EverQuote, Inc. 10-K

ITEM 7. 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 in conjunction with our consolidated financial statements and related notes appearing in Part II, Item 8 of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the ‘‘Risk Factors’’ section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis. Overview EverQuote makes insurance shopping easy, efficient and personal, saving consumers and insurance providers time and money. We operate a leading online marketplace for insurance shopping, connecting consumers with insurance providers. Our mission is to empower insurance shoppers to better protect life’s most important assets—their family, property, and future. Our vision is to become the largest online source of insurance policies by using data and technology 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, which we view as including both carriers and agents, attract and connect with customers 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. Our service is free for consumers, and we derive our revenue from sales of consumer referrals to insurance providers and, in select verticals, directly from commissions on the sale of policies. Insurance providers operate in a highly competitive and regulated industry and typically specialize on pre-determined subsets of consumers. As a result, not every consumer is a good match for every provider, and some providers struggle to efficiently 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 providers to evaluate the performance of their marketing spend on our platform and manage their own return on investment. 44 Table of Contents Since our founding in 2011, our core mission has been to make finding insurance easy and more personal, saving consumers and insurance providers time and money. We are working to build the largest and most trusted online insurance marketplace in the world. In pursuing this goal, we have consistently innovated through our disruptive data driven approach. Highlights of our history of innovation include: • In 2011, we launched the EverQuote marketplace for auto insurance. • In 2013, we launched EverQuote Pro, our provider portal, for carriers. • In 2015, we launched EverQuote Pro for agents. • In 2016, we added home and life insurance in our marketplace. • In 2018, we exceeded 46 million cumulative quote requests since launch of our marketplace. • In 2019, we added health, renters and commercial insurance in our marketplace. • In 2020, we launched our direct-to-consumer insurance offerings in our life vertical and in our health vertical via the acquisition of Crosspointe Insurance & Financial Services, LLC, or Crosspointe. In the years ended December 31, 2020 and 2019, our total revenue was $346.9 million and $248.8 million, respectively, representing year-over-year growth of 39.4%. We had net losses of $11.2 million and $7.1 million for the years ended December 31, 2020 and 2019, respectively, and had $18.4 million and $8.3 million in adjusted EBITDA for these same periods, respectively. See the section titled “—Non-GAAP Financial Measure” for information regarding our use of adjusted EBITDA and its reconciliation to net income (loss) determined in accordance with generally accepted accounting principles in the United States, or GAAP. COVID-19 In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The COVID-19 pandemic has continued to spread throughout the United States and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as that of our customers and consumer traffic to our marketplace for an indefinite period of time. For example, we believe that immediately after shelter-in-place orders went into effect consumers performed less searches for insurance online. To support the health and well-being of our employees, customers, partners and communities, our employees continue to work remotely as of March 1, 2021. While such disruptions have not had a material adverse impact on our financial results through December 31, 2020, such disruptions may impact consumer insurance shopping behavior. We continue to monitor and are managing our operations for the ongoing impact of COVID-19. Factors Affecting Our Performance We believe that our performance and future growth depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section titled “Risk Factors.” Auto insurance industry risk We derive a significant portion of our revenue from auto insurance providers and our financial results depend on the performance of the auto insurance industry. For example, in 2016, the U.S. commercial auto 45 Table of Contents insurance industry experienced its worst underwriting performance in 15 years, with higher loss ratios that were driven by both adverse claim severity and frequency trends. As a result, our auto insurance carrier customers reduced marketing spend and cost per sale targets the following year, ultimately impacting our revenue growth in the auto insurance vertical in 2017. Expanding consumer traffic Our success depends in part on the growth of our consumer traffic, as measured by quote requests. We have historically increased consumer traffic to our marketplace by expanding existing advertising channels and adding new channels. 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, which would likely result in a decrease in quote requests from consumers targeted by such advertising, if we believe the revenue associated with such consumer traffic does not result in incremental profit to our business. 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. We have expanded both the number of insurance providers and the spend per provider on our platform. While not a factor in our historical increases in revenue per quote request, we believe we have an opportunity to increase the number of referrals per quote request while increasing the bind rate per quote request, which would allow us to increase our revenue at low incremental cost. Revenue per quote request We seek to increase our revenue per quote request by attaining higher insurance provider bids and by increasing the number of referrals per quote request. Insurance provider bids are influenced by competition in our marketplace auctions, the performance of our consumer referrals for insurance providers relative to other consumer acquisition channels, as well as by market conditions, insurance provider budgets and insurance providers’ new customer acquisition targets. Increases in revenue per quote request allow us to increase advertising and consumer traffic to our marketplace while maintaining or increasing profitability. Cost per quote request We seek to efficiently acquire consumers by increasing the effectiveness of our consumer advertising and insurance marketplace. Cost per quote request is influenced by the cost and mix of advertising and the conversion rate of marketplace visitors who request an insurance quote. While we seek to minimize cost per quote request, we may incur increased cost per quote request in order to achieve profitability at relative volumes of quote requests and revenue per quote request. Key Business Metrics We regularly review a number of metrics, including United States generally accepted accounting principles, or 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. Quote Requests Quote requests are consumer-submitted website forms that contain data required to provide an insurance quote, quote requests we receive through offline channels such as telephone calls and quote requests submitted directly to third-party partners. 46 Table of Contents Variable Marketing Margin We define variable marketing margin, or VMM, as revenue, as reported in our consolidated statements of operations and comprehensive income (loss), less advertising costs (a component of sales and marketing expense, as reported in our statements of operations and comprehensive income (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. Adjusted EBITDA We define Adjusted EBITDA as net income (loss), adjusted to exclude: stock-based compensation expense, depreciation and amortization expense, acquisition-related costs, legal settlement expense, interest income and the provision for (benefit from) income taxes. Adjusted EBITDA is a non-GAAP financial measure that we present in this Annual Report on Form 10-K to supplement the financial information we present on a GAAP basis. We monitor and present Adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, to establish budgets and to develop operational goals for managing our business. Adjusted EBITDA should not be considered in isolation from, or as an alternative to, measures prepared in accordance with GAAP. Adjusted EBITDA should be considered together with other operating and financial performance measures presented in accordance with GAAP. Also, Adjusted EBITDA may not necessarily be comparable to similarly titled measures presented by other companies. For further explanation of the uses and limitations of this measure and a reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income (loss), please see “—Non GAAP Financial Measure”. Key Components of Our Results of Operations Revenue We generate our revenue 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 support three secure consumer referral formats: • Clicks: An online-to-online referral, with a handoff of the consumer to the provider’s website. • Data: An online-to-offline referral, with quote request data transmitted to the provider for follow-up. • Calls: An online-to-offline referral for outbound calls and an offline-to-offline referral for inbound calls, with the consumer and provider connected by phone. We recognize revenue from consumer referrals at the time of delivery. Our revenue is comprised of consumer referral fees from the automotive and other insurance verticals, which includes home and renters, life, health and commercial insurance verticals, as follows: Year Ended December 31, 2020 2019 (in thousands) Automotive $ 283,236 $ 212,300 Other 63,699 36,511 Total Revenue $ 346,935 $ 248,811 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. 47 Table of Contents We allocate certain overhead expenses, such as rent, utilities, office supplies and depreciation and amortization of general office assets, to cost of revenue and operating expense categories based on headcount. As a result, an overhead expense allocation is reflected in cost of revenue and each operating expense category. Personnel-related costs included in cost of revenue and each operating expense category include wages, fringe benefit costs and stock-based compensation expense. Cost of Revenue Cost of revenue is comprised primarily of the costs of operating our marketplace and delivering consumer referrals to our customers. These costs consist primarily of technology service costs including hosting, software, data services, and third-party call center costs. In addition, cost of revenue includes depreciation and amortization of our platform technology assets and personnel-related costs. Sales and Marketing Sales and marketing expense consists primarily of advertising and marketing expenditures as well as personnel-related costs for employees engaged in sales, marketing, data analytics and consumer acquisition functions and amortization of sales and marketing-related intangible assets. Advertising expenditures consist of variable costs that are related to attracting consumers to our marketplace, generating consumer quote requests and promoting our marketplace to carriers and agents. Advertising costs are expensed as incurred. Marketing costs consist primarily of content and creative development, public relations, memberships, and event costs. In order to continue to grow our business and brand awareness, we expect that we will continue to commit substantial resources to our sales and marketing efforts. We expect our sales and marketing expense will increase in the near term, both as a percentage of revenue and in absolute dollars, but decrease in the longer term as a percentage of revenue due to efficiencies of scale and improvements in our marketplace technology. Research and Development Research and development expenses consist 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 expenses will increase as we continue to enhance and expand our platform technology. General and Administrative General and administrative expenses consist 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 general and administrative expenses to increase as we continue to incur the costs of compliance associated with being a publicly traded company, including legal, audit, insurance and consulting fees. Acquisition-related costs Acquisition-related costs include expenses associated with third-party professional services we utilize for the evaluation and execution of successful acquisitions as well as changes in the fair value of our contingent consideration liability recorded as the result of the Crosspointe acquisition. Legal settlement Legal settlement includes costs associated with the settlement of securities litigation in connection with our initial public offering (see Note 12 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K) representing the net of the settlement amount and the insurance proceeds. 48 Table of Contents Other Income Other income consists of interest income and other income. Interest income consists of interest earned on invested cash balances. Other income consists of miscellaneous income unrelated to our core operations. Income Taxes We have not recorded income tax benefits for the net losses we have incurred in the years ended December 31, 2020 and 2019 or for our research and development tax credits generated, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. As of December 31, 2020, we had federal net operating loss carryforwards of $72.9 million, which may be available to offset future taxable income, of which $9.0 million of the total net operating loss carryforwards expire at various dates beginning in 2029, while the remaining $63.9 million do not expire but are limited in their usage to an annual deduction equal to 80% of annual taxable income. As of December 31, 2020, we had state net operating loss carryforwards of $60.7 million, which may be available to offset future taxable income and expire at various dates beginning in 2027. As of December 31, 2020, we also had federal and state research and development tax credit carryforwards of $4.5 million and $2.4 million, respectively, which may be available to reduce future tax liabilities and expire at various dates beginning in 2030 and 2029, respectively. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date. Non-GAAP Financial Measure To supplement our consolidated financial statements presented in accordance with GAAP and to provide investors with additional information regarding our financial results, we present in this Annual Report on Form 10-K adjusted EBITDA as a non-GAAP financial measure. Adjusted EBITDA is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similarly titled measures presented by other companies. Adjusted EBITDA . We define adjusted EBITDA as our net income (loss), excluding the impact of stock-based compensation expense; depreciation and amortization expense; acquisition-related costs; legal settlement expense; interest income; and our provision for (benefit from) income taxes. The most directly comparable GAAP measure to adjusted EBITDA is net income (loss). We monitor and present in this Annual Report on Form 10-K adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, to establish budgets and to develop operational goals for managing our business. In particular, we believe that excluding the impact of these expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core operating performance. We use adjusted EBITDA to evaluate our operating performance and trends and make planning decisions. We believe adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in the calculation of adjusted EBITDA. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects. Adjusted EBITDA is not prepared in accordance with GAAP and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the most directly comparable financial measure calculated and presented in accordance with GAAP. Some of these limitations are: • adjusted EBITDA excludes stock-based compensation expense as it has recently been, and will continue to be for the foreseeable future, a significant recurring non-cash expense for our business; • adjusted EBITDA excludes depreciation and amortization expense and, although this is a non-cash expense, the assets being depreciated and amortized may have to be replaced in the future; 49 Table of Contents • adjusted EBITDA excludes acquisition-related costs that affect cash available to us; • adjusted EBITDA excludes legal settlement expense that affect cash available to us; • adjusted EBITDA does not reflect the cash received from interest income on our investments, which affects the cash available to us; • adjusted EBITDA does not reflect income tax expense (benefit) that affects cash available to us; and • the expenses and other items that we exclude in our calculation of adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from adjusted EBITDA when they report their operating results. In addition, other companies may use other measures to evaluate their performance, all of which could reduce the usefulness of adjusted EBITDA as a tool for comparison. The following table reconciles adjusted EBITDA to net income (loss), the most directly comparable financial measures calculated and presented in accordance with GAAP. Reconciliation of Net Loss to Adjusted EBITDA: Year Ended December 31, 2020 2019 (in thousands) Net loss $ (11,202 ) $ (7,117 ) Stock-based compensation 24,179 12,721 Depreciation and amortization 3,350 2,186 Acquisition-related costs 2,258 — Legal settlement — 1,227 Interest income (189 ) (669 ) Adjusted EBITDA $ 18,396 $ 8,348 50 Table of Contents Results of Operations Comparison of the Years Ended December 31, 2020 and 2019 The following tables set forth our results of operations for the periods shown: Year Ended December 31, 2020 2019 (in thousands) Statement of Operations Data: Revenue(1) $ 346,935 $ 248,811 Cost and operating expenses(2): Cost of revenue 21,373 15,903 Sales and marketing 284,880 202,689 Research and development 29,662 20,214 General and administrative 20,444 16,827 Acquisition-related costs 2,258 — Legal settlement — 1,227 Total cost and operating expenses 358,617 256,860 Loss from operations (11,682 ) (8,049 ) Other income: Interest income 189 669 Other income 291 263 Total other income 480 932 Net loss $ (11,202 ) $ (7,117 ) Other Financial and Operational Data: Quote requests 27,013 20,011 Variable marketing margin $ 108,642 $ 73,316 Adjusted EBITDA(3) $ 18,396 $ 8,348 (1) Comprised of revenue from the following distribution channels: Year Ended December 31, 2020 2019 Direct channels 92 % 94 % Indirect channels 8 % 6 % 100 % 100 % (2) Includes stock-based compensation expense as follows: Year Ended December 31, 2020 2019 (in thousands) Cost of revenue $ 361 $ 193 Sales and marketing 10,246 3,805 Research and development 7,751 3,967 General and administrative 5,821 4,756 $ 24,179 $ 12,721 51 Table of Contents (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: Year Ended December 31, Change 2020 2019 Amount % (dollars in thousands) Revenue $ 346,935 $ 248,811 $ 98,124 39.4 % Revenue increased by $98.1 million from $248.8 million for the year ended December 31, 2019 to $346.9 million for the year ended December 31, 2020. The increase in revenue was due to an increase of $70.9 million and $27.2 million from our automotive and other insurance marketplace verticals, respectively. The increase in revenue from our automotive vertical was primarily driven by an increase in the volume of quote requests resulting from increased advertising to attract consumers and an increase in revenue per quote request. The increase in revenue from our other marketplace verticals was primarily due to an increase in quote requests resulting from increased advertising to attract consumers, partially offset by a decline in revenue per quote request. Cost of Revenue Year Ended December 31, Change 2020 2019 Amount % (dollars in thousands) Cost of revenue $ 21,373 $ 15,903 $ 5,470 34.4 % Percentage of revenue 6.2 % 6.4 % Cost of revenue increased by $5.5 million from $15.9 million for the year ended December 31, 2019 to $21.4 million for the year ended December 31, 2020. Cost of revenue increased due primarily to increased hosting costs of $1.8 million related to increased marketplace activity and to increased third-party call center costs of $1.5 million, which were primarily related to increased volume of call referrals. Technical services increased by $1.0 million due primarily to increased volume of consumer referrals and amortization of capitalized software costs increased by $0.7 million. Sales and Marketing Year Ended December 31, Change 2020 2019 Amount % (dollars in thousands) Sales and marketing expense $ 284,880 $ 202,689 $ 82,191 40.6 % Percentage of revenue 82.1 % 81.5 % Sales and marketing expenses increased by $82.2 million from $202.7 million for the year ended December 31, 2019 to $284.9 million for the year ended December 31, 2020. The increase in sales and marketing expense was primarily due to an increase in advertising expenditures of $62.8 million and an increase in personnel-related costs of $15.4 million. Personnel-related costs for the years ended December 31, 2020 and 2019 included stock-based compensation expense of $10.2 million and $3.8 million, respectively. Research and Development Year Ended December 31, Change 2020 2019 Amount % (dollars in thousands) Research and development expense $ 29,662 $ 20,214 $ 9,448 46.7 % Percentage of revenue 8.5 % 8.1 % 52 Table of Contents Research and development expenses increased by $9.4 million from $20.2 million for the year ended December 31, 2019 to $29.7 million for the year ended December 31, 2020. The increase in research and development expense was primarily due to an increase in personnel-related costs of $9.9 million as a result of our continued hiring of research and development employees and a shift towards hiring more senior personnel, to further develop and enhance our marketplace websites and technology. Personnel-related costs for the years ended December 31, 2020 and 2019 included stock-based compensation expense of $7.8 million and $4.0 million, respectively. General and Administrative Year Ended December 31, Change 2020 2019 Amount % (dollars in thousands) General and administrative expense $ 20,444 $ 16,827 $ 3,617 21.5 % Percentage of revenue 5.9 % 6.8 % General and administrative expenses increased by $3.6 million from $16.8 million for the year ended December 31, 2019 to $20.4 million for the year ended December 31, 2020. The increase in general and administrative expenses was primarily due to an increase in personnel-related costs of $2.9 million and an increase in insurance costs of $0.6 million. Personnel-related costs for the years ended December 31, 2020 and 2019 included stock-based compensation expense of $5.8 million and $4.8 million, respectively. Acquisition-related Costs Acquisition-related costs for the year ended December 31, 2020 were $2.3 million and consisted of costs for third-party professional services we utilized for the evaluation and execution of our Crosspointe acquisition of $0.5 million and expense of $1.8 million related to the change in the fair value of our contingent consideration liability recorded as the result of the Crosspointe acquisition. Legal Settlement Legal settlement expenses for the year ended December 31, 2019 were $1.2 million and were associated with the settlement of securities litigation in connection with our initial public offering (see Note 12 to the Consolidated Financial Statements). Other Income The decrease in interest income from $0.7 million for the year ended December 31, 2019 to $0.2 million for the year ended December 31, 2020 was due to lower interest rates on invested cash balances. Other income also included sublease income of $0.3 million in each of the years ended December 31, 2020 and 2019. The sublease ended in 2020. Quote Requests Year Ended December 31, Change 2020 2019 Amount % (in thousands except percentages) Quote requests 27,013 20,011 7,002 35.0 % Quote requests increased by 7.0 million for 2020 as compared to 2019 due to increased spending on online marketplace advertising as well as improvements in our traffic acquisition. 53 Table of Contents Variable Marketing Margin Year Ended December 31, Change 2020 2019 Amount % (dollars in thousands) Revenue $ 346,935 $ 248,811 $ 98,124 39.4 % Less: total advertising expense (a component of sales and marketing expense) 238,293 175,495 Variable marketing margin $ 108,642 $ 73,316 $ 35,326 48.2 % Percentage of revenue 31.3 % 29.5 % The increase in variable marketing margin was due primarily to an increased volume of quote requests. Liquidity and Capital Resources At December 31, 2020, our principal sources of liquidity were cash and cash equivalents of $42.9 million and availability of $25.0 million under our revolving line of credit. Borrowings under our revolving line of credit are collateralized by substantially all of our assets and property. Additionally, we are subject under our revolving line of credit to affirmative and negative covenants to which we will remain subject until maturity. These 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. As of December 31, 2020, we were in compliance with these covenants. In addition, we are required to maintain a minimum asset coverage ratio of 1.5 to 1 calculated as the sum of unrestricted cash and qualified accounts receivable divided by borrowings outstanding under the revolving line of credit. Events of default under our revolving line of credit include failure to make payments when due, insolvency events, failure to comply with covenants and material adverse events with respect to us. In the event of a default, the lender may declare all borrowings immediately due and payable. Since our inception, we have incurred operating losses and may continue to incur losses in the foreseeable future. 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 revolving line of credit. 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. 54 Table of Contents Cash Flows The following table shows a summary of our cash flows for each of the years ended December 31, 2020 and 2019: Year Ended December 31, 2020 2019 (in thousands) Net cash provided by operating activities $ 10,668 $ 4,413 Net cash used in investing activities (18,752 ) (2,975 ) Net cash provided by financing activities 4,907 2,982 Effect of exchange rate changes on cash, cash equivalents and restricted cash (7 ) — Net increase (decrease) in cash, cash equivalents and restricted cash $ (3,184 ) $ 4,420 Net cash provided by operating activities Operating activities provided $10.7 million and $4.4 million of cash during the years ended December 31, 2020 and 2019, respectively. Cash provided by operating activities in 2020 primarily resulted from the offset of net non-cash charges of $29.4 million to our net loss of $11.2 million and net cash used by changes in our operating assets and liabilities of $7.5 million. Net cash used by changes in our operating assets and liabilities consisted primarily of a $14.0 million increase in accounts receivable, partially offset by an aggregate $5.3 million increase in accounts payable and accrued expenses and other current liabilities and a $0.8 million increase in other long-term liabilities. Cash provided by operating activities in 2019 primarily resulted from the offset of net non-cash charges of $15.5 million to our net loss of $7.1 million and net cash used by changes in our operating assets and liabilities of $4.0 million. Net cash used by changes in our operating assets and liabilities consisted primarily of a $15.2 million increase in accounts receivable and a $5.6 million increase in prepaid expenses and other current assets, both partially offset by an aggregate $17.0 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 growth in our business, timing of customer and vendor invoicing and payments. The change in other long-term liabilities in 2020 was primarily due to the deferred payment of employer tax remittances. Net cash used in investing activities Net cash used in investing activities was $18.8 million and $3.0 million for the years ended December 31, 2020 and 2019, respectively. Net cash used in investing activities for the year ended December 31, 2020 included cash paid of $14.9 million to purchase Crosspointe. Cash used in investing activities for the years ended December 31, 2020 and 2019 also consisted of cash used to acquire property and equipment, which included the capitalization of software development costs. During the years ended December 31, 2020 and 2019, we capitalized $3.0 million and $2.7 million, respectively, of software development costs. Net cash provided by financing activities During the years ended December 31, 2020 and 2019, net cash provided by financing activities was $4.9 million and $3.0 million, respectively, and consisted of proceeds received from the exercise of common stock options. Critical Accounting Policies and Significant Judgments and Estimates Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect 55 Table of Contents the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our audited consolidated financial statements, appearing in Part II of Item 8 of this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements. Goodwill and Acquired Intangible Assets We record goodwill when consideration paid in a business acquisition exceeds the value of the net assets acquired. Our estimates of fair value are based upon assumptions believed to be reasonable at that time but that are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events or circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results. During the measurement period, which extends no later than one year from the acquisition date, we may record certain adjustments to the carrying value of the assets acquired and liabilities assumed with the corresponding offset to goodwill. After the measurement period, all adjustments are recorded in the consolidated statements of operations and comprehensive loss as operating expenses or income. Goodwill is not amortized, but rather is tested for impairment annually, or more frequently if facts and circumstances warrant a review, such as significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. We have determined that there is a single reporting unit for the purpose of conducting our goodwill impairment assessment. We assess both the existence of potential impairment and the amount of impairment loss by comparing the fair value of the reporting unit with its carrying amount, including goodwill. Intangible assets are recorded at their estimated fair values at the date of acquisition. We amortize acquired intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis. Valuation of Contingent Consideration The Crosspointe acquisition provides for shares of Class A common stock to be issued to the former owners of Crosspointe upon achievement of certain revenue targets over three years. Shares of Class A common stock issuable upon achievement of the first two annual targets are for a fixed number of shares of Class A common stock, and as such, we recorded the fair value of these shares within stockholders’ equity based on the number of shares issuable and the fair market value of Class A common stock on the acquisition date. Achievement of the third annual target will result in the issuance of a variable number of shares of Class A common stock and, as such, we recorded the fair value of these shares as a long-term liability. We estimated the fair value of the shares of Class A common stock issuable upon achievement of the three annual targets as of the acquisition date. We remeasure the fair value of the shares of Class A common stock issuable upon the estimated achievement levels of the third annual target at each subsequent reporting date until the liability is fully settled. We use a Monte Carlo simulation model in our estimates. Significant assumptions and estimates utilized in the model include the forecasted revenue, revenue volatility and discount rate. Revenue Recognition We derive our revenue by selling consumer referrals to insurance provider customers, including insurance carriers and agents. On January 1, 2019, we adopted the new revenue standard ASC 606, which amended revenue recognition principles and provides a single, comprehensive set of criteria for revenue recognition within and 56 Table of Contents across all industries. To determine revenue recognition for arrangements that we determine are within the scope of the revenue standard, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. Revenue is recognized when control of promised goods or services is transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We only apply the five-step model to contracts when collectability of the consideration to which we are entitled in exchange for the goods or services we transfer to the customer is determined to be probable. Amounts are recorded as accounts receivable when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less. We recognize revenue when we satisfy our performance obligations by delivering the referrals to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those referrals. Stock-Based Compensation We measure stock options and other stock-based awards granted to employees, non-employees and directors based on their fair value on the date of the grant. We recognize compensation expense of employee awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. We apply the straight-line method of expense recognition to all employee awards with only service-based vesting conditions and apply the graded-vesting method to all employee awards with both service-based and performance-based vesting conditions, commencing when achievement of the performance condition becomes probable. Compensation expense for nonemployee awards is recognized in the same manner as if we had paid cash for the goods or services received. We estimate the fair value of stock options with service-based vesting or performance-based vesting granted to employees, non-employees and directors using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our common stock options, the risk-free interest rate for a period that approximates the expected term of our common stock options, and our expected dividend yield. We measure stock options with market-based vesting based on the fair value on the date of grant using a Monte Carlo simulation model. We estimate the fair value of each restricted stock unit, or RSU, based on the fair value using the market value of our common stock. Income Taxes We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the consolidated financial statement and tax basis of assets and liabilities, as measured by enacted tax rates anticipated to be in effect when these differences reverse. This method also requires the recognition of future tax benefits to the extent that realization of such benefits is more likely than not. Deferred tax expense or benefit is the result of changes in the deferred tax assets and liabilities. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, we establish a valuation allowance through a charge to income tax expense. We evaluate the potential for recovery of deferred tax assets by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies. 57 Table of Contents Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission. Recently Issued Accounting Pronouncements A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our audited consolidated financial statements appearing in Part II, Item 8 of this Annual Report on Form 10-K. Inflation Risk During the last two years, inflation and changing prices have not had a material effect on our business. We are unable to predict whether inflation or changing prices will materially affect our business in the foreseeable future.