Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and the related notes and other financial information included in our Annual Report on Form 10-K for the year ended December 31, 2022, on file with the Securities and Exchange Commission. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below, elsewhere in this Quarterly Report on Form 10-Q, particularly in Item 1A. Risk Factors, and in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022.
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:
•In 2011, we launched the EverQuote marketplace for auto insurance.
•In 2013, we launched EverQuote Pro, our provider portal, for carriers.
•In 2015, we launched EverQuote Pro for agents.
•In 2016, we added home and life insurance in our marketplace.
•In 2019, we added health and renters insurance in our marketplace.
•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.
•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.
19
In the three months ended March 31, 2023 and 2022, our total revenue was $109.2 million and $110.7 million, respectively, representing a year-over-year decrease of 1.3%. We had net losses of $2.5 million and $5.7 million for the three months ended March 31, 2023 and 2022, respectively, and had $5.4 million and $2.4 million in adjusted EBITDA for the three months ended March 31, 2023 and 2022, 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.
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, elsewhere in this Quarterly Report on Form 10-Q, particularly in Item 1A. Risk Factors, and in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022.
Auto insurance industry risk
We derive a significant portion of our revenue from auto insurance providers, including our two largest insurance carrier customers who represented 34% and 11%, respectively, of total revenue for the three months ended March 31, 2023, and our financial results depend on the performance of the auto insurance industry. Starting in the third quarter of 2021, the auto insurance industry has experienced deteriorating underwriting performance due to 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 had a negative impact on the pricing and demand for consumer referrals in our marketplace during 2022.
The state of the auto insurance market remains dynamic. In January 2023, we saw a major carrier return to higher spending patterns, but subsequently reduce customer acquisition spending in April 2023 due to higher than expected claims losses. We expect revenue from referrals to continue to be impacted by changes in demand from our insurance carrier customers caused by cost inflation, claim severity and frequency and the adequacy of policy premiums to cover the cost of claims.
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.
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, interest income and the provision for (benefit from) income taxes. Adjusted EBITDA is a non-GAAP financial measure that we present in this Quarterly Report on Form 10-Q 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
20
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:
•Clicks: An online-to-online referral, with a handoff of the consumer to the provider’s website.
•Data: An online-to-offline referral, with quote request data transmitted to the provider for follow-up.
•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 9% and 13% of total revenue in the three months ended March 31, 2023 and 2022, respectively. 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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Automotive |
|
$ |
89,699 |
|
|
$ |
87,675 |
|
Other |
|
|
19,521 |
|
|
|
23,006 |
|
Total Revenue |
|
$ |
109,220 |
|
|
$ |
110,681 |
|
We expect an overall decrease in revenue in 2023 as compared to 2022 as we anticipate decreased 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, and 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
21
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 decrease in the near term as we expect decreased carrier spend for referrals, which will impact our advertising expenditures.
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 remain relatively consistent in the near term.
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.
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 Quarterly Report on Form 10-Q 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; 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 Quarterly Report on Form 10-Q 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 items in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core operating performance.
22
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:
•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;
•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;
•adjusted EBITDA excludes acquisition-related costs that affect cash available to us and the change in fair value of non-cash contingent consideration;
•adjusted EBITDA does not reflect the cash received from interest income on our investments, which affects the cash available to us;
•adjusted EBITDA does not reflect income tax expense (benefit) that affects cash available to us; and
•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.
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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Net loss |
|
$ |
(2,529 |
) |
|
$ |
(5,715 |
) |
Stock-based compensation |
|
|
6,509 |
|
|
|
7,530 |
|
Depreciation and amortization |
|
|
1,407 |
|
|
|
1,511 |
|
Acquisition-related costs |
|
|
(113 |
) |
|
|
(892 |
) |
Interest income |
|
|
(187 |
) |
|
|
(8 |
) |
Income tax expense |
|
|
286 |
|
|
|
— |
|
Adjusted EBITDA |
|
$ |
5,373 |
|
|
$ |
2,426 |
|
23
Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
The following tables set forth our results of operations for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Statement of Operations Data: |
|
|
|
|
|
|
Revenue(1) |
|
$ |
109,220 |
|
|
$ |
110,681 |
|
Cost and operating expenses(2): |
|
|
|
|
|
|
Cost of revenue |
|
|
5,770 |
|
|
|
5,984 |
|
Sales and marketing |
|
|
90,237 |
|
|
|
96,150 |
|
Research and development |
|
|
7,927 |
|
|
|
8,196 |
|
General and administrative |
|
|
7,830 |
|
|
|
6,941 |
|
Acquisition-related costs |
|
|
(113 |
) |
|
|
(892 |
) |
Total cost and operating expenses |
|
|
111,651 |
|
|
|
116,379 |
|
Loss from operations |
|
|
(2,431 |
) |
|
|
(5,698 |
) |
Other income (expense): |
|
|
|
|
|
|
Interest income |
|
|
187 |
|
|
|
8 |
|
Other income (expense), net |
|
|
1 |
|
|
|
(25 |
) |
Total other income (expense), net |
|
|
188 |
|
|
|
(17 |
) |
Loss before income taxes |
|
|
(2,243 |
) |
|
|
(5,715 |
) |
Income tax expense |
|
|
(286 |
) |
|
|
— |
|
Net loss |
|
$ |
(2,529 |
) |
|
$ |
(5,715 |
) |
Other Financial and Operational Data: |
|
|
|
|
|
|
Variable marketing margin |
|
$ |
35,593 |
|
|
$ |
34,264 |
|
Adjusted EBITDA(3) |
|
$ |
5,373 |
|
|
$ |
2,426 |
|
(1) Comprised of revenue from the following distribution channels:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Direct channels |
|
|
86 |
% |
|
|
88 |
% |
Indirect channels |
|
|
14 |
% |
|
|
12 |
% |
|
|
|
100 |
% |
|
|
100 |
% |
(2) Includes stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Cost of revenue |
|
$ |
54 |
|
|
$ |
59 |
|
Sales and marketing |
|
|
2,273 |
|
|
|
3,210 |
|
Research and development |
|
|
2,374 |
|
|
|
2,411 |
|
General and administrative |
|
|
1,808 |
|
|
|
1,850 |
|
|
|
$ |
6,509 |
|
|
$ |
7,530 |
|
(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.
24
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
|
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Revenue |
|
$ |
109,220 |
|
|
$ |
110,681 |
|
|
$ |
(1,461 |
) |
|
|
-1.3 |
% |
Revenue decreased by $1.5 million from $110.7 million for the three months ended March 31, 2022 to $109.2 million for the three months ended March 31, 2023. The decrease was due to a decrease of $3.5 million in revenue from our other insurance verticals, partially offset by an increase of $2.0 million in revenue from our automotive vertical. The decrease in revenue from our other insurance verticals was due to a decrease of $2.2 million in commission revenue and a decrease in carrier spend for referrals of $1.3 million, with both of these decreases primarily attributable to our health vertical. The increase in revenue from our automotive vertical was primarily due to an increase in carrier spend for referrals of $4.8 million, partially offset by a decrease of $2.8 million in commission revenue.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
|
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Cost of revenue |
|
$ |
5,770 |
|
|
$ |
5,984 |
|
|
$ |
(214 |
) |
|
|
-3.6 |
% |
Percentage of revenue |
|
|
5.3 |
% |
|
|
5.4 |
% |
|
|
|
|
|
|
Cost of revenue decreased by $0.2 million from $6.0 million for the three months ended March 31, 2022 to $5.8 million for the three months ended March 31, 2023. Cost of revenue decreased primarily due to a decrease in third-party call center costs of $0.6 million as a result of shifting call referrals from third-party call centers to employees. Hosting costs also decreased by $0.4 million. These decreases were partially offset by increased personnel-related costs and office and occupancy allocations of $0.6 million and $0.1 million, respectively.
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
|
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Sales and marketing expense |
|
$ |
90,237 |
|
|
$ |
96,150 |
|
|
$ |
(5,913 |
) |
|
|
-6.1 |
% |
Percentage of revenue |
|
|
82.6 |
% |
|
|
86.9 |
% |
|
|
|
|
|
|
Sales and marketing expense decreased by $5.9 million from $96.2 million for the three months ended March 31, 2022 to $90.2 million for the three months ended March 31, 2023. The decrease in sales and marketing expense was primarily due to a decrease in advertising costs of $2.8 million and a decrease in personnel-related costs of $2.6 million, primarily in our DTC agency. Personnel-related costs included stock-based compensation expense of $2.3 million and $3.2 million for the three months ended March 31, 2023 and 2022, respectively. Referral verification service costs and technology service costs each also decreased by $0.2 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
|
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Research and development expense |
|
$ |
7,927 |
|
|
$ |
8,196 |
|
|
$ |
(269 |
) |
|
|
-3.3 |
% |
Percentage of revenue |
|
|
7.3 |
% |
|
|
7.4 |
% |
|
|
|
|
|
|
Research and development expense decreased by $0.3 million from $8.2 million for the three months ended March 31, 2022 to $7.9 million for the three months ended March 31, 2023. The decrease in research and development expense was primarily due to a decrease in personnel-related costs.
25
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
|
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
General and administrative expense |
|
$ |
7,830 |
|
|
$ |
6,941 |
|
|
$ |
889 |
|
|
|
12.8 |
% |
Percentage of revenue |
|
|
7.2 |
% |
|
|
6.3 |
% |
|
|
|
|
|
|
General and administrative expenses increased by $0.9 million from $6.9 million for the three months ended March 31, 2022 to $7.8 million for the three months ended March 31, 2023. The increase in general and administrative expenses was primarily due to an increase in personnel-related costs of $0.3 million, an increase in legal and consulting fees of $0.3 million and an increase in bad debt expense of $0.2 million.
Acquisition-related
Acquisition-related costs for the three months ended March 31, 2023 and 2022 solely consisted of the change in fair value of our contingent consideration liabilities recorded as the result of our acquisitions. We recorded credits to acquisition-related costs for the three months ended March 31, 2023 and 2022 of $0.1 million and $0.9 million, respectively, related to the decrease in the fair value of our contingent consideration liability due to changes to our future revenue forecasts.
Other Income (Expense)
Interest income increased by $0.2 million in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due to increases in interest rates. Other income (expense), net was not significant for either of the three months ended March 31, 2023 or 2022.
Income Tax Expense
We recorded income tax expense of $0.3 million in the three months ended March 31, 2023. We maintain a valuation allowance on our overall net deferred tax asset as it is deemed more likely than not the net deferred tax asset will not be realized.
Variable Marketing Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Change |
|
|
|
2023 |
|
|
2022 |
|
|
Amount |
|
|
% |
|
|
|
(dollars in thousands) |
|
Revenue |
|
$ |
109,220 |
|
|
$ |
110,681 |
|
|
$ |
(1,461 |
) |
|
|
-1.3 |
% |
Less: total advertising expense (a component of sales and marketing expense) |
|
|
73,627 |
|
|
|
76,417 |
|
|
|
|
|
|
|
Variable marketing margin |
|
$ |
35,593 |
|
|
$ |
34,264 |
|
|
$ |
1,329 |
|
|
|
3.9 |
% |
Percentage of revenue |
|
|
32.6 |
% |
|
|
31.0 |
% |
|
|
|
|
|
|
The increase in variable marketing margin was due primarily to traffic optimization.
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents of $28.8 million as of March 31, 2023 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.
26
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 March 31, 2023, 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. 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 March 31, 2023, $34.7 million of our $46.3 million commissions receivable contract asset was classified as long-term. We believe our 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 for the three months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Net cash used in operating activities |
|
$ |
(1,237 |
) |
|
$ |
(3,845 |
) |
Net cash used in investing activities |
|
|
(1,007 |
) |
|
|
(681 |
) |
Net cash provided by financing activities |
|
|
157 |
|
|
|
15,558 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
5 |
|
|
|
(5 |
) |
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
$ |
(2,082 |
) |
|
$ |
11,027 |
|
27
Net cash used in operating activities
Operating activities used $1.2 million during the three months ended March 31, 2023, primarily resulting from our net loss of $2.5 million and net cash used by changes in our operating assets and liabilities of $6.8 million, partially offset by net non-cash charges of $8.1 million. Net cash used by changes in our operating assets and liabilities consisted primarily of a $9.8 million increase in accounts receivable, partially offset by decreases of $1.7 million in prepaid expenses and other current assets and $0.6 million in commissions receivable and an increase in accounts payable and accrued expenses and other current liabilities of $0.9 million. Operating activities used $3.8 million during the three months ended March 31, 2022 primarily resulting from our net loss of $5.7 million and net cash used by operating activities of $6.4 million, partially offset by net non-cash charges of $8.2 million. Net cash used by changes in our operating assets and liabilities consisted primarily of an $11.0 million increase in accounts receivable and a $5.4 million increase in commissions receivable, partially offset by a $10.4 million increase in accounts payable and accrued expenses and other current liabilities.
Changes in accounts receivable, accounts payable and accrued expenses and other current liabilities were generally due to changes in our business and 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 is classified as long-term.
Net cash used in investing activities
Net cash used in investing activities was $1.0 million and $0.7 million for the three months ended March 31, 2023 and 2022, respectively. Net cash used in investing activities for the three months ended March 31, 2023 and 2022 included the acquisition of property and equipment, which included the capitalization of certain software development costs. During the three months ended March 31, 2023 and 2022, we capitalized $0.9 million and $0.5 million, respectively, of software development costs.
Net cash provided by financing activities
During the three months ended March 31, 2023 and 2022, net cash provided by financing activities was $0.2 million and $15.6 million, respectively. Net cash provided by financing activities during the three months ended March 31, 2023 consisted of proceeds received from the exercise of common stock options, partially offset by tax withholding payments relating to net share settlements. Net cash provided by financing activities during the three months ended March 31, 2022 consisted 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 our company, and $0.6 million from the exercise of common stock options.
Contractual Obligations and Commitments
There have been no material changes to the contractual obligations reported in our Annual Report on Form 10-K for the year ended December 31, 2022.
Critical Accounting Policies and Significant Judgments and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of our condensed 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 condensed 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. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
The following critical accounting policies reflect significant judgments and estimates used in the preparation of our condensed consolidated financial statements:
•goodwill and acquired intangible assets;
•valuation of contingent consideration;
•revenue recognition and the valuation of commissions and accounts receivable; and
28
•stock-based compensation expense.
There have been no material changes to our critical accounting policies from those disclosed in our financial statements and the related notes and other financial information included in our Annual Report on Form 10-K for the year ended December 31, 2022, on file with the Securities and Exchange Commission. For further disclosure, refer to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and our audited consolidated financial statements included in our Annual Report on Form 10-K.
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 unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.