Porch Group, Inc. (PRCH) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

Porch Group is a leading vertical software company reinventing the home services and insurance industries. Porch Group provides software and services to approximately 30,900 companies and small businesses, such as home inspectors, mortgage companies and loan officers, title companies, moving companies, real estate agencies, utility companies, roofers, insurance agencies, and others, helping these service providers grow their business and improve the customer experience for their customers. Through these relationships, we gain unique and early access to homebuyers and homeowners, to then assist these consumers with critical services such as insurance, home warranty, and moving. Porch Group’s Vertical Software segment has three types of customers: (1) home services companies, such as home inspectors, mortgage companies and loan officers, and title companies, who generally pay Porch recurring software and service fees and provide Porch with introductions to homebuyers and homeowners; (2) consumers, whom Porch assists with moving and homeownership by providing comparison and provision of various critical home services, such as insurance, home warranty, moving, security, TV/Internet, and home improvement; and (3) service providers, such as moving companies, security companies, title companies, mortgage companies and TV/Internet providers, who pay for new customer sign-ups. The Company’s Insurance segment offers various forms of homeowner insurance policies through its own insurance carrier and certain homeowner and auto insurance policies through its licensed insurance agency. The Insurance segment also includes home warranty service revenue.

Porch has established many partnerships across a number of home-related industries to increase its service offerings for consumers. Additionally, Porch has also proven effective at selectively acquiring companies which can be efficiently integrated into Porch’s platform. In 2017, we significantly expanded our position in the home inspection industry by acquiring ISN, a developer of ERP and CRM software for home inspectors. In November 2018, we acquired HireAHelper™, a provider of software and demand for moving companies.

In 2021, we entered into new verticals and increased our capabilities in offering insurance and warranty products to consumers, and software to additional types of home service companies with the successful acquisitions of HOA, AHP, V12 Data, Rynoh, and Floify, to name a few. In 2022, we deepened our position in the home warranty industry with the acquisition of RWS.

For consumers, Porch largely relies on relationships with approximately 30,900 companies and small businesses to provide access and introductions. The Company then utilizes technology, lifecycle marketing and teams in lower cost locations to operate a Moving Concierge service to assist these consumers with their move. The Company has invested in limited direct-to-consumer marketing capabilities, but expects to become more advanced over time with capabilities such as digital and social retargeting.

Key Performance Measures and Operating Metrics

In the management of our businesses, we identify, measure and evaluate a variety of operating metrics. The key performance measures and operating metrics we use in managing our businesses are set forth below. These key performance measures and operating metrics are not prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and may not be comparable to or calculated in the same way as other similarly titled measures and metrics used by other companies. The key performance measures presented have been adjusted for divested Porch businesses in 2020.

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The following table summarizes our Average Companies in Quarter and Average Revenue per Account per Month in Quarter for each of the quarterly periods indicated:

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The following tables shows the impact of this error on Average Revenue per Account per Month in Quarter:

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In 2022, the Company completed the acquisition of RWS. In 2021, the Company completed acquisitions of V12 Data in Q1, HOA and Rynoh in Q2, AHP in Q3 and Floify in Q4, that impacted the average number of companies in the quarter.

Due to COVID-19, some small companies put their business with the Company on hold which is reflected in lower number of total companies in 2020 and higher average revenue per account.

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

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The following tables shows the impact of this error on Average Revenue per Monetized Service in Quarter:

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In 2022, the Company completed the acquisition of RWS. In 2021, the Company completed acquisitions of V12 Data in Q1, HOA and Rynoh in Q2, AHP in Q3 and Floify in Q4, that impacted the number of monetized services in the quarter.

In 2020, the Company shifted insurance monetization from getting paid per quote to earning multiyear insurance commissions, resulting in fewer monetized transactions with higher average revenue.

In March 2020, COVID-19 impacted the service volumes during the period from March until June. The impact on service volumes, largely recovered by June 30, 2020 and after adjusting for insurance monetization remains above prior year volumes.

Recent Developments

Share Repurchases

In October 2022, the Company’s Board of Directors approved a share repurchase program authorizing management to repurchase up to $15 million in the Company’s common stock and/or convertible notes. Repurchases under this program may be made from time to time on the open market between November 10, 2022 and June 30, 2023, at prevailing market prices.

During the fourth quarter of 2022, the Company repurchased 2,388,756 shares with the total cost of $4.4 million (including commissions).

Reciprocal Exchange

Homeowners of America plans to file an application to form and license a Texas reciprocal exchange (the “Reciprocal”) with the Texas Department of Insurance (“TDI”). If approved by the TDI, the insurance underwriting business of Porch will be conducted through the Reciprocal. A Porch subsidiary would serve as the attorney-in-fact for the Reciprocal. In that role it would perform underwriting, claims and management services for the Reciprocal and receive a management fee calculated as a percentage of its premiums. EIG and HOA’s managing general agent would act as general agents for the Reciprocal and HOAIC and receive fees and commissions. There can be no assurance that the Reciprocal will receive regulatory approval, and if obtained, that the approval would be based on terms as proposed or subject to additional requirements that may not be acceptable to the Company.

Equity and Debt Financing

During 2022, the Company drew $10 million on HOA’s term loan facility for capital and surplus requirements.

In September 2021, the Company raised net cash of $413.5 million from the issuance of 0.75% Convertible Senior Notes due in September 2026 (the “2026 Notes”). Senior secured debt of $47.0 million was paid down with a portion of the proceeds from the issuance of the 2026 Notes. The Company used $52.9 million of the proceeds from the issuance of the 2026 Notes for the purchase of capped call transactions for purposes of limiting the dilution from the potential conversion of the notes into common stock. Also in 2021, the Company raised $126.7 million of additional equity capital from the exercise of public and private warrants. The proceeds from these equity and debt offerings provide cash for general corporate purposes and additional merger and acquisitions.

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Acquisitions

During 2022, 2021 and 2020, the Company completed a number of business combination transactions. The purpose of each of the acquisitions were to expand the scope and nature of the Company’s product and service offerings, obtain new customer acquisition channels, add additional team members with important skillsets, and realize synergies. The table below identifies the acquisitions in the reporting periods:

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Adoption of New Accounting Standards

The Company early adopted Accounting Standards Update No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers on January 1, 2022 and applied the guidance prospectively for business combinations that occur after the adoption date.

Key Factors Affecting Operating Results

The Company has been implementing its strategy as a vertical software platform for the home, providing software and services to approximately 30,900 companies and small businesses, such as home inspectors, moving companies, utility companies, warranty companies and others. The Company’s Insurance segment continues to grow scale, through both policy count, and geographic expansion. The following are key factors affecting our operating results in 2022, 2021 and 2020:

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Basis of Presentation

The consolidated financial statements and accompanying notes of Porch include the accounts of the Company and its consolidated subsidiaries and were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The company consolidates acquisitions as of the date on which the Company obtains controlling financial interest. All significant intercompany accounts and transactions are eliminated in consolidation.

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The Company operates in two operating segments: Vertical Software and Insurance. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker (“CODM”) in making decisions regarding resource allocation and assessing performance. The Company has determined that its Chief Executive Officer is the CODM.

Components of Results of Operations

Total Revenue

The Company generates revenue in the following ways:

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The Insurance segment includes revenue generated from various property-related insurance policies through its own risk-bearing carrier and independent agency as well as risk-bearing home warranty companies. We collect policy fees from policyholders of our own underwritten homeowners insurance products, reinsurers pay the Company ceding commissions when premiums are ceded from owned insurance products, revenues are earned in the form of policy premiums collected from insureds from owned insurance products, and third-party insurance companies pay our agency upfront and renewal commissions for selling their policies. The Insurance segment also includes home warranty revenue which mainly consists of premiums paid by warranty customers for the Company’s home warranty products.

The Vertical Software segment includes revenue from software and services subscription revenue, move-related transactions revenue and post-move-related transaction revenue. Software and service subscription revenue primarily relates to subscriptions to the Company’s software offerings across a number of verticals. The Company’s subscription arrangements for this revenue stream do not provide the customer with the right to take possession of the software supporting the cloud-based application services. The Company’s standard subscription contracts are monthly contracts in which pricing is based on a price per user or seat, or a specified price per inspection completed through the software. The Company also sells marketing software and services to companies who want to advertise to movers. Marketing software and service fees are primarily contractual monthly recurring billings. Fees earned for providing access to the subscription

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

Move-related transactions revenue is generated when the Company connects consumers with service providers including movers, TV/Internet, and security monitoring companies. The Company earns revenue when consumers purchase services from these third-party providers. For select moving jobs, the Company will select the mover, set the price, and manage the job end-to-end; here, the Company generates revenue based on the full job value.

Post-move-related transaction revenue includes monthly fees paid by home service contractors as well as fees earned from introducing consumers to home service providers, either on a per lead, per appointment, or per job basis. Revenue generated from service providers is recognized at a point in time upon the connection of a homeowner to the service provider.

Total Costs and Expenses

Operating expenses

Operating expenses are categorized into six categories:

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

Cost of revenue primarily consists of insurance losses and loss adjustment expenses, claims personnel costs, warranty claims, third-party providers for executing moving labor and handyman services when the Company is managing the job, data costs related to marketing campaigns, certain call center costs, credit card processing and merchant fees.

Selling and marketing expenses primarily consist of payroll, employee benefits and stock-based compensation expense, and other headcount related costs associated with sales efforts directed toward companies and consumers, and amortization of deferred policy acquisition costs (“DAC”) of new and renewal insurance contracts. Also included are any direct costs to acquire customers, such as search engine optimization, marketing costs and affiliate and partner leads.

Selling and marketing costs are classified as either fixed or variable. Fixed selling and marketing costs primarily consist of compensation of sales management, professional fees and software costs that do not vary with sales volumes.

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Product and technology development costs primarily consist of payroll, employee benefits, stock-based compensation expense, other headcount-related costs associated with product development, net of costs capitalized as internally developed software. Also included are cloud computing, hosting and other technology costs, software subscriptions, professional services and amortization of internally developed software.

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

Gain on divestiture of businesses consists of gain on the sale of a business during the year ended December 31, 2020.

Impairment loss on intangible assets and goodwill results from circumstances when the fair value of a reporting unit or asset group is less than its carrying amount. Goodwill and indefinite-lived intangible assets are subject to annual impairment assessments. All intangible assets and goodwill are also subject to impairment assessments whenever facts and circumstances indicate that these assets may be impaired. See Impairment of Long-Lived Assets and Impairment of Goodwill sections of Critical Accounting Policies and Estimates for the description of methods used to determine these impairment losses.

Critical Accounting Policies and Estimates

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

At least quarterly, we evaluate our estimates and assumptions and make changes accordingly. For information on our significant accounting policies, see Note 1 (Description of Business and Summary of Significant Accounting Policies) to the accompanying consolidated financial statements included in Item 8 of this Annual Report.

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

Revenue Recognition

The Company determines revenue recognition for contracts with customers, through the following five-step framework:

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The Company identifies performance obligations in its contracts with customers (excluding insurance and warranty), which primarily include move-related transactions and post-move transactions such as, delivery of homeowner leads and performance of home project services, and providing access to the Company’s software platforms. The transaction price is determined based on the amount which the Company expects to be entitled to in exchange for providing the promised services to the customer. The transaction price in the contract is allocated to each distinct performance obligation on a relative standalone selling price basis. Revenue is recognized when or as performance obligations are satisfied. In certain transactions, the transaction price is considered variable, and an estimate of the constrained transaction price is recorded by the Company. Changes in variable consideration may result in an increase or a decrease to revenue. Changes to the estimated variable consideration were not material for the periods presented.

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

Stock-Based Compensation

Accounting for stock-based compensation is a critical accounting policy due to the broad-based equity awards provided to employees at all levels within the Company and the use of equity awards as part of the strategy to retain employees as a result of mergers and acquisitions. The Company issues stock-based compensation to employees and nonemployees in the form of stock options and restricted stock awards, including performance and market-based restricted stock awards. The awards are generally expensed on a straight-line basis, except for awards with performance or market conditions which are expensed on a graded vesting basis. Forfeitures are accounted for when they occur.

The fair value of stock options is based on the grant date using the Black-Scholes option-pricing model. There are a variety of estimates in the Black-Scholes option-pricing model, including expected volatility, term, dividends and risk-free rate. The awards are accounted for by recognizing the fair value of the related award over the requisite service period, which is generally the vesting period.

The fair value of restricted stock awards is determined using the closing price of the Company’s common stock on the grant date. The value of market-based restricted stock units is determined using a Monte Carlo simulation model that utilizes significant assumptions, including volatility, that determine the probability of satisfying the market condition stipulated in the award to calculate the fair value of the award. Stock-based compensation expense for awards with performance conditions is only recognized when management believes the performance condition is probable of achievement.

Business Combinations

The Company has engaged in mergers and acquisitions in the past and intends to continue to make acquisitions a part of our long-term strategy. The Company made acquisitions with cash and non-cash consideration totaling $54.1 million in 2022, $346.3 million in 2021 and $17.6 million in 2020. The Company accounts for business acquisitions using the acquisition method of accounting and records any identifiable intangible assets separate from goodwill. Intangible assets are recorded at their fair value based on estimates as of the date of acquisition. Goodwill is recorded as the residual amount of the purchase price consideration less the fair value assigned to the individual identifiable assets acquired and liabilities assumed as of the date of acquisition. The accounting estimates associated with acquisitions are complex due to judgements and assumptions involved in determining (1) the total consideration paid because we have used cash, stock and earnouts and (2) the value of assets acquired and liabilities assumed. The Company allocates the purchase price of the acquisition to the assets acquired and liabilities assumed based on estimates of the fair value at the dates of the acquisitions. Contingent consideration, which represents an obligation of the Company to make additional payments or equity interests to the former owner as part of the purchase price if specified future events occur or

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conditions are met, is accounted for at the acquisition date fair value either as a liability or as equity depending on the terms of the acquisition agreement.

Impairment of Long-Lived Assets

We test our long-lived asset groups when changes in circumstances indicate their carrying value may not be recoverable. Events that trigger a test for recoverability include a significant decrease in the market price for a long-lived asset, significant negative industry or economic trends, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-live asset, a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or a sustained decrease in share price. When a triggering event occurs, a test for recoverability is performed, comparing projected undiscounted future cash flows to the carrying value of the asset group. If the test for recoverability identifies a possible impairment, the asset group’s fair value is measured relying primarily on a discounted cash flow method. An impairment charge is recognized for the amount by which the carrying value of the asset group excess its estimated fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amounts for those assets are depreciated over their remaining useful lives.

We evaluate long-lived assets at the lowest level at which independent cash flows can be identified, which is dependent on the strategy and expected future use of our long-lived assets. We evaluate corporate assets or other long-lived assets that are not asset group-specific at the consolidated level.

We estimate the fair value of an asset group using the income approach. The income approach uses cash flow projections. Inherent in our development of cash flow projections are assumptions and estimates derived from a review of our operating results, business plan forecasts, expected growth rates, and cost of capital, similar to those a market participant would use to assess fair value. We also make certain assumptions about future economic conditions and other data. Many of these factors used in assessing fair value are outside the control of management and these assumptions and estimates may change in future periods.

During the year ended December 31, 2022, the Company recorded impairment charges of $17.7 million, related to intangible assets within its Vertical Software segment.

Impairment of Goodwill

We test goodwill for impairment annually or whenever events or changes in circumstances indicate that an impairment may exist. We assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Factors that indicate the fair value of a reporting unit may be less than its carrying amount include industry and market considerations such as a deterioration in the economic environment or a decline in market-dependent multiples or metrics, overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings, increased cost factors that have a negative effect on earnings and cash flows, or a sustained decrease in share price. The process for evaluating potential impairment of goodwill is highly subjective and requires significant judgment. If factors indicate that the fair value of the reporting unit is less than its carrying amount, we perform a quantitative assessment and the fair value of the reporting unit is estimated by using a combination of market approaches based on peer performance and discounted cash flow methodologies. If the carrying value of the reporting unit exceeds its fair value, an impairment loss equal to the excess is recorded.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions to evaluate the impact of operating and macroeconomic changes on each reporting unit. The fair value of each reporting unit is estimated using a combination of the income approach and the market valuation approach using publicly traded company multiples in similar businesses. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internally developed forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital, which is risk-adjusted to reflect the specific risk profile of the reporting unit being tested. The weighted average cost of capital used in our most recent impairment test as of September 30, 2022, was risk-adjusted to reflect the specific risk profile of the reporting units and ranged from 17% to 20%.

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During the third quarter of 2022, management identified various qualitative factors that collectively, indicated that the Company had triggering events, including a sustained decrease in stock price, increased costs due to inflationary pressures, and a deterioration of the macroeconomic environment in the housing and real estate industry. The Company performed a valuation of both the Vertical Software and Insurance reporting units using a combination of market approaches based on peer performance and discounted cash flow or dividend discount model methodologies. Given the results of the quantitative assessment, the Company determined that the Insurance reporting unit’s goodwill was impaired. As a result, the Company recognized a goodwill impairment charge of $39.4 million in the third quarter of 2022.

In the fourth quarter of 2022, the Company updated its preliminary purchase price allocations for certain acquisitions. As a result of these adjustments, the carrying value of the Insurance reporting unit was higher than the fair value as of September 30, 2022, which resulted in the Company recognizing an additional goodwill impairment charge of $4.3 million in the fourth quarter of 2022.

During the year ended December 31, 2022, the Company recorded impairment charges of $43.7 million, related to its Insurance segment.

Results of Operations

Comparison of Year Ended December 31, 2022 to Year Ended December 31, 2021

The net loss in 2022 of $156.6 million compared with the net loss in 2021 of $106.6 million was primarily impacted by the impairment loss on intangible assets and goodwill of $61.4 million.

The following table sets forth our historical operating results for the periods indicated:

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NM — percentage calculated is not meaningful.

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Revenue

Total revenue increased by $83.5 million, or 43% from $192.4 million for the year ended December 31, 2021, to $275.9 million in the same period in 2022. During 2022 and 2021, the Company acquired a number of businesses, including RWS (acquired in April 2022), V12 Data (acquired in January 2021), HOA (acquired in April 2021), Rynoh (acquired in May 2021), AHP (acquired in September 2021), Floify (acquired in October 2021) and RWS (acquired in April 2022). These acquisitions contributed approximately $63 million to the increase in revenue in 2022, with the remainder attributable to accelerated post-acquisition and organic growth.

Cost of Revenue

Cost of revenue increased by $48.9 million, or 83% from $58.7 million for the year ended December 31, 2021, to $107.6 million in the same period in 2022. The increase in the cost of revenue was primarily attributable to the 2022 and 2021 acquisitions. These acquisitions contributed approximately $37 million to the overall increase in cost of revenue. The remainder of the increase is primarily due to higher loss and loss adjustment expense at the Company’s Insurance segment, as a result of a higher number of claims paid due to volatile catastrophe weather events, including Hurricane Ian, during the third quarter of 2022, and Winter Storm Elliott during the fourth quarter of 2022. Claims costs for these events were driven higher due in part to inflation-related pressures. As a percentage of revenue, cost of revenue represented 39% of revenue for the year ended December 31, 2022, compared with 31% in the same period in 2021.

Selling and marketing

Selling and marketing expenses increased by $29.6 million, or 35% from $84.3 million for the year ended December 31, 2021, to $113.8 million in the same period in 2022. Businesses acquired in 2022 and 2021 contributed approximately $17.2 million to the increase in selling and marketing costs, mainly related to RWS, Floify, AHP, Rynoh and HOA operations. The increase related to the acquired businesses includes approximately $6.2 million of amortization of acquired intangibles and stock-based compensation expense. Growth in the insurance and software and service subscription businesses further contributed to the increase. As a percentage of revenue, selling and marketing expenses represented 41% of revenue for the year ended December 31, 2022, compared with 44% in the same period in 2021. The improvement in selling and marketing expenses as a percentage of revenue is due to the growing economies of scale in the insurance, inspection and moving groups.

Product and technology

Product and technology expenses increased by $12.6 million, or 27% from $47.0 million for the year ended December 31, 2021, to $59.6 million in the same period in 2022. Approximately $12.8 million of the increase is attributable to the acquired businesses, notably HOA, Floify and Rynoh. The increase related to the acquired businesses includes approximately $7.8 million of amortization of acquired intangibles and stock-based compensation expense. The remaining increase is related to investments in data platform, consumer app and other software offerings. This was offset by the $6.3 million decrease in depreciation and amortization of intangibles and stock-based compensation expense related to the existing businesses. As a percentage of revenue, product and technology expenses represented 22% of revenue for the year ended December 31, 2022, compared with 24% in the same period in 2021. The improvement in product and technology expenses as a percentage of revenue is due to the growing economies of scale in the overall business.

General and administrative

General and administrative expenses increased by $24.8 million, or 29% from $85.8 million for the year ended December 31, 2021, to $110.6 million in the same period in 2022. Approximately $17.2 million of the increase is attributable to the 2022 and 2021 acquisitions, notably in HOA, RWS, AHP and Floify. The increase related to the acquired businesses includes approximately $4.2 million of amortization of acquired intangibles and stock-based compensation expense. The remainder of the increase is due to additional costs related to hiring of corporate administrative resources, audit and accounting fees, as well as costs related to integrating of our acquired businesses and SOX requirements. This was offset by stock-based compensation expense not related to the acquired businesses, for the

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year ended December 31, 2022, which was approximately $2.0 million lower than in the same period in 2021. In addition, in 2022, there was a loss on revaluation of contingent consideration of $6.9 million as compared to a gain of $2.2 million during the same period in 2021. As a percentage of revenue, general and administrative expenses represented 40% of revenue in 2022, compared with 45% in 2021.

Impairment loss on intangible assets and goodwill

In the year ended December 31, 2022, the Company recorded impairment losses on intangible assets and goodwill totaling $61.4 million, which included a $43.7 million goodwill impairment at its Insurance segment, and a $17.7 million impairment of intangible assets within its Vertical Software segment. These impairment charges reflect recent continued inflationary pressures, the Company’s common stock valuation, and broad disruptions in the equity markets, specifically for technology and property and casualty insurance companies. There were no impairment losses on intangible assets and goodwill in the same period in 2021.

Interest expense, net

Interest expense increased by $2.9 million, or 52% from $5.8 million for the year ended December 31, 2021, to $8.7 million in the same period in 2022. This was primarily due to issuance of $425 million of the 2026 Notes in September 2021, that in part was used to pay off the $42.1 million of Senior Secured Term Loans that were outstanding at June 30, 2021. The higher outstanding debt balance was the primary reason for the increased interest expense.

Change in fair value of earnout liability

Changes in fair value of earnout liability were $13.8 million (gain) for the year ended December 31, 2022 and $18.5 million (loss) in the same period in 2021. The decrease in fair value was primarily due to the decline in the stock price at December 31, 2022 as compared to December 31, 2021. During 2021, $54.9 million of the earnout liability was reclassified to additional paid in capital as a result of vesting events in 2021. There were no vesting events during 2022.

Change in fair value of private warrant liability

Change in fair value of private warrant liability was $14.5 million (gain) for the year ended December 31, 2022 and $15.4 million (loss) in the same period in 2021. The decrease in fair value was primarily due to the decline in the stock price at December 31, 2022 as compared to December 31, 2021. During 2021, $31.7 million was reclassified to additional paid in capital as a result of warrant exercises. There were no exercises during 2022.

Investment income and realized gains, net of investment expenses

Investment income and realized gains, net of investment expenses was $1.2 million for the year ended December 31, 2022, and $0.7 million in the same period in 2021. In April 2021, the Company acquired Homeowners of America Insurance Company that maintains a short-term and long-term investment portfolio that generated investment income for nine months in 2021.

Income tax benefit (expense)

Income tax expense of $0.8 million was recognized for the year ended December 31, 2022 primarily due to state franchise and minimum taxes and adjustments to a federal net operating loss carryback. Income tax benefit of $10.3 million was recognized in 2021 primarily due to the partial release of the Company’s valuation allowance as a result of deferred tax liabilities from acquisitions. The Company’s effective tax rate in both periods differs substantially from the statutory tax rate primarily due to a full valuation allowance related to the Company’s net deferred tax assets.

Refer to “Item 7. Management’s Discussion and Analysis of Condition and Results of Operations” in the 2021 Annual Report on Form 10-K as filed with the SEC on March 16, 2022 for the comparison of the results of operations for the years ended December 31, 2021 and 2020.

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Segment Results of Operations

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

Segment Revenue

Comparison of Year Ended December 31, 2022 to Year Ended December 31, 2021

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For the year ended December 31, 2022, Vertical Software segment revenue was $154.9 million or 56% of total revenue for the same period. For the year ended December 31, 2021, Vertical Software segment revenue was $137.2 million or 71% of total revenue for the same period. The increase in revenue in 2022 is driven by the 2022 and 2021 acquisitions of RWS in April 2022, Rynoh in May 2021 and Floify in October 2021. Certain existing businesses experienced year-over-year decrease as a result of a decline in housing market in 2022 as compared to 2021.

Insurance segment revenue was $121.0 million for the year ended December 31, 2022, and represented 44% of total revenue for the same period. For the year ended December 31, 2021, Insurance segment revenue was $55.3 million or 29% of total revenue for the same period. The increase is mainly due to the acquisitions of RWS (acquired in April 2022) and AHP (acquired in September 2021), with the remainder due to the accelerated growth of these businesses after acquisition, as well as the organic growth of HOA and RWS.

Refer to “Item 7. Management’s Discussion and Analysis of Condition and Results of Operations” in the 2021 Annual Report on Form 10-K as filed with the SEC on March 16, 2022 for the comparison of segment revenue for the years ended December 31, 2021 and 2020.

Segment Adjusted EBITDA (Loss)

Segment Adjusted EBITDA (loss) is defined as revenue less operating expenses associated with our segments. Segment Adjusted EBITDA (loss) also excludes non-cash items, certain transactions that are not indicative of ongoing segment operating and financial performance and are not reflective of the Company’s core operations. See Note 17

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(Segment Information) to the accompanying consolidated financial statements included in Item 8 of this Annual Report for additional information.

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

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

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Vertical Software segment’s Adjusted EBITDA (loss) was negatively impacted by the downturn in the housing market in 2022, which resulted in lower home purchase volumes and lower demand for the Company’s services. Insurance segment’s Adjusted EBITDA (loss) in 2022 was a result of significantly higher claims costs caused by severe weather events in the second half of 2022.

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Non-GAAP Financial Measures

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

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

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

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

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

Revenue Less Cost of Revenue

The following table reconciles revenue less cost of revenue for the years ended December 31, 2022, 2021 and 2020, respectively (dollar amounts in thousands):

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Revenue less cost of revenue increased by $34.7 million, or 25.9% from $133.7 million for the year ended December 31, 2021, to $168.4 million for the year ended December 31, 2022. During 2022, the Company acquired RWS. During 2021, the Company acquired a number of businesses with an aggregate purchase price of $346.3 million. These acquisitions included V12 Data (acquired in January 2021), HOA (acquired in April 2021), Rynoh (acquired in May 2021), AHP (acquired in September 2021) and Floify (acquired in October 2021). These businesses were not owned by the Company for the entire year ended December 31, 2021, therefore, less revenue less cost of revenue was recognized from these businesses during that period. Thus, the increase revenue less cost of revenue in 2022 is primarily driven by the 2022 and 2021 acquisitions, accelerated growth after acquisition and organic growth.

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Adjusted EBITDA (loss)

The following table reconciles net loss to Adjusted EBITDA (loss) for the years ended December 31, 2022, 2021 and 2020, respectively (dollar amounts in thousands):

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Adjusted EBITDA (loss) for the year ended December 31, 2022, was $49.6 million, a $25.6 million decline from Adjusted EBITDA (loss) of $24.0 million for the same period in 2021. During 2022, the Company acquired RWS. During 2021, the Company acquired a number of businesses, including, V12 Data (acquired in January 2021), HOA (acquired in April 2021), Rynoh (acquired in May 2021), AHP (acquired in September 2021) and Floify (acquired in October 2021). These businesses were not owned by the Company for the entire year ended December 31, 2021 and, therefore, little or no revenue and Adjusted EBITDA (loss) was recognized from this business during 2021. The decline in Adjusted EBITDA (loss) in 2022 is primarily driven by the macro housing environment affecting both segments, and higher volume of claims paid out by HOA in 2022, mainly as a result of the volatile weather events, including Hurricane Ian, during the third quarter of 2022, and Winter Storm Elliott during the fourth quarter of 2022, affecting the Insurance segment. Continued investments in sales and marketing and product and technology related to consumer experience, app build out, data platforms and investments in establishing and maintaining SOX and other internal controls across IT and accounting organizations further impacted Adjusted EBITDA (loss). This decline was partially offset by the impact of the 2022 and 2021 acquisitions.

Liquidity and Capital Resources

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

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During 2022, the Company drew $10.0 million on HOA’s term loan facility. Also during 2022, the Company participated in an advance funding arrangement with third-party financers that provide the Company with contract premiums upfront for certain home warranty contracts. We remain obligated to repay these premiums to the third-party financer if a customer cancels its warranty contract prior to full repayment of the advance funding amount received by the Company. As of December 31, 2022, the principal balance of this advance funding arrangement is $15.7 million. See Note 7 (Debt).

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

Also during 2021, the Company raised $126.7 million and $4.3 million from exercise of public warrants and stock options, respectively.

As of December 31, 2022, the Company had cash and cash equivalents of $215.1 million and $13.5 million of restricted cash.

The Company has incurred losses since its inception, and has an accumulated deficit at December 31, 2022 and December 31, 2021 totaling $585.0 million and $424.1 million, respectively. As of December 31, 2022, and December 31, 2021 the Company had $451.1 million and $425.6 million aggregate principal amount outstanding of debt, respectively.

Based on the Company’s current operating and growth plan, management believes cash and cash equivalents at December 31, 2022, are sufficient to finance the Company’s operations, planned capital expenditures, working capital requirements and debt service obligations for at least the next 12 months. As the Company’s operations evolve and continues its growth strategy, including through acquisitions, the Company may elect or need to obtain alternative sources of capital, and it may finance additional liquidity needs in the future through one or more equity or debt financings. The Company may not be able to obtain equity or additional debt financing in the future when needed or, if available, the terms may not be satisfactory to the Company or could be dilutive to its stockholders.

Porch Group, Inc. is a holding company that transacts a majority of its business through operating subsidiaries, including insurance subsidiaries. Consequently, the Company’s ability to pay dividends and expenses is largely dependent on dividends or other distributions from its subsidiaries. Porch’s insurance company subsidiaries are highly regulated and are restricted by statute as to the amount of dividends they may pay without the prior approval of their respective regulatory authorities. As of December 31, 2022, cash and cash equivalents of $78.1 million and investments held by these companies was $91.6 million.

Insurance companies in the United States are also required by state law to maintain a minimum level of policyholder’s surplus. Insurance regulators in the states in which we operate have a risk-based capital standard designed to identify property and casualty insurers that may be inadequately capitalized based on inherent risks of the insurer’s assets and liabilities and its mix of net written premium. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action. As of December 31, 2022, the total adjusted capital of our U.S. insurance subsidiary was in excess of its respective prescribed risk-based capital requirements.

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

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In 2022 and 2021, the Company invested $38.6 million and $256.4 million (net of cash acquired) to acquire a number of companies, in transactions accounted for as business combinations.

The following table provides a summary of cash flow data for the years ended December 31, 2022 and 2021:

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NM — percentage calculated is not meaningful.

2022

Net cash used in operating activities was $17.7 million for the year ended December 31, 2022. Net cash used in operating activities consists of net loss of $156.6 million, adjusted for non-cash items and the effect of changes in working capital. Non-cash adjustments primarily include impairment loss on intangible assets and goodwill of $61.4 million, stock-based compensation expense of $27.0 million, depreciation and amortization of $27.9 million, non-cash interest expense of $2.3 million, fair value adjustments to contingent consideration of $6.9 million (loss), and fair value adjustments to earnout liability and private warrant liability of $13.8 million (gain) and $14.5 million (gain), respectively. Net changes in working capital provided $37.2 million, primarily due to increases in insurance-related liabilities and deferred revenue.

Investing Cash Flows

Net cash used in investing activities was $79.7 million for the year ended December 31, 2022. Net cash used in investing activities is primarily related to acquisitions, net of cash acquired of $38.6 million, purchases of investments of $52.5 million, investments to develop internal use software of $8.1 million purchases of property and equipment of $2.4 million. This was partly offset by the cash inflows related to maturities and sales of investments of $21.9 million.

Financing Cash Flows

Net cash provided by financing activities was $1.2 million for the year ended December 31, 2022. Net cash provided by financing activities is primarily related to proceeds from advance funding and debt issuance, net of fees of $33.6 million and exercises of options $1.1 million. This was partially offset by shares repurchased to pay income tax withholdings upon vesting of RSUs of $3.1 million, repurchases of stock of $1.8 million, payments of acquisition-related contingent consideration of $0.7 million and advance funding and debt repayments of $30.9 million and $5.2 million, respectively.

2021

Operating Cash Flows

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

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Investing Cash Flows

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

Financing Cash Flows

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

Contractual Obligations and Commitments

Our principal commitments consist of obligations under leases for office space. For more information regarding our lease obligations, see Note 13 (Leases) to the accompanying consolidated financial statements included in Item 8 of this Annual Report. In addition, we have a substantial level of debt. For more information regarding our debt service obligations, see Note 7 (Debt) to the accompanying consolidated financial statements included in Item 8 of this Annual Report. We also have certain non-cancellable purchase commitments primarily for data purchases. As of December 31, 2022, our other contractual commitments associated with agreements that are enforceable and legally binding and that specify all significant terms were payments of $4.6 million due in the next 12 months and $4.6 million due thereafter. For more information regarding our purchase commitments, see Note 16 (Commitments and contingencies) to the accompanying consolidated financial statements included in Item 8 of this Annual Report. We expect to fund these obligations with cash flows from operations and cash on our balance sheet.

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

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

See Note 1 (Description of Business and Summary of Significant Accounting Policies) to the accompanying consolidated financial statements included in Item 8 of this Annual Report, for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one, of their potential impact on our financial condition and our results of operations.