Porch is running out of cash: IPO filing

Lowe’s, a backer of the home-services firm since 2014, quietly sold back 16M shares in 2019

TRD NATIONAL /
Oct.October 15, 2020 12:32 PM
Porch CEO Matt Ehrlichman (iStock; Porch)

Porch CEO Matt Ehrlichman (iStock; Porch)

In Porch.com’s IPO filing, the home-services startup touts one of its core values: “No Jerks/No Egos.”

But the “nice guy” approach has brought the firm to the brink of financial ruin, the filing shows. Unless it’s able to raise additional capital, the company “will not have sufficient cash flows and liquidity to fund its planned business for the next 12 months.”

The disclosure, filed with the Securities and Exchange Commission Wednesday, was made ahead of Porch’s merger with a blank-check company led by Abu Dhabi Investment Authority veterans Thomas Hennessy and Joseph Beck. The deal, announced in July, values Porch at $523 million. According to the IPO filing, Porch generated $77.6 million in revenue last year, up from $54.1 million in 2018.

Abu Dhabi Investment Authority veterans Thomas Hennessey and Joseph Beck

Abu Dhabi Investment Authority veterans Thomas Hennessey and Joseph Beck

Founded in 2011, Porch sells software to home-services companies in exchange for data on homebuyers. It then sells additional home services, such as contractor services and TV and internet, to those clients.

But the company’s accountants have raised “substantial doubt” about the cash-strapped company’s ability to stay in business, the filing shows. The Real Deal took a closer look at the 581-page prospectus to learn more; here’s what we found:

Accounting woes. Porch is not yet profitable. As of June 30, its balance sheet listed $3.9 million in cash, plus $46.4 million in assets and $63.2 million in debt. The company also had a total deficit of $263.5 million.

Alarmingly, Porch also said that in preparing its 2019 financials, it identified a “material weakness” in its financial reporting. In particular, it lacked “qualified personnel to prepare and review complex technical accounting issues.” To remedy the situation, it hired a CFO in June and controller in July and is working with outside consultants.

(More) about those losses. Porch sells software to 11,000 home-services companies. On average, it generated $556 per account during 2020’s second quarter. In the first half of this year, Porch’s revenue dropped 14.3 percent to $32.2 million. Its losses narrowed to $24.6 million, compared to $67.9 million during the first half of 2019.

Who’s in control. CEO Matt Ehrlichman will hold a 24.9 percent stake in the company after the deal closes, according to the filing. Hennessy, Beck and their partners will hold a combined 18.3 percent stake.

Payday for Porch execs. Until February 2020, Ehrlichman’s annual base pay was $1, but this year, it was bumped up to $420,000. In connection with the merger, he and Matthew Neagle, Porch’s chief revenue officer, will also get one-time bonuses, ranging from $200,000 to $500,000 for Neagle and $500,000 to $1.5 million for Ehrlichman. Ehrlichman will also get one million shares of company stock that will vest based on those shares hitting certain price targets.

Sweetening the deal. To get the merger done, Ehrlichman struck a deal with investor Valor Equity Capital, which agreed to approve the arrangement in exchange for $9.5 million in shares. Valor also demanded a caveat: Post-merger, if its stake is valued at less than $44.2 million, Ehrlichman will transfer additional shares to make up the difference. At closing, Ehrlichman agreed to pay Valor $4 million in cash.

Selling Lowe’s. Home-improvement giant Lowe’s led Porch’s $27.6 million Series A in 2014. But in May 2019, the retailer sold 16.1 million shares back to Ehrlichman for $0.25 a share, or just over $4 million.

The IPO filing notes the price was “below fair market value,” and a check with Pitchbook shows that Porch shares had been priced at $8.66 in a 2018 funding round. For accounting reasons, the company was required to recognize the Lowe’s stock deal as a “compensation expense” of $33.2 million. According to Pitchbook, Porch’s share price dropped after the Lowe’s deal. It closed a $20.62 million round in January that priced shares at $3.50.

One more small problem. In the IPO filing, Porch said it plans to expand into insurance, as well as new home products and new locations, as part of its growth plan. Currently, Porch sells products and services in all 50 states. However, it is “qualified to do business only in Washington, Texas and Delaware,” the IPO filing said. Failure to get licensed could lead to fines, plus the company could be subject to back taxes and contract disputes in non-licensed jurisdictions.





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