UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 001-38549
EverQuote, Inc.
(Exact name of registrant as specified in its charter)
Delaware
26-3101161
(State or other jurisdiction of
incorporation or organization)
(I.R.S. EmployerIdentification No.)
210 Broadway
Cambridge, Massachusetts
02139
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (855) 522-3444
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange
on which registered
Class A Common Stock, $0.001 Par Value Per Share
EVER
The Nasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 10, 2023, the registrant had 27,384,243 shares of Class A common stock, $0.001 par value per share, issued and outstanding and 5,604,278 shares of Class B common stock, $0.001 par value per share, issued and outstanding.
Table of Contents
Page
PART I.
FINANCIAL INFORMATION
4
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations and Comprehensive Loss
5
Condensed Consolidated Statements of Stockholders’ Equity
6
Condensed Consolidated Statements of Cash Flows
8
Notes to Unaudited Condensed Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
29
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
30
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
31
Signatures
32
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans, and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “might,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” “seek,” “would” or “continue,” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition liquidity and results of operations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022, in our subsequent periodic filings with the Securities and Exchange Commission and elsewhere in this Quarterly Report on Form 10-Q, particularly in Item 1A. Risk Factors. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. While we may elect to update these forward-looking statements at some point in the future, whether as a result of any new information, future events, or otherwise, we have no current intention of doing so except to the extent required by applicable law.
Some of the key factors that could cause actual results to differ include:
3
PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
EVERQUOTE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
March 31, 2023
December 31, 2022
Assets
Current assets:
Cash and cash equivalents
$
28,753
30,835
Accounts receivable, net
39,186
29,604
Commissions receivable, current portion
11,633
13,530
Prepaid expenses and other current assets
5,296
7,005
Total current assets
84,868
80,974
Property and equipment, net
6,594
6,460
Goodwill
21,501
Acquired intangible assets, net
7,438
7,955
Operating lease right-of-use assets
4,910
5,769
Commissions receivable, non-current portion
34,712
33,410
Other assets
414
450
Total assets
160,437
156,519
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
30,689
30,680
Accrued expenses and other current liabilities
10,764
9,924
Deferred revenue
1,947
1,867
Operating lease liabilities
2,862
2,936
Total current liabilities
46,262
45,407
Operating lease liabilities, net of current portion
2,502
3,501
Other long-term liabilities
37
125
Total liabilities
48,801
49,033
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding
—
Class A common stock, $0.001 par value; 220,000,000 shares authorized; 27,356,482 shares and 26,447,880 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively
27
26
Class B common stock, $0.001 par value; 30,000,000 shares authorized; 5,604,278 and 6,139,774 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively
Additional paid-in capital
276,186
269,521
Accumulated other comprehensive income (loss)
7
(6
)
Accumulated deficit
(164,590
(162,061
Total stockholders' equity
111,636
107,486
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
Three Months Ended March 31,
2023
2022
Revenue
109,220
110,681
Cost and operating expenses:
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
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
Net loss per share, basic and diluted
(0.08
(0.19
Weighted average common shares outstanding, basic and diluted
32,892
30,529
Comprehensive loss:
Other comprehensive income:
Foreign currency translation adjustment
13
10
Comprehensive loss
(2,516
(5,705
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
Accumulated
Class A
Class B
Additional
Other
Total
Common Stock
Paid-in
Comprehensive
Stockholders'
Shares
Amount
Capital
Income (Loss)
Deficit
Equity
Balances at December 31, 2022
26,447,880
6,139,774
Issuance of common stock upon exercise of stock options
45,163
287
Net issuance of common stock upon vesting of restricted stock units
327,943
(131
(130
Transfer of Class B common stock to Class A common stock
535,496
(535,496
Stock-based compensation expense
6,509
Balances at March 31, 2023
27,356,482
5,604,278
Income
Balances at December 31, 2021
23,544,995
24
6,407,678
222,730
(137,645
85,125
Private placement of common stock
1,004,016
14,999
15,000
92,975
558
Vesting of restricted stock units
307,953
7,464
Balances at March 31, 2022
24,949,939
25
245,751
20
(143,360
102,442
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense
1,407
1,511
7,530
Change in fair value of contingent consideration liabilities
Provision for bad debt
245
75
Unrealized foreign currency transaction losses
Changes in operating assets and liabilities:
Accounts receivable
(9,827
(10,973
1,709
(287
Commissions receivable, current and non-current
595
(5,381
688
645
36
(29
13,296
852
(2,857
80
(112
(902
(663
Net cash used in operating activities
(1,237
(3,845
Cash flows from investing activities:
Acquisition of property and equipment, including costs capitalized for development of internal-use software
(1,007
(681
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options
Proceeds from private placement of common stock
Tax withholding payments related to net share settlement
Net cash provided by financing activities
157
15,558
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(5
Net increase (decrease) in cash, cash equivalents and restricted cash
(2,082
11,027
Cash, cash equivalents and restricted cash at beginning of period
35,101
Cash, cash equivalents and restricted cash at end of period
46,128
Supplemental disclosure of noncash investing and financing information:
Acquisition of property and equipment included in accounts payable
67
309
Operating lease liabilities arising from obtaining right-of-use assets
567
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business and Basis of Presentation
EverQuote, Inc. (the “Company”) was incorporated in the state of Delaware in 2008. Through its internet websites, the Company operates an online marketplace for consumers shopping for auto, home and renters, life and health insurance. The Company generates revenue primarily by selling consumer referrals to insurance provider customers, consisting of carriers and agents, and indirect distributors in the United States. The Company also generates revenue from commission fees paid by insurance provider customers for insurance policies it sells to consumers.
The Company is subject to a number of risks and uncertainties common to companies in similar industries and stages of development including, but not limited to, rapid technological changes, competition from substitute products and services from larger companies, protection of proprietary technology, customer concentration, patent litigation, the need to obtain additional financing to support growth and dependence on third parties and key individuals.
The accompanying condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. Since inception, the Company has incurred operating losses, including net losses of $2.5 million for the three months ended March 31, 2023 and $24.4 million for the year ended December 31, 2022. As of March 31, 2023, the Company had an accumulated deficit of $164.6 million. As of the issuance date of these condensed consolidated financial statements, the Company expects that its cash and cash equivalents will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next 12 months from the issuance date of the condensed consolidated financial statements, without considering borrowing availability under the Company’s credit facility.
The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
2. Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The condensed consolidated balance sheet at December 31, 2022 was derived from audited consolidated financial statements but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements as of March 31, 2023 and for the three months ended March 31, 2023 and 2022 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 on file with the SEC. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s financial position as of March 31, 2023 and results of operations for the three months ended March 31, 2023 and 2022 and cash flows for the three months ended March 31, 2023 and 2022 have been made. The Company’s results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2023 or any other period.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, revenue recognition and the valuation of commissions and accounts receivable, the expensing and capitalization of website and software development costs, goodwill and acquired intangible assets, the contingent consideration liabilities, the valuation of stock-based awards and income taxes. The Company bases its estimates on historical experience, known trends and other market-specific or relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates, as there are changes in circumstances, facts and experience. Changes in estimates are recorded in periods in which they become known. These estimates may change, as new events occur and additional information is obtained and actual results could differ materially from these estimates.
Concentrations of Credit Risk and of Significant Customers
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts and commissions receivable. The Company maintains its cash and cash equivalents at accredited financial institutions. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
The Company sells its consumer referrals to insurance provider customers, consisting of carriers and agents, and indirect distributors in the United States and receives commissions from insurance provider customers for insurance policies sold. For the three months ended March 31, 2023, two customers represented 34% and 11%, respectively, of total revenue. For the three months ended March 31, 2022, two customers represented 14% and 11%, respectively, of total revenue. As of March 31, 2023, one customer accounted for 30% of the accounts receivable and commissions receivable balance. As of December 31, 2022, one customer accounted for 23% of the total accounts and commissions receivable balance.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
The Company’s cash equivalents and contingent consideration liabilities are carried at fair value, determined according to the fair value hierarchy described above (see Note 3). The carrying values of the Company’s accounts receivable, accounts payable and accrued expenses and other current liabilities approximate their fair values due to the short-term nature of these assets and liabilities. Commissions receivable are recorded at the estimated constrained lifetime values.
Accounts Receivable
The Company provides credit to customers in the ordinary course of business and believes its credit policies are prudent and reflect industry practices and business risk. The Company monitors economic conditions to identify facts or circumstances that may indicate that its receivables are at risk of collection. The Company provides reserves against accounts receivable for estimated losses, if any, that may result from a customer’s inability to pay based on the composition of its accounts receivable, current economic conditions, and historical credit loss activity. Amounts determined to be uncollectible are charged or written-off against the reserve. As of March 31, 2023 and December 31, 2022, the Company’s allowance for credit losses was $0.9 million and $0.7 million, respectively. During the three months ended March 31, 2023 and 2022, the Company wrote off an insignificant amount of uncollectible accounts.
Revenue Recognition
The Company derives its revenue primarily by selling consumer referrals to its insurance provider customers, including insurance carriers, agents and indirect distributors. The Company also generates revenue from commission fees for the sale of policies, primarily in its health and automotive verticals. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606 Revenue from Contracts with Customers ("ASC 606"), the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.
The Company only applies the five-step model to contracts when collectability of the consideration to which the Company is entitled in exchange for the goods or services it transfers to the customer is determined to be probable. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
Referral Revenue
The Company recognizes referral revenue when it satisfies its performance obligations by delivering the referrals to its customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those referrals.
Commission Revenue
The Company’s commission revenue consists of the estimated constrained lifetime values (the “constrained LTVs”) of commission payments the Company expects to receive from health insurance carriers and auto insurance carriers on the sale of insurance policies to consumers and renewals of such policies. Commission revenue is recognized upon satisfaction of the Company’s performance obligation. The Company considers its performance obligation related to commissions for both the initial policy sale and future renewals of the policy to be satisfied upon submission of the policy application. Therefore, a significant portion of the commission revenue the Company records upon satisfaction of its performance obligation is paid by the Company’s insurance provider customer over a multi-year time frame as policyholders renew and pay the insurance provider for their policies. The current portion of commissions receivable consists of estimated commissions on new policies sold and estimated renewal commissions on policies expected to be renewed within one year, while the non-current portion of commissions receivable are commissions for estimated renewals expected to be renewed beyond one year. Commission revenue represented approximately 9% and 13% of total revenue in the three months ended March 31, 2023 and 2022, respectively.
The Company estimates commission revenue for each health insurance product by using a portfolio approach to a group of policies by product type and the application submission date of the relevant policy, which are referred to as “cohorts.” The Company’s estimate of constrained LTVs is based on an analysis of historical commission payment trends for relevant policies to establish an expected lifetime value and incorporates management’s judgment in interpreting those trends to calculate LTVs and to apply constraints to such LTVs. Significant factors impacting historical trends include carrier mix, average policy duration and conversion rates of paying policies.
Commission revenue from auto insurance carriers consists of constrained LTVs of commission payments the Company expects to receive for selling an insurance policy based on the effective date of the policy. The Company’s estimate of constrained LTVs is based on an analysis of historical commission payment trends for relevant policies to establish an expected lifetime value and incorporates management’s judgment in interpreting those trends to calculate LTVs and to apply constraints to such LTVs. The most significant factor impacting historical trends is average policy duration.
The Company applies a constraint to its estimated LTVs to only recognize the amount of variable consideration that it believes is probable that it will be entitled to receive and will not be subject to a significant revenue reversal in the future.
To the extent that commission payment trends change or the underlying factors impacting commission payments change, the Company’s estimate of constrained LTVs could be materially impacted. To the extent the Company makes changes to its estimates of constrained LTVs, it recognizes any material impact of the change to commission revenue in the reporting period in which the change is made, including revisions of estimated lifetime commissions either below or in excess of previously estimated constrained LTVs recognized as an adjustment to revenue and the related contract asset. The Company recognizes revenue for new policies by applying the latest estimated constrained LTV for that product.
11
Disaggregated Revenue
The Company presents disaggregated revenue from contracts with customers by distribution channel, as the distribution channel impacts the nature and amount of the Company’s revenue, and by vertical market segment. The Company’s direct distribution channel consists of insurance carriers and third-party agents. The Company’s indirect distribution channel consists of insurance aggregators and media networks who purchase referrals with the intent to resell. Revenue generated via the Company’s direct distribution channel is generally higher per referral than revenue generated by the Company’s indirect distribution channels and provides the Company with additional insights and data regarding insurance provider demand and referral performance.
Total revenue is comprised of revenue from the following distribution channels:
Direct channels
86
%
88
Indirect channels
14
12
100
Total revenue is comprised of revenue from the following insurance verticals (in thousands):
Automotive
89,699
87,675
19,521
23,006
Total Revenue
The Company has elected to apply the practical expedient in ASC 606 to expense incremental direct costs of obtaining a contract, consisting of sales commissions, as incurred as the expected period of benefit of the sales commissions is one year or less. At March 31, 2023 and December 31, 2022, the Company had not capitalized any costs to obtain any of its contracts.
Deferred Revenue
Amounts received for referrals prior to satisfying the revenue recognition criteria are recorded as deferred revenue in the accompanying consolidated balance sheets. Amounts expected to be recognized as revenue within 12 months of the balance sheet date are classified as current deferred revenue. Deferred revenue was $1.9 million as of December 31, 2022. During the three months ended March 31, 2023, the Company recognized revenue of $1.2 million that was included in the contract liability balance (deferred revenue) at December 31, 2022. The Company recognizes deferred revenue by first allocating from the beginning deferred revenue balance to the extent that the beginning deferred revenue balance exceeds the revenue to be recognized. Billings during the period are added to the deferred revenue balance to be recognized in future periods.
Commissions Receivable
Commissions receivable are contract assets that represent estimated variable consideration for commissions to be received from insurance carriers for performance obligations that have been satisfied. The current portion of commissions receivable are estimated commissions expected to be received within one year, while the non-current portion of commissions receivable are expected to be received beyond one year.
The Company assesses impairment for uncollectible consideration when information available indicates it is probable that an asset has been impaired. There were no impairments recorded during the three months ended March 31, 2023 or 2022. While the Company is exposed to credit losses due to the non-payment by insurance carriers, it considers the risk of this to be remote.
Advertising Expense
Advertising expense consists of variable costs that are related to attracting consumers to the Company’s marketplace and generating consumer quote requests, including through its verified partner network, and promoting its marketplace to insurance carriers and agents. The Company expenses advertising costs as incurred and such costs are included in sales and marketing expense in the accompanying consolidated statements of operations and comprehensive loss. During the three months ended March 31, 2023 and 2022, advertising expense totaled $73.6 million and $76.4 million, respectively.
Net Income (Loss) per Share
Basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period, including potential dilutive common shares assuming the dilutive effect of outstanding stock options and unvested restricted stock units. For periods in which the Company reported a net loss, diluted net loss per common share is the same as basic net loss per common share, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
The Company has two classes of common stock outstanding: Class A common stock and Class B common stock. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class B common stock is convertible into one share of Class A common stock at the option of the holder at any time. The Company allocates undistributed earnings attributable to common stock between the common stock classes on a one-to-one basis when computing net income (loss) per share. As a result, basic and diluted net income (loss) per share of Class A common stock and Class B common stock are equivalent.
The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:
March 31,
Options to purchase common stock
2,271,325
1,569,865
Unvested restricted stock units
2,568,662
3,234,894
4,839,987
4,804,759
The table above does not include shares of Class A common stock issuable upon settlement of contingent consideration for the Company’s acquisitions. Such shares are also not included in the Company’s calculation of basic or diluted net loss per common share until issued.
Recently Issued Accounting Pronouncements
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (Topic 820), which clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The guidance also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The guidance includes disclosure requirements including the fair value of equity securities subject to contractual sale restrictions included in the balance sheet, the nature and remaining duration of the restriction and circumstances that could cause a lapse in the restriction. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, with early adoption permitted. The amendments in this update are to be applied prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. The Company is currently assessing the impact of the adoption of this guidance on its consolidated financial statements.
3. Fair Value of Financial Instruments
The following tables present the Company’s fair value hierarchy for its assets and liabilities which are measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022 (in thousands):
Fair Value Measurements at March 31, 2023 Using:
Level 1
Level 2
Level 3
Assets:
Cash equivalents:
Money market funds
24,990
Liabilities:
Contingent consideration liability associated with acquisition of PolicyFuel included in other long-term liabilities
Fair Value Measurements at December 31, 2022 Using:
15,812
Contingent consideration liability associated with acquisition of PolicyFuel included in accrued expenses and other current liabilities
150
There were no transfers into or out of Level 3 during the three months ended March 31, 2023 or 2022.
Money market funds were valued by the Company based on quoted market prices, which represent a Level 1 measurement within the fair value hierarchy.
Contingent consideration liabilities relate to the acquisition of Policy Fuel, LLC and its affiliated entities (“PolicyFuel”) in 2021. The former owners of PolicyFuel are eligible to receive a variable number of shares of Class A common stock upon the achievement (at varying levels) of certain annual revenue targets over the three-year period following the acquisition. Contingent consideration liabilities are valued by the Company using significant inputs not observable in the market (a Level 3 measurement). The valuation of contingent consideration uses assumptions and estimates to forecast a range of outcomes for the contingent consideration. The Company assesses these assumptions and estimates on a quarterly basis as additional data impacting the assumptions is obtained. Changes in the fair value of contingent consideration related to updated assumptions and estimates are recognized as acquisition-related costs within the consolidated statements of operations and comprehensive loss.
The Company uses a Monte Carlo simulation model in its estimates of the fair value of the contingent consideration related to the PolicyFuel acquisition. The most significant assumptions and estimates utilized in the model include forecasted revenue (an acquisition specific input) and the market value of the Company’s Class A common stock (an observable input). Other assumptions utilized in the model include equity volatility, revenue volatility and discount rate. The decrease in fair value of contingent consideration related to the Class A common stock issuable upon achievement of revenue targets during the three months ended March 31, 2023 and 2022 was primarily due to changes in estimates of forecasted revenue.
The following table provides a roll-forward of the aggregate fair values of the Company’s contingent consideration liabilities for which fair value is determined by Level 3 inputs (in thousands):
Contingent
Consideration
Liabilities
Fair value at December 31, 2022
Change in fair value of contingent consideration related to PolicyFuel acquisition
Fair value at March 31, 2023
4. Goodwill and Acquired Intangible Assets
Goodwill is not amortized, but instead is reviewed for impairment at least annually or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. The Company considers its business to be one reporting unit for purposes of performing its goodwill impairment analysis. To date, the Company has had no impairments to goodwill.
There were no changes to goodwill for the three months ended March 31, 2023.
Acquired intangible assets consisted of the following (in thousands):
Weighted Average Useful Life
Gross Amount
Accumulated Amortization
Carrying Value
(in years)
Customer relationships
7.6
10,200
(3,678
6,522
Developed technology
1,700
(930
770
Other identifiable intangible assets
2.8
570
(424
146
12,470
(5,032
(3,353
6,847
(786
914
(376
194
(4,515
Future amortization expense of intangible assets as of March 31, 2023 is expected to be as follows (in thousands):
Year Ending December 31,
2023 (remaining nine months)
1,484
2024
1,715
2025
960
2026
685
2027
708
Thereafter
1,886
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5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
December 31,
Accrued employee compensation and benefits
4,179
4,254
Accrued advertising expenses
4,666
3,970
Other current liabilities
1,919
6. Loan and Security Agreement
On July 15, 2022, the Company executed a Loan and Security Modification Agreement to amend its Loan and Security Agreement (the “2020 Loan Agreement”) with Western Alliance Bank (“Lender”), to increase the revolving line of credit available thereunder from $25.0 million to $35.0 million, to extend the maturity date of the revolving line of credit from August 2022 to July 2025 and to provide the Company access to a term loan of up to $10.0 million. The 2020 Loan Agreement, as amended by the Loan and Security Modification Agreement, is referred to as the Amended Loan Agreement.
Pursuant to the Amended Loan Agreement, borrowings under the revolving line of credit cannot exceed 85% of eligible accounts receivable balances, bear interest at the greater of 4.25% or the prime rate as published in the Wall Street Journal and mature on July 15, 2025. The term loan may be drawn through December 31, 2023 and borrowings bear interest at 0.25% plus the greater of 4.25% or the prime rate as published in the Wall Street Journal. Borrowings under the term loan of the Amended Loan Agreement are repayable in monthly interest-only payments through December 31, 2023. Commencing on January 1, 2024, the term loan is payable in 42 equal monthly installments of the then outstanding principal and accrued interest through June 2027. The Company 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 the Company’s assets and property. Under the Amended Loan Agreement, the Company has agreed to affirmative and negative covenants to which the Company will remain subject until maturity. The covenants include limitations on the Company’s 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, the Company is 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, the company is 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 Company’s ratio of (i) trailing twelve-month adjusted “EBITDA” (as defined in the Amended Loan Agreement) less capital expenditures, less cash taxes, to (ii) 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) the Company’s outstanding obligations owing to the Lender, to (ii) the Company’s 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, the Company was in compliance with these covenants.
As of March 31, 2023, the Company had no amounts outstanding under the revolving line of credit.
7. Stock-Based Compensation
2008 and 2018 Plans
The Company has outstanding awards under its 2008 Stock Incentive Plan, as amended (the “2008 Plan”), but is no longer granting awards under this plan. Shares of common stock issued upon exercise of stock options granted prior to September 8, 2017 will be issued as either Class A common stock or Class B common stock. Shares of common stock issued upon exercise of stock options granted after September 8, 2017 will be issued as Class A common stock.
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The Company’s 2018 Equity Incentive Plan (the “2018 Plan” and, together with the 2008 Plan, the “Plans”) provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other stock-based awards. The number of shares initially reserved for issuance under the 2018 Plan is the sum of 2,149,480 shares of Class A common stock, plus the number of shares (up to 5,028,832 shares) equal to the sum of (i) the 583,056 shares of Class A common stock and Class B common stock that were available for grant under the 2008 Plan upon the effectiveness of the 2018 Plan and (ii) the number of shares of Class A common stock and Class B common stock subject to outstanding awards under the 2008 Plan that expire, terminate or are otherwise surrendered, canceled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right (subject, in the case of incentive stock options, to any limitations of the Internal Revenue Code). The number of shares of Class A common stock that may be issued under the 2018 Plan will automatically increase on the first day of each fiscal year until, and including, the fiscal year ending December 31, 2028, equal to the least of (i) 2,500,000 shares of Class A common stock; (ii) 5% of the sum of the number of shares of Class A common stock and Class B common stock outstanding on the first day of such fiscal year; and (iii) an amount determined by the Company’s board of directors. The shares of common stock underlying any awards that are forfeited, canceled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, repurchased or are otherwise terminated by the Company under the 2018 Plan will be added back to the shares of common stock available for issuance under the 2018 Plan. The number of authorized shares reserved for issuance under the 2018 Plan was increased by 1,629,382 shares effective as of January 1, 2023 in accordance with the provisions of the 2018 Plan described above. As of March 31, 2023, 2,519,261 shares remained available for future grant under the 2018 Plan.
Options and restricted stock units (“RSUs”) granted under the Plans vest over periods determined by the board of directors. Options granted under the Plans expire no longer than ten years from the date of the grant. The exercise price for stock options granted is not less than the fair value of common shares based on quoted market prices. Certain of the Company’s RSUs are net settled by withholding shares of the Company’s Class A common stock to cover statutory income taxes.
During the three months ended March 31, 2023, the Company granted 699,880 service-based options and RSUs under the 2018 Plan with an aggregate grant date fair value of $9.9 million.
Inducement Grants
In connection with the acquisition of PolicyFuel in 2021, the Company granted service- and service- and performance-based RSUs to newly hired employees. The RSUs were approved by the Company’s board of directors and were granted as an inducement material to the new employees entering into employment with the Company in accordance with Nasdaq Rule 5635(c)(4) (the “Inducement Awards”). The Inducement Awards were granted outside of the 2018 Plan.
Stock-Based Compensation
The Company recorded stock-based compensation expense in the following expense categories of its consolidated statements of operations and comprehensive loss (in thousands):
54
59
2,273
3,210
2,374
2,411
1,808
1,850
As of March 31, 2023, unrecognized compensation expense for RSUs and option awards was $36.6 million, which is expected to be recognized over a weighted average period of 2.6 years.
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8. Commitments and Contingencies
Leases
The Company leases office space under various non-cancelable operating leases. There have been no material changes to the Company’s leases during the three months ended March 31, 2023. For additional information, please read Note 12, Leases, to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
Indemnification Agreements
In the normal course of business, the Company may provide indemnification of varying scope and terms to third parties and enters into commitments and guarantees (“Agreements”) under which it may be required to make payments. The duration of these Agreements varies, and in certain cases, is indefinite. Furthermore, many of these Agreements do not limit the Company’s maximum potential payment exposure.
In addition, the Company has entered into indemnification agreements with members of its board of directors and executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers.
Through March 31, 2023, the Company has not incurred any material costs as a result of such indemnifications. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its consolidated financial statements as of March 31, 2023 and December 31, 2022.
Legal Proceedings and Other Contingencies
The Company is from time to time subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of its business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company’s consolidated results of operations or financial condition.
9. Retirement Plan
The Company has established a defined-contribution plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers all employees who meet defined minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a pre-tax basis. As currently established, the Company is not required to make any contributions to the 401(k) Plan. The Company contributed $0.2 million during each of the three months ended March 31, 2023 and 2022.
10. Related Party Transactions
The Company has, in the ordinary course of business, entered into arrangements with other companies who have shareholders in common with the Company. Pursuant to these arrangements, related-party affiliates receive payments for providing website visitor referrals. During the three months ended March 31, 2023 and 2022, the Company recorded expense of $1.8 million and $1.2 million, respectively, related to these arrangements. During the three months ended March 31, 2023 and 2022, the Company paid $1.8 million and $0.7 million, respectively, related to these arrangements. As of March 31, 2023, and December 31, 2022, amounts due to related-party affiliates totaled $0.6 million and $0.6 million, respectively, which were included in accounts payable on the condensed consolidated balance sheets.
On February 23, 2022, the Company sold 1,004,016 shares of Class A common stock at a purchase price of $14.94 per share for gross proceeds of $15.0 million in a private placement to Recognition Capital, LLC, an entity which is owned and controlled by David Blundin, Chairman of the board of directors and co-founder of the Company.
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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 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
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
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:
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:
(in thousands)
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
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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.
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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:
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:
Stock-based compensation
Depreciation and amortization
(187
(8
286
5,373
2,426
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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:
Statement of Operations Data:
Revenue(1)
Cost and operating expenses(2):
Other Financial and Operational Data:
Variable marketing margin
35,593
34,264
Adjusted EBITDA(3)
(1) Comprised of revenue from the following distribution channels:
(2) Includes stock-based compensation expense as follows:
(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.
Revenue:
Change
(dollars in thousands)
(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.
(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 expense
(5,913
-6.1
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 expense
(269
-3.3
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.
General and administrative expense
889
12.8
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 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.
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.
Less: total advertising expense (a component of sales and marketing expense)
73,627
76,417
1,329
3.9
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.
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:
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 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.
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:
28
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.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We have a credit agreement that provides us with credit at a floating rate of interest. As of March 31, 2023, we had no outstanding borrowings under our credit facility and therefore no material exposure to fluctuations in interest rates.
We contract with vendors in foreign countries and we have foreign subsidiaries. As such, we have exposure to adverse changes in exchange rates of foreign currencies associated with our foreign transactions and our foreign subsidiaries. We believe this exposure to be immaterial. We do not hedge against this exposure to fluctuations in exchange rates.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
Information with respect to legal proceedings and this item is included in Note 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements contained in Part I, Item I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Item 1A. Risk Factors.
In addition to risks and uncertainties in the ordinary course of business that are common to all businesses, important factors that are specific to our industry and company could have a material and adverse impact on our business, financial condition, results of operations and cash flows. You should carefully consider the risk factors set forth in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022 and in our subsequent periodic filings with the Securities and Exchange Commission. Other than as reflected in the following updated risk factor, there has been no material change from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2022:
A significant portion of our revenue in recent periods was derived from two customers, and our results of operations could be adversely affected and stockholder value harmed if we lose business from these customers.
Sales to Progressive Casualty Insurance Company accounted for 34% of our revenue for the three months ended March 31, 2023 and 21% of our revenue for the year ended December 31, 2022. Sales to State Farm Mutual Automobile Insurance Company accounted for 11% of our revenue for the three months ended March 31, 2023 and 11% of our revenue for the year ended December 31, 2022. These customers made purchases from us under short-term agreements and may decrease or cease doing business with us at any time with no notice. As a result, we have no assurances that these customers will continue to purchase from us at their historical levels or at all. If these customers were to reduce their level of purchases from us or discontinue their relationships with us, the loss could have a material adverse effect on our results of operations in both the short and long term.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Equity Securities
There were no shares of equity securities sold or issued, or options granted, by us during the three months ended March 31, 2023 that were not registered under the Securities Act of 1933, as amended, and that were not previously reported in a Current Report on Form 8-K.
Issuer Purchases of Equity Securities
We did not purchase any of our registered equity securities during the period from January 1, 2023 to March 31, 2023.
Item 6. Exhibits.
Exhibit
Number
Description
31.1
Certification of Chief Executive Officer of the Registrant Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer of the Registrant Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1†
Certification of Chief Executive Officer of the Registrant Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2†
Certification of Chief Financial Officer of the Registrant Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
† The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of EverQuote, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 8, 2023
By:
/s/ Jayme Mendal
Jayme Mendal
Chief Executive Officer and President
(Principal Executive Officer)
/s/ John Wagner
John Wagner
Chief Financial Officer and Treasurer
(Principal Financial Officer)