock to the former owners of Eversurance upon achievement of the third and final target of the contingent consideration arrangement. We issued 62,671 shares of our Class A common stock in December 2022 to settle the first milestone related to the PolicyFuel contingent consideration. The fair value of our contingent consideration liability for the PolicyFuel shares for the second and third milestones was $0.2 million as of December 31, 2022. A hypothetical change of 10% in our estimate of the number of shares of our Class A common stock to be released upon achievement of the revenue targets or the market value of Class A common stock, would not be material.
Revenue Recognition
We derive our revenue primarily by selling consumer referrals to our insurance provider customers, including insurance carriers, agents and indirect distributors. We also generate revenue from commission fees for the sale of policies, primarily in our health and automotive verticals. To determine revenue recognition for arrangements that we determine are within the scope of the revenue standard, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation.
We only apply the five-step model to contracts when collectability of the consideration to which we are entitled in exchange for the goods or services we transfer to the customer is determined to be probable. Amounts are recorded as accounts receivable when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
Referral Revenue
We recognize referral revenue when we satisfy our performance obligations by delivering the referrals to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those referrals.
Commission Revenue
Commission revenue consists of the estimated constrained lifetime values, or constrained LTVs, of commission payments we expect to receive from health insurance carriers and auto insurance carriers on the sale of insurance policies to consumers and renewals of such policies. Commission revenue is recognized upon satisfaction of our performance obligation. We consider our performance obligation related to commissions for both the initial policy sale and future renewals of the policy to be satisfied upon submission of the policy application. Therefore, a significant portion of the commission revenue we record upon satisfaction of our performance obligation is paid by our insurance provider customer over a multi-year time frame as policyholders renew and pay the insurance provider for their policies. The current portion of commissions receivable consists of estimated commissions on new policies sold and estimated renewal commissions on policies expected to be renewed within one year, while the non-current portion of commissions receivable are commissions for estimated renewals expected to be renewed beyond one year. Commission revenue represented approximately 13% of total revenue for the year ended December 31, 2022 and less than 10% of total revenue for each of the years ended December 31, 2021 and 2020.
We estimate commission revenue for each health insurance product by using a portfolio approach to a group of policies by product type and the application submission date of the relevant policy, which are referred to as “cohorts.” Our estimate of constrained LTVs is based on an analysis of historical commission payment trends for relevant policies to establish an expected lifetime value and incorporates our judgment in interpreting those trends to calculate LTVs and to apply constraints to such LTVs. Significant factors impacting historical trends include carrier mix, average policy duration and conversion rates of paying policies.
Commission revenue from auto insurance carriers consists of constrained LTVs of commission payments we expect to receive for selling an insurance policy based on the effective date of the policy. Our estimate of constrained LTVs is based on an analysis of historical commission payment trends for relevant policies to establish an expected lifetime value and incorporates our judgment in
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interpreting those trends to calculate LTVs and to apply constraints to such LTVs. The most significant factor impacting historical trends is average policy duration.
We apply a constraint to estimated LTVs to only recognize the amount of variable consideration that we believe is probable that we will be entitled to receive and will not be subject to a significant revenue reversal in the future.
To the extent that commission payment trends change or the underlying factors impacting commission payments change, our estimates of constrained LTVs could be materially impacted. To the extent we make changes to our estimates of constrained LTVs, we recognize any material impact of the change to commission revenue in the reporting period in which the change is made, including revisions of estimated lifetime commissions either below or in excess of previously estimated constrained LTVs recognized as an adjustment to revenue and the related contract asset. We recognize revenue for new policies by applying the latest estimated constrained LTV for that product.
Stock-Based Compensation
We measure stock options and other stock-based awards granted to employees, non-employees and directors based on their fair value on the date of the grant. We recognize compensation expense of employee awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. We apply the straight-line method of expense recognition to all employee awards with only service-based vesting conditions and apply the graded-vesting method to all employee awards with both service-based and performance-based vesting conditions, commencing when achievement of the performance condition becomes probable. Compensation expense for nonemployee awards is recognized in the same manner as if we had paid cash for the goods or services received.
We estimate the fair value of stock options with service-based vesting or performance-based vesting granted to employees, non-employees and directors using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our common stock options, the risk-free interest rate for a period that approximates the expected term of our common stock options, and our expected dividend yield. We measure stock options with market-based vesting based on the fair value on the date of grant using a Monte Carlo simulation model. We estimate the fair value of each restricted stock unit, or RSU, based on the market value of our common stock.
The fair value of performance-based RSUs that are liability classified will be recorded as compensation expense based on the fair value of the number of shares issued at vesting. Prior to vesting, compensation expense is recognized over the period during which services are rendered, based on the performance conditions deemed to be probable of achievement. At the end of each financial reporting period prior to the vesting date, the fair value of these awards is remeasured using the then-current fair value of our Class A common stock. For a description of liability-classified performance-based RSUs refer to Note 10 of the Notes to Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our audited consolidated financial statements appearing in Part II, Item 8 of this Annual Report on Form 10-K.