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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 September 30, 2020
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. Employer
Identification 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 September 30, 2020, the registrant had 20,346,926 shares of Class A common stock, $0.001 par value per share, issued and outstanding and 7,429,502 shares of Class B common stock, $0.001 par value per share, issued and outstanding.
 
 
 

Table of Contents
 
 
 
 
  
Page
 
PART I.
 
  
 
4
 
Item 1.
 
  
 
4
 
 
 
  
 
4
 
 
 
  
 
5
 
 
 
  
 
6
 
 
 
  
 
7
 
 
 
  
 
8
 
Item 2.
 
  
 
20
 
Item 3.
 
  
 
30
 
Item 4.
 
  
 
30
 
PART II.
 
  
 
31
 
Item 1.
 
  
 
31
 
Item 1A.
 
  
 
31
 
Item 2.
 
  
 
55
 
Item 6.
 
  
 
56
 
  
 
57
 
 
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 and statements regarding the anticipated impact on our business of the outbreak of the novel strain of coronavirus
(COVID-19)
and related public health measures, 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 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 the “Risk Factors” section and elsewhere in this Quarterly Report on Form
10-Q.
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. Some of the key factors that could cause actual results to differ from our expectations include:
 
   
our future financial performance, including our expectations regarding our revenue, cost of revenue, variable marketing margin, operating expenses, cash flows and ability to achieve, and maintain, future profitability;
 
   
the impact of the
COVID-19
pandemic;
 
   
our ability to attract and retain consumers and insurance providers using our marketplace;
 
   
our ability to develop new and enhanced products and services to attract and retain consumers and insurance providers, and our ability to successfully monetize them;
 
   
our anticipated growth and growth strategies and our ability to effectively manage that growth;
 
   
our ability to maintain and build our brand;
 
   
our reliance on our third-party service providers;
 
   
our ability to offer and sell insurance as a licensed insurance agent;
 
   
our ability to expand internationally;
 
   
the impact of competition in our industry and innovation by our competitors;
 
   
our ability to hire and retain necessary qualified employees to expand our operations;
 
   
our ability to adequately protect our intellectual property;
 
   
our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business;
 
   
the increased expenses and administrative workload associated with being a public company;
 
   
failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud;
 
   
the future trading prices of our Class A common stock; and
 
   
our use of proceeds from our initial public offering.
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.
 
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)
 
    
September 30,

2020
   
December 31,

2019
 
Assets
    
Current assets:
    
Cash and cash equivalents
   $ 45,881     $ 46,054  
Accounts receivable
     41,527       32,214  
Prepaid expenses and other current assets
     7,119       7,065  
  
 
 
   
 
 
 
Total current assets
     94,527       85,333  
Property and equipment, net
     5,871       5,197  
Goodwill
     9,618       —    
Acquired intangible assets, net
     3,775       —    
Other assets
     2,444       691  
  
 
 
   
 
 
 
Total assets
   $ 116,235     $ 91,221  
  
 
 
   
 
 
 
Liabilities and Stockholders’ Equity
    
Current liabilities:
    
Accounts payable
   $ 33,735     $ 23,663  
Accrued expenses and other current liabilities
     11,224       13,225  
Deferred revenue
     1,692       1,501  
  
 
 
   
 
 
 
Total current liabilities
     46,651       38,389  
Other long-term liabilities
     2,361       1,062  
  
 
 
   
 
 
 
Total liabilities
     49,012       39,451  
  
 
 
   
 
 
 
Commitments and contingencies (Note 9)
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;
20,346,926 shares and 14,635,834 shares issued and outstanding
at September 30, 2020 and December 31, 2019, respectively
     20       15  
Class B common stock, $0.001 par value; 30,000,000 shares authorized;
7,429,502 shares and 11,802,341 shares issued and outstanding at
September 30, 2020 and December 31, 2019, respectively
     7       12  
Additional
paid-in
capital
     181,639       158,752  
Accumulated deficit
     (114,443     (107,009
  
 
 
   
 
 
 
Total stockholders’ equity
     67,223       51,770  
  
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 116,235     $ 91,221  
  
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
4

EVERQUOTE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except per share amounts)
 
    
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
    
    2020    
   
    2019    
   
    2020    
   
    2019    
 
Revenue
   $ 89,977     $ 67,112     $ 249,643     $ 175,012  
  
 
 
   
 
 
   
 
 
   
 
 
 
Cost and operating expenses:
        
Cost of revenue
     5,378       4,052       15,690       11,222  
Sales and marketing
     73,598       53,212       204,663       143,358  
Research and development
     8,149       5,596       21,574       14,685  
General and administrative
     6,141       4,334       15,614       12,641  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total cost and operating expenses
     93,266       67,194       257,541       181,906  
  
 
 
   
 
 
   
 
 
   
 
 
 
Loss from operations
     (3,289     (82     (7,898     (6,894
  
 
 
   
 
 
   
 
 
   
 
 
 
Other income:
        
Interest income
     18       168       176       536  
Other income
     87       87       288       175  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total other income
     105       255       464       711  
  
 
 
   
 
 
   
 
 
   
 
 
 
Net income (loss) and comprehensive income (loss)
   $ (3,184   $ 173     $ (7,434   $ (6,183
  
 
 
   
 
 
   
 
 
   
 
 
 
Net income (loss) per share:
        
Basic
   $ (0.12   $ 0.01     $ (0.27   $ (0.24
  
 
 
   
 
 
   
 
 
   
 
 
 
Diluted
   $ (0.12   $ 0.01     $ (0.27   $ (0.24
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted average common shares outstanding:
                
Basic
     27,526       25,910       27,102       25,596  
  
 
 
   
 
 
   
 
 
   
 
 
 
Diluted
     27,526       28,607       27,102       25,596  
  
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
5

EVERQUOTE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands, except share amounts)
 
   
  Class A Common Stock  
   
Class B Common Stock
   
Additional
Paid-in
   
Accumulated
   
Total
  Stockholders’  
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Equity
 
Balances
at
December 31, 2019
    14,635,834     $ 15       11,802,341     $ 12     $ 158,752     $ (107,009   $ 51,770  
Issuance of common stock upon exercise of stock options
    214,179       —         —         —         1,364       —         1,364  
Vesting of restricted stock units
    329,897       —         —         —         —         —         —    
Stock-based compensation expense
    —         —         —         —         4,540       —         4,540  
Transfer of Class B common stock to Class A common stock
    1,388,536       2       (1,388,536     (2     —         —         —    
Net loss
    —         —         —         —         —         (1,442     (1,442
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balances at March 31, 2020
    16,568,446       17       10,413,805       10       164,656       (108,451     56,232  
Issuance of common stock upon exercise of stock options
    126,375       —         —         —         954       —         954  
Vesting of restricted stock units
    254,265       —         —         —         —         —         —    
Stock-based compensation expense
    —         —         —         —         6,250       —         6,250  
Transfer of Class B common stock to Class A common stock
    1,983,220       2       (1,983,220     (2     —         —         —    
Net loss
    —         —         —         —         —         (2,808     (2,808
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balances at June 30, 2020
    18,932,306       19       8,430,585       8       171,860       (111,259     60,628  
Contingent consideration
to be settled
 in
Class A 
common stock
    —         —         —         —         1,335       —         1,335  
Issuance of common stock upon exercise of stock options
    194,099       —         —         —         1,244       —         1,244  
Vesting of restricted stock units
    219,438       —         —         —         —         —         —    
Stock-based compensation expense
    —         —         —         —         7,200       —         7,200  
Transfer of Class B common stock to Class A common stock
    1,001,083       1       (1,001,083     (1     —         —         —    
Net loss
    —         —         —         —         —         (3,184     (3,184
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balances at September 30, 2020
    20,346,926     $ 20       7,429,502     $ 7     $ 181,639     $ (114,443   $ 67,223  
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
                           
   
Class A Common Stock
   
Class B Common Stock
   
Additional
Paid-in
   
Accumulated
   
Total
  Stockholders’  
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Equity
 
Balances at December 31, 2018
    7,528,741     $ 8       17,696,414     $ 18     $ 143,050     $ (99,892   $ 43,184  
Issuance of common stock upon exercise of stock options
    114,831       —         —         —         234       —         234  
Vesting of restricted stock units
    99,197       —         —         —         —         —         —    
Stock-based compensation expense
    —         —         —         —         2,750       —         2,750  
Transfer of Class B common stock to Class A common stock
    1,032,231       1       (1,032,231     (1     —         —         —    
Net loss
    —         —         —         —         —         (4,382     (4,382
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balances at March 31, 2019
    8,775,000       9       16,664,183       17       146,034       (104,274     41,786  
Issuance of common stock upon exercise of stock options
    132,770       —         —         —         649       —         649  
Vesting of restricted stock units
    182,764       —         —         —         —         —         —    
Stock-based compensation expense
    —         —         —         —         3,238       —         3,238  
Transfer of Class B common stock to Class A common stock
    1,413,336       2       (1,413,336     (2     —         —         —    
Net loss
    —         —         —         —         —         (1,974     (1,974
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balances at June 30, 2019
    10,503,870       11       15,250,847       15       149,921       (106,248     43,699  
Issuance of common stock upon exercise of stock options
    212,465       1       —         —         1,172       —         1,173  
Vesting of restricted stock units
    130,361       —         —         —         —         —         —    
Stock-based compensation expense
    —         —         —         —         3,269       —         3,269  
Transfer of Class B common stock to Class A common stock
    723,368       —         (723,368     —         —         —         —    
Net income
    —         —         —         —         —         173       173  
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balances at September 30, 2019
    11,570,064     $ 12       14,527,479     $ 15     $ 154,362     $ (106,075   $ 48,314  
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
6

EVERQUOTE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
    
Nine Months Ended September 30,
 
    
            2020            
   
            2019            
 
Cash flows from operating activities:
    
Net loss
   $ (7,434   $ (6,183
Adjustments to reconcile net loss to net cash provided by
operating activities:
    
Depreciation and amortization expense
     2,174       1,593  
Stock-based compensation expense
     17,990       9,257  
Provision for bad debt
     15       479  
Changes in operating assets and liabilities, net of effects from acquisition:
    
Accounts receivable
     (9,328     (12,927
Prepaid expenses and other current assets
     2,048       (1,754
Other assets
     (222     (2
Accounts payable
     10,030       6,532  
Accrued expenses and other current liabilities
     (2,325     3,414  
Deferred revenue
     191       127  
Other long-term liabilities
     764       (79
  
 
 
   
 
 
 
Net cash provided by operating activities
     13,903       457  
  
 
 
   
 
 
 
Cash flows from investing activities:
    
Acquisition of property and equipment, including costs capitalized
for development of
internal-use
software
     (2,708     (2,198
Acquisition of business
     (14,930     —    
  
 
 
   
 
 
 
Net cash used in investing activities
     (17,638     (2,198
  
 
 
   
 
 
 
Cash flows from financing activities:
    
Proceeds from exercise of stock options
     3,562       2,056  
  
 
 
   
 
 
 
Net cash provided by financing activities
     3,562       2,056  
  
 
 
   
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
     (173     315  
Cash, cash equivalents and restricted cash at beginning of period
     46,304       41,884  
  
 
 
   
 
 
 
Cash, cash equivalents and restricted cash at end of period
   $ 46,131     $ 42,199  
  
 
 
   
 
 
 
Supplemental disclosure of noncash investing and financing information:
    
Acquisition of property and equipment included in accounts payable
   $ 42     $ —    
Fair value of contingent consideration in connection with
acquisition included in equity
   $ 1,335     $ —    
Fair value of contingent consideration in connection with acquisition
included in other long-term liabilities
   $ 416     $ —    
Reconciliation of cash, cash equivalents and restricted cash:
    
Cash and cash equivalents
   $ 45,881     $ 41,949  
Restricted cash (included in other assets)
     250       250  
  
 
 
   
 
 
 
Total cash, cash equivalents and restricted cash shown in the statement
of cash flows
   $ 46,131     $ 42,199  
  
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
7

EVERQUOTE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, health and commercial insurance. The Company generates revenue by selling consumer referrals to insurance provider customers, consisting of carriers and agents, and indirect distributors in the United States.
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.
In addition, the Company is subject to risks and uncertainties relating to the ongoing outbreak of the novel strain of coronavirus
(“COVID-19”),
which the World Health Organization declared a pandemic in March 2020. 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. Work-from-home and other measures have introduced additional operational risks, including cybersecurity risks, and may adversely affect the way the Company and its customers and insurance providers conduct business. The extent to which the
COVID-19 pandemic
impacts the Company’s workforce, business, financial condition, results of operations and the Company’s use of estimates in preparation of its consolidated financial statements will depend on future developments, which are highly uncertain and cannot be predicted at this time.
On July 2, 2018, the Company completed an initial public offering (“IPO”), in which it issued and sold 3,125,000 shares of Class A common stock at a public offering price of $18.00 per share, resulting in net proceeds to the Company of approximately $48.6 million after deducting underwriting discounts and commissions and other offering costs. Additionally, certain of the Company’s stockholders sold 1,562,500 shares of Class A common stock at the same public offering price of $18.00 per share. The Company did not receive any proceeds from the sale of shares by its stockholders.
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 $7.4 million for the nine months ended September 30, 2020 and $7.1 million for the year ended December 31, 2019. As of September 30, 2020, the Company had an accumulated deficit of $114.4 million. The Company has primarily funded its operations through issuances of shares of redeemable convertible preferred stock and common stock, debt, including a revolving line of credit with Western Alliance Bank, which was renewed in August 2020, cash flows from operations and proceeds from the Company’s IPO. As of the issuance date of these 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 financial statements.
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 consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, EverQuote NI Limited. All intercompany accounts and transactions have been eliminated in consolidation.
The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or
non-public
entities, the Company has adopted the new or revised standard at the time
non-public
entities adopt the new or revised standard. Because the market value of the Company’s Class A common stock held by
non-affiliates
exceeded $700.0 million as of June 30, 2020, the Company will have been public for more than one year and it has filed at least one annual report, the Company will cease to be an emerging growth company as of December 31, 2020. As a result, beginning with the Company’s Annual Report on Form
10-K
for the year ending December 31, 2020, the Company will be subject to certain requirements that apply to other public companies but did not previously apply to the Company due to its status as an emerging growth company, including the provisions of Section 404 of the Sarbanes-Oxley Act, which require that the Company’s independent registered public accounting firm provides an attestation report on the effectiveness of the Company’s internal control over financial reporting.
 
8

2. Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The condensed balance sheet at December 31, 2019 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 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 financial statements and the notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form
10-K for
the year ended December 31, 2019 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 September 30, 2020 and results of operations for the three and nine months ended September 30, 2020 and 2019 and cash flows for the nine months ended September 30, 2020 and 2019 have been made. The Company’s results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020 or any other interim 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 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 collectability of accounts receivable, the expensing and capitalization of website and software development costs, goodwill and acquired intangible assets, commissions receivable, the contingent consideration liability, the valuation of stock-based awards and income taxes. The Company bases its estimates on historical experience, known trends and other market-specific or other 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. Actual results may differ from those estimates or assumptions. Due to the
COVID-19
pandemic, there has been uncertainty and disruption in the global economy and financial markets. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of November 6, 2020, the date of issuance of these consolidated financial statements. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
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 receivable. The Company maintains cash balances that may be in excess of federally insured limits at two 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. For the three months ended September 30, 2020, one customer represented 26% of total revenue. For the nine months ended September 30, 2020, one customer represented 23% of total revenue. For the three months ended September 30, 2019, one customer represented 23% of total revenue. For the nine months ended September 30, 2019, two customers represented 21% and 11
%, respectively,
 
of total revenue. As of September 30, 2020, two customers accounted for 18% and 11
%, respectively,
 
of the accounts receivable balance. As of December 31, 2019, two customers accounted for 14% each of the accounts 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:
 
 
 
Level 1—Quoted prices in active markets for identical assets or liabilities.
 
 
 
Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
 
 
 
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
 
9

The Company’s cash equivalents 
of
$15.8
 million as of September 30, 2020, consisting of money market funds, are carried at fair value based on Level 1 inputs. The carrying values of the Company’s accounts receivable
, commissions receivable and commissions payable
,
 accounts payable and accrued expenses and other current liabilities approximate their fair values due to the short-term nature of these assets and liabilities. The Company’s contingent consideration included in other long-term liabilities is carried at fair value based on Level 3 inputs (see Note 3).
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. Management reviews accounts receivable on a periodic basis and reserves for receivables in the Company’s allowance for doubtful accounts on a specific identification basis when they are determined to be uncollectible. After the Company has exhausted all collection efforts, the outstanding receivable is written off against the allowance. The Company had no allowance for doubtful accounts as of September 30, 2020 and December 31, 2019, as the Company deemed all amounts to be collectible.
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 (included within prepaid expenses and other current assets) are estimated commissions expected to be received within one year, while
the non-current portion
of commissions receivable (included within other assets
(non-current))
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 or nine months ended September 30, 2020.
Commissions Payable
Commissions payable represent the estimated share of policy commissions earned by the Company’s agents. The current portion of commissions payable (included within accrued expenses and other current liabilities) are estimated commissions expected to be paid within one year, while
the non-current portion
of commissions payable (included within other long-term liabilities) are expected to be paid beyond one year.
Goodwill and Acquired Intangible Assets
The Company records goodwill when consideration paid in a business acquisition exceeds the value of the net assets acquired. The Company’s 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, the Company 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 income (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. The Company has determined that there is a single reporting unit for the purpose of conducting this goodwill impairment assessment. The Company assesses 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. The Company amortizes 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.
Revenue Recognition
The Company derives its revenue by selling consumer referrals to its insurance provider customers, including insurance carriers and agents. To determine revenue recognition for arrangements that the Company determines are within the scope of the revenue standard, 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.
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. 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
 
10

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. The Company recognizes 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.
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.
Total revenue is comprised of revenue from the following distribution channels:
 
 
  
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
  
    2020    
 
 
    2019    
 
 
    2020    
 
 
    2019    
 
Direct channels
     93     95     93     94
Indirect channels
     7     5     7     6
  
 
 
   
 
 
   
 
 
   
 
 
 
     100     100     100     100
  
 
 
   
 
 
   
 
 
   
 
 
 
Total revenue is comprised of revenue from the following insurance verticals (in thousands):
 
    
Three Months Ended September 30,
    
Nine Months Ended September 30,
 
    
        2020        
    
        2019        
    
        2020        
    
        2019        
 
Automotive
   $ 74,779      $ 57,306      $ 207,014      $ 152,108  
Other
     15,198        9,806        42,629        22,904  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total Revenue
   $ 89,977      $ 67,112      $ 249,643      $ 175,012  
  
 
 
    
 
 
    
 
 
    
 
 
 
The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that would have been recognized is one year or less or the amount is immaterial. At September 30, 2020, the Company had not capitalized any costs to obtain any of its contracts.
Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in the accompanying 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 $1.7 million and $1.5 million as of September 30, 2020 and December 31, 2019, respectively. During the nine months ended September 30, 2020, the Company recognized revenue of $1.1 million that was included in the contract liability balance (deferred revenue) at December 31, 2019. 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.
Advertising Expense
Advertising expense consists of variable costs that are related to attracting consumers to the Company’s marketplace and generating consumer quote requests, promoting its marketplace to insurance carriers and agents, and increasing downloads of the Company’s social safe-driving mobile app EverDrive. In November 2019, the Company announced that it would no longer support EverDrive. The Company expenses advertising costs as incurred and such costs are included in sales and marketing expense in the accompanying statements of operations and comprehensive income (loss). During the three months ended September 30, 2020 and 2019, advertising expense totaled $60.5 million and $46.2 million, respectively. During the nine months ended September 30, 2020 and 2019, advertising expense totaled $172.9 million and $123.5 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 affect is anti-dilutive.
 
11

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:
 
    
September
 
30,
 
    
        2020        
    
        2019        
 
Options to purchase common stock
     2,773,222        3,042,559  
Unvested restricted stock units
     3,646,253        3,056,392  
  
 
 
    
 
 
 
     6,419,475        6,098,951  
  
 
 
    
 
 
 
The Company may also issue up to 97,922 shares of common stock as contingent consideration in connection with its acquisition of Crosspointe Insurance & Financial Services, LLC (see Note 3).
The Company has two classes of common stock outstanding: Class A common stock and Class B common stock. As more fully described in Note
7
, 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 share of Class B common stock are equivalent.
Recently Issued Accounting Pronouncements
In February 2016, the
FASB issued ASU No. 2016-02,
 Leases (Topic 842)
 (“ASU 2016-02”), which sets out
the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. For public entities, the guidance was effective for annual reporting periods beginning after December 15, 2018 and for interim periods within those fiscal years. For non-public entities and emerging growth companies that choose to take advantage of the extended transition periods, the guidance is effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted. ASU 2016-02 initially required adoption using a modified retrospective approach, under which all years presented in the financial statements would be prepared under the revised guidance. In July 2018, the FASB
issued ASU No. 2018-11,
 Leases (Topic 842)
, which added an optional transition method under which financial statements may be prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities will
recognize a cumulative catch-up adjustment to the
opening balance of retained earnings in the period of adoption. In November 2019, the FASB issued ASU
No. 2019-10,
which deferred the effective date for
non-public
entities and emerging growth companies that choose to take advantage of the extended transition periods to annual reporting periods beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Since the Company will cease to be an emerging growth company as of December 31, 2020, the Company is required to adopt the standard during the fourth quarter of 2020. The Company plans to adopt
ASU No. 2016-02 using
the modified retrospective approach transition method as of the date of adoption such that prior periods will not be restated. The Company expects that the adoption will result in the
recognition of material right-of-use assets and lease
liabilities on its consolidated balance sheet.
In June 2016, the FASB issued ASU
No. 2016-13,
Financial Instruments – Credit Losses (Topic 326)
. The new standard adjusts the accounting for assets held at amortized costs basis, including marketable securities accounted for as available for sale, and trade receivables. The standard eliminates the probable initial recognition threshold and requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2019 and for interim periods within those fiscal years.
For non-public entities
and emerging growth companies that choose to take advantage of the extended transition periods, the guidance was effective for annual reporting periods beginning after December 15, 2020. Since the Company will cease to be an emerging growth company as of December 31, 2020, the Company is required to adopt the standard during the fourth quarter of 2020. The Company is currently assessing the impact of the adoption of this guidance on its financial statements.
In August 2018, the FASB issued ASU
No. 2018-15,
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
The objective of the standard is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use
software. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2019 and for interim periods within those fiscal years.
For non-public entities
and emerging growth companies that choose to take advantage of the extended transition periods, the guidance is effective for annual reporting periods beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. Since the Company will cease to be an emerging growth company as of December 31, 2020, the Company is required to adopt the standard during the fourth quarter of 2020. The Company is currently assessing the impact of the adoption of this guidance on its financial statements.
 
12

3. Acquisition
On September 1, 2020, the Company completed the acquisition of Crosspointe Insurance & Financial
Services, LLC (“Crosspointe”), a
health insurance agency headquartered in Evansville, Indiana. Crosspointe is a sales and decision support contact center that connects consumers to high quality healthcare insurance in a customer-centric environment and serves the individual and family health, Medicare, and ancillary health product markets. This acquisition enables the Company to accelerate and expand its opportunity in the health insurance market, by providing insurance shoppers with a broader range of health insurance products through access to a greater number of carrier partners, and an improved and more personalized customer buying experience.
The Crosspointe acquisition was accounted for as a purchase of a business under ASC Topic 805,
Business Combinations
. Under the acquisition method of accounting, the assets and liabilities of Crosspointe were recorded as of the acquisition date, at their respective fair values. The purchase consideration of
 
$16.7 million reflected a cash payment of $14.9 million,
subject to adjustment, and contingent consideration of
$1.8 million representing the fair value of
Class A
common stock issuable to the former owners of Crosspointe upon achievement of certain revenue targets over three years.
The cash payment may be adjusted for certain working capital adjustments which are identified by the Company within 90 days of the acquisition date. These adjustments, if any, will affect the final amount of the purchase price and the allocation of that purchase price to the working capital accounts. The former owners of Crosspointe are eligible to receive up to
 
97,922
shares of Class A common stock upon achievement of certain revenue targets. These revenue targets are measured in annual intervals. 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 the Company has recorded the fair value of these shares within 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, the Company has recorded the fair value of these shares as a long-term liability. The Company’s consolidated financial statements reflect the preliminary allocation of the purchase price to the assets and liabilities assumed based on fair value as of the date of the acquisition. The Company’s preliminary estimate of the fair value of specifically identifiable assets acquired and liabilities assumed as of the date of acquisition is subject to change upon finalizing its valuation analysis. The final determination may result in changes in the fair value of certain assets and liabilities as compared to these preliminary estimates, which is expected to be finalized in the first half of 2021.
The Company estimated the fair value of the contingent consideration using a Monte Carlo simulation model under a risk-neutral framework and the fair market value of the estimated number of shares of Class A common stock to be issued. Significant assumptions and estimates utilized in the model include the risk-adjusting discount rate, volatility and forecasted revenue. As of September 1, 2020, the acquisition date, the estimated fair value of the contingent consideration included in other long-term liabilities was
 
$
0.4
 
million. The Company will continue to assess the probability that the third revenue target will be met and at what level, and any subsequent changes in the estimated fair value of the liability resulting from changes to the probability assessment or changes in the fair market value of the Class A common stock to be issued will be reflected in earnings until the liability is fully settled
. There was
no
change
to the acquisition date amount recognized or any changes in the range of outcomes or assumptions used to develop the fair value of the contingent consideration liability as of September 30, 2020.
 
The following tables summarize the
preliminary
purchase price for Crosspointe and the
preliminary
allocation of the purchase price (in thousands):
 
Cash paid
   $
            
14,930  
Fair value of contingent consideration
to be settled
 in stock
     1,751  
  
 
 
 
Total purchase price consideration
   $ 16,681  
  
 
 
 
Assets Acquired and Liabilities Assumed:
    
Commission receivable (current and long-term)
   $ 3,636  
Customer Relationships
 
 
3,600
 
Other identifiable
intangible assets
     270  
Goodwill
     9,618  
  
 
 
 
Total assets acquired
     17,124  
Accounts payable and accrued expenses (current and long-term)
     (443
  
 
 
 
Total allocation of purchase price consideration
   $ 16,681  
  
 
 
 
Customer relationships were valued using the income approach, which included Level 3 inputs. Acquired intangible assets are amortized over their estimated useful lives of three to five years based on the pattern of consumption of the economic benefits of the intangible asset.
 
13

Commissions receivable were recorded at constrained lifetime values.
Goodwill was recognized for the excess purchase price over the fair value of the net assets acquired. Goodwill is primarily attributable to the workforce of the acquired business (which is not eligible for separate recognition as an identifiable intangible asset) and future growth. Goodwill from the Crosspointe acquisition is included within the Company’s one reporting unit and is included in the Company’s enterprise-level annual review for impairment. Goodwill resulting from the acquisition of Crosspointe is deductible for tax purposes.
The Company incurred $0.5 million of acquisition-related costs during the three and nine months ended September 30, 2020, which were expensed as incurred. The operating
results
of the acquired entity have been included in the consolidated financial statements beginning on the acquisition date but have not been disclosed as the Company does not account for the results of the acquired entity separate from its own results. Pro forma results of operations for the acquisitio
n
 have not been presented as they are not material to the Company’s consolidated results of operations.
4. Goodwill and Acquired Intangible Assets
The carrying amount of goodwill was $9.6 million as of September 30, 2020 related to goodwill from the Company’s acquisition of Crosspointe. Goodwill is not amortized, but instead
will
be
 
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.
Acquired intangible assets consisted of the following (in thousands):
 
     
          
     
          
     
          
     
          
 
 
  
 
 
  
September 30, 2020
 
 
  
Weighted
Average
Useful Life
 
  
Gross
Amount
 
  
Accumulated
Amortization
 
  
Carrying
Value
 
 
  
(in years)
 
  
 
 
  
 
 
  
 
 
                                           
Customer relationships
     5     
$
3,600      $ (85    $ 3,515  
Other identifiable intangible assets
     3.7
 
 
     270        (10      260  
     
 
 
    
 
 
    
 
 
 
     
$
3,870
 
 
   $ (95    $ 3,775  
     
 
 
    
 
 
    
 
 
 
Future amortization expense of the intangible assets as of September 30, 2020, is expected to be as follows (in thousands):
 
Year Ending December 31,
      
2020
 (Remaining three months)
  
$
425
2021
   1,211
2022
   846
2023
   624
2024
   450
Thereafter
   219
  
 
 
 
   $ 3,775  
  
 
 
 
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
 
    
  September 30,  
    
  December 31,  
 
    
2020
    
2019
 
Accrued employee compensation and benefits
   $ 4,120      $ 2,388  
Accrued advertising expenses
     4,352        4,119  
Accrued legal settlement
     —          4,750  
Other current liabilities
     2,752        1,968  
  
 
 
    
 
 
 
   $ 11,224      $ 13,225  
  
 
 
    
 
 
 
 
14

6. Loan and Security Agreement
As of December 31, 2019, the Company had available borrowings of $11.0 million under its amended Loan and Security Agreement, as modified by the 2018 Loan and Modification Agreement (the “2018 Loan Modification”). Pursuant to the 2018 Loan Modification, borrowings under the revolving line of credit could not exceed 80% of eligible accounts receivable balances and bore interest
at one-half percent
(0.5%) above the greater of 4.25% or the prime rate. The 2018 Loan Modification was amended during the three months ended March 31, 2020 to extend the availability of the line of credit to May 2020. The 2018 Loan Modification was
 
amended and restated in August 2020 (the “2020 Loan Agreement”) to increase the available line of credit to $25.0 million, extend the maturity date to August 2022 and amend the interest rate. Pursuant to the 2020 Loan Agreement, borrowings under the revolving line of credit cannot exceed 80% of eligible accounts receivable balances and bear interest at the greater of 3.25% or the prime rate. Borrowings are collateralized by substantially all of the Company’s assets and property. As of September 30, 2020, the Company had available borrowings of $25.0 million under the 2020 Loan Agreement. 
Under the
2020
Loan Agreement, the Company is subject to specified affirmative and negative covenants until maturity. These covenants include limitations on the Company’s ability to incur additional indebtedness and engage in certain fundamental business transactions, such as mergers or acquisitions. In addition,
the Company is required to maintain a financial performance covenant: 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 which would meet the criteria of a default under the 2020 Loan Agreement include failure to make payments when due, insolvency events, failure to comply with covenants or material adverse events with respect to the Company.
7. Equity
Each share of Class A common stock entitles the holder to one vote for each share on all matters submitted to a vote of the Company’s stockholders at all meetings of stockholders and written actions in lieu of meetings. Each share of Class B common stock entitles the holder to ten votes for each share on all matters submitted to a vote of the Company’s stockholders at all meetings of stockholders and written actions in lieu of meetings.
Holders of both classes of common stock are entitled to receive dividends, when and if declared by the board of directors.
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. Automatic conversion shall occur upon the occurrence of a transfer of such share of Class B common stock or at the date and time, or the occurrence of an event, specified by a vote or written consent of the holders of a majority of the voting power of the then outstanding shares of Class B common stock. A transfer is described as a sale, assignment, transfer, conveyance, hypothecation or disposition of such share or any legal or beneficial interest in such share other than certain permitted transfers as described in the Restated Certificate of Incorporation, including a transfer to a holder of Preferred Stock. Each share of Class B common stock held by a stockholder shall automatically convert into one fully paid and
non-assessable
share of Class A common stock nine months after the death or incapacity of the holder of such Class B common stock.
8. Stock-Based Compensation
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.
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 of Class A common stock (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
 
15

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 1,321,908 shares effective as of January 1, 2020 in accordance with the provisions of the 2018 Plan described above. As of September 30, 2020, 375,478 shares remain available for future grants 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.
Award Issuances
During the nine months ended September 30, 2020, the Company granted 1,045,558 service-based RSUs with an aggregate grant date fair value of $45.2 million.
During the nine months ended September 30, 2020, the Company granted 138,645 service- and performance-based RSUs with an aggregate grant date fair value of $5.9 million.
Option Issuances
During the nine months ended September 30, 2020, the Company granted 531,108 options with service-based, market-based and performance-based vesting conditions. The fair value of these grants is estimated using a Monte Carlo simulation model. Assumptions and estimates utilized in the model include the risk-free interest rate, dividend yield, expected stock volatility and the estimated period to achievement of the performance and market condition.
 
The following table presents the assumptions used in the Monte Carlo simulation model to determine the fair value of these stock-based awards on their issuance date: 
 
Risk-free interest rate
     1.5
Expected volatility
     49.0
Expected dividend yield
     0
Derived service period (in years)
     4.1  
Stock-based compensation expense is recognized when the achievement of the performance-based vesting conditions is probable regardless of whether the market condition is achieved. The aggregate grant date fair value of these options was $8.1 million. As the Company has deemed achievement of the performance condition to be probable, the Company is recognizing stock-based compensation for these awards over the estimated service period using the graded-vesting method. During the three and nine months ended September 30, 2020, the Company recognized stock-based compensation expense of $0.6 million and $1.4 million, respectively, related to these awards.
Stock-Based Compensation
The Company recorded stock-based compensation expense in the following expense categories of its statements of operations and comprehensive
income (
loss
)
(in thousands):
 
    
Three Months Ended

September 30,  
    
Nine Months Ended

September 30,
 
    
2020
    
2019
    
2020
    
2019
 
Cost of revenue
  $ 111     $ 52     $ 253     $ 139  
Sales and marketing
    3,080       991       7,322       2,676  
Research and development
    2,228       1,061       5,366       2,914  
General and administrative
    1,781       1,165       5,049       3,528  
 
 
 
   
 
 
   
 
 
   
 
 
 
  $ 7,200     $ 3,269     $ 17,990     $ 9,257  
 
 
 
   
 
 
   
 
 
   
 
 
 
Stock-based compensation expense for the three and nine months ended September 30, 2020 included a total of $1.0 million and $2.2 million, respectively, related to unvested RSUs and option awards with performance-based vesting conditions, including options with performance- and market-based vesting conditions, for which the performance-based condition has not yet been achieved but has been deemed probable of being achieved.
 
16

As of September 30, 2020, unrecognized compensation expense for RSUs and option awards with service-based vesting conditions and RSUs and option awards with performance-based vesting conditions either achieved or deemed probable of being achieved was $63.0 million, which is expected to be recognized over a weighted average period of 3.9 years. Additionally, the Company had unrecognized compensation expense of $6.1 million related to unvested awards with performance-based vesting conditions, which have not been deemed probable.
9. Commitments and Contingencies
Operating Leases
The Company leases office space in Cambridge, Massachusetts under
a non-cancelable operating
lease that expires in September 2024. The Company also leases office space in Woburn, Massachusetts under
a non-cancelable operating
lease that expires in January 2022. In the first quarter of 2020, the Company entered into a three-year
non-cancelable
operating lease in Seattle, Washington under which lease payments commenced in the second quarter of 2020.
 
In connection with the acquisition of Crosspointe, the Company acquired a ten-year non-cancelable operating lease in Evansville, Indiana that expires in August 2030.
Lease incentives, payment escalations and rent holidays specified in the lease agreements are accrued or deferred as appropriate such that rent expense per square foot is recognized on a straight-line basis over the terms of occupancy. As of September 30, 2020 and December 31, 2019, the Company had a deferred rent liability of $1.1 million
 and $1.2 million, respectively.
During the three months ended September 30, 2020 and 2019, the Company recorded rent expense of $0.7 million and $0.6 million, respectively. During the nine months ended September 30, 2020 and 2019, the Company recorded rent expense of $1.9 million and $1.8 million, respectively.
As of September 30, 2020 and December 31, 2019, the Company maintained security deposits of $0.5 million and $0.4 million, respectively, with the landlords of its leases, which amounts are included in other assets on the Company’s balance sheet.
Future minimum lease payments under the operating leases as of September 30, 2020 are as follows (in thousands):
 
Year Ending December 31,
      
2020 (Remaining three months)
   $ 750  
2021
     3,025  
2022
     2,872  
2023
     2,785  
2024
     2,099  
Thereafter
     1,003  
  
 
 
 
   $ 12,534  
  
 
 
 
Indemnification Agreements
In the normal course of business, the Company may provide indemnification of varying scope and terms to third parties and enter 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 September 30, 2020 and December 31, 2019, 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 financial statements as of September 30, 2020 and December 31, 2019.
Legal Proceedings
On February 15, 2019, Sean F. Townsend, a purported holder of the Company’s common stock, filed a civil action in the Supreme Court for the State of New York against the Company, the Company’s chief executive officer, chief financial officer, general counsel, the Company’s directors, and the Company’s underwriters for its IPO, captioned
Townsend v. EverQuote, Inc. et al.
, Index No. 650997-2019. On February 26, 2019, Mark Townsend, a second purported holder of the Company’s common stock, filed an identical civil action in the Supreme Court for the State of New York against the same defendants, captioned
Townsend v. EverQuote,
 
17

Inc. et al.
, Index No. 651177-2019. The plaintiffs alleged claims for violations of Sections 11, 12(a), and 15 of the Securities Act of 1933, on behalf of a purported class of all persons or entities who purchased or otherwise acquired the Company’s common stock pursuant or traceable to the Registration Statement issued in connection with its IPO. Those claims generally challenged as false or misleading certain of the Company’s disclosures about its quote request volume. The plaintiffs sought, on behalf of themselves and the purported class, damages, costs and expenses of litigation, and rescission, disgorgement, or other equitable relief. After filing a motion to dismiss the plaintiffs’ consolidated amended complaint, the Company participated in a mediation and agreed to pay $4.8 million in settlement of all of plaintiffs’ purported class claims, of which $3.6 million was reimbursed by the Company’s insurance provider. The parties thereafter on February 6, 2020 filed a Stipulation of Settlement settling the litigation in principle, subject to final approval of the Court. On June 11, 2020, the Court entered a final order approving the settlement and terminating the case.
The Company was contacted by a representative from a state tax assessor’s office requesting remittance of uncollected sales taxes. The Company does not believe its services are taxable in this state and is investigating this request and intends to vigorously defend this position. If the Company does not prevail in its position, uncollected sales taxes due for the period could amount to approximately $1.5 million, including interest and penalties. The Company has not recorded any liabilities related to this matter as the loss has not been deemed probable.
On April 29, 2020, EverQuote was named as a defendant in a putative, statewide (Colorado) class action lawsuit filed in U.S. District Court for the District of Colorado captioned Scott M. Runyon v EverQuote, Inc. The complaint
alleged
that the Company violated the Telephone Consumer Protection Act by making unsolicited marketing calls to his cellphone and those of other Colorado residents using an automatic telephone dialing system without prior express consent. Plaintiff
sought
, among other forms of relief, statutory damages of $500 to $1,500 for each alleged violation and an order enjoining future violations. Plaintiff also
asserted
an individual claim against the Company for invasion of privacy arising out of the same calls to his cellphone and a claim for unspecified damages. 
The Company believed Plaintiff’s claims lacked merit. 
On July 23, 2020, the U.S. District Court granted a stay pending the Supreme Court’s decision in Facebook Inc. v. Duguid, Case
No. 19-511. 
In October 2020 the case was resolved on an individual
basis
 
for
an immaterial amount
, with EverQuote denying any wrongdoing, and
the Company expects
the case will be dismissed in November 2020
.
On July 30, 2020, EverQuote was named as a defendant in a putative, nationwide class action lawsuit filed in U.S. District Court for the Western District of Pennsylvania captioned Carol Scavo v. EverQuote, Inc. The complaint
alleged
that the Company violated the Telephone Consumer Protection Act by sending unsolicited text message advertisements to her cellphone and those of other United States residents using an automatic telephone dialing system without prior express consent. Plaintiff
sought
, among other forms of relief, statutory damages of $500 to $1,500 for each alleged violation and an order enjoining future violations.
 
The Company believed Plaintiff’s
claims
lacked
 
merit
. The case was resolved on an individual
basis
 
for
an immaterial amount
, with EverQuote denying any wrongdoing
,
 and
was dismissed pursuant to settlement in October 2020
.
The Company is from time to time subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of its business. While the outcome of these other claims cannot be predicted with certainty, management does not believe that the outcome of any of these other legal matters will have a material adverse effect on the Company’s results of operations or financial condition.
10. 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 September 30, 2020 and 2019 and contributed $0.5 million and $0.4 million during the nine months ended September 30, 2020 and 2019, respectively.
11. 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 and to a lesser extent a small amount of office space. During the three months ended September 30, 2020 and 2019, the Company recorded expense of $0.7 million and $1.6 million, respectively, related to these arrangements. During the three months ended September 30, 2020 and 2019, the Company paid $0.4 million and
 
$1.3
 

million, respectively, related to these arrangements. During the nine months ended September 30, 2020 and 2019, the Company recorded expense of $2.4 million and $4.2 million, respectively, related to these arrangements. During the nine months ended September 30, 2020 and 2019, the Company paid $2.4 million and $4.2 million, respectively, related to these arrangements. As of September 30, 2020 and December 31, 2019, amounts due to related-party affiliates totaled $0.5 million and $1.1 million, respectively, which were included in accounts payable on the balance sheets.
 
18

The Company
subleased
a portion of its office space to one of its related-party affiliates
, which sublease ended in September 2020
.
 During each of the three months ended September 30, 2020 and 2019, the Company recorded other income of $0.1 million related to this arrangement and received $0.1 million in payments. During the nine months ended September 30, 2020 and 2019, the Company recorded other income of $0.3 million and $0.2 million, respectively, related to this arrangement and received $0.3 million and $0.2 million, respectively, in payments. As of September 30, 2020 and December 31 2019, there were no amounts due from related-party affiliates.
 
19

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion 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 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, 2019, on file with the Securities and Exchange Commission. The following discussion 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 and elsewhere in this Quarterly Report on Form
10-Q,
particularly in the section titled
“Risk Factors.”
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. Our goal is to reshape insurance shopping for consumers and improve the way insurance providers attract and connect with customers shopping for insurance. With over 11 million consumer visits per month, our results-driven marketplace, powered by our proprietary data and technology platform, matches and connects consumers seeking to purchase insurance with relevant options from our broad direct network of insurance providers, saving consumers and providers time and money.
Consumers may view insurance as a simple commodity with standard pricing. However, 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.
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.
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 and renters insurance in our marketplace.
 
   
In 2019, we announced our partnership with Bold Penguin to add commercial insurance in our marketplace.
 
   
In September 2020, we completed the acquisition of Crosspointe Insurance & Financial Services, LLC, or Crosspointe.
In the three months ended September 30, 2020 and 2019, our total revenue was $90.0 million and $67.1 million, respectively, representing year-over-year growth of 34%. We had a net loss of $3.2 million and net income of $0.2 million for the three months ended September 30, 2020 and 2019, respectively, and had $5.2 million and $3.9 million in Adjusted EBITDA for the three months ended September 30, 2020 and 2019, respectively. In the nine months ended September 30, 2020 and 2019, our total revenue was $249.6 million and $175.0 million, respectively, representing year-over-year growth of 43%. We had net losses of $7.4 million and $6.2 million for the nine months ended September 30, 2020 and 2019, respectively, and had $13.0 million and $4.1 million in Adjusted EBITDA for the nine months ended September 30, 2020 and 2019, 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.
 
20
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. To support the health and well-being of our employees, customers, partners and communities, our employees are working remotely as of November 6, 2020. While such disruptions have not had a material adverse impact on our financial results through September 30, 2020, such disruptions may impact consumer insurance shopping behavior. We are monitoring and managing our operations for the ongoing impact of
COVID-19.
In addition, with many insurance carriers reporting strong profitability as a result of the
COVID-19
pandemic, we believe that carriers will further invest in online customer acquisition to increase their volume of new premiums and that the
COVID-19
pandemic may accelerate the transition from offline to online customer acquisition in the insurance industry.
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 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.
Shift from indirect to direct distribution channels
We have shifted the majority of our revenue from our indirect channel, consisting of aggregators and media networks, to our direct channel, consisting of carriers and agents. This shift has been an important part of our maturity and evolution. The benefits of direct distribution include improved consumer experience, higher pricing per referral, improved pricing stability, greater revenue predictability, richer data feedback, better performance and stronger relationships with providers and consumers. In 2018, direct distribution accounted for 90% of total revenue. In 2019, direct distribution accounted for 94% of total revenue. In the three and nine months ended September 30, 2020, direct distribution accounted for 93% of total revenue.
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. We believe revenue per quote request will increase over time.
 
21

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 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 the 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. As we attract more consumers to our platform and they complete quote requests, we are able to refer them to our insurance provider customers, selling more referrals while also collecting data, which we use to improve user experience, conversion rates and, we believe, consumer satisfaction.
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, 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”.
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.
 
22

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:
 
    
Three Months Ended
September 30,
    
Nine Months Ended

September 30,
 
    
2020
    
2019
    
2020
    
2019
 
     (in thousands)      (in thousands)  
Automotive
   $ 74,779        57,306      $ 207,014      $ 152,108  
Other
     15,198        9,806        42,629        22,904  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total Revenue
   $ 89,977      $ 67,112      $ 249,643      $ 175,012  
  
 
 
    
 
 
    
 
 
    
 
 
 
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.
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, promoting our marketplace to carriers and agents, and increasing downloads of our social safe-driving mobile app EverDrive. In November 2019, we announced that we would no longer support EverDrive. 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. General and administrative expenses also include acquisition-related costs, which 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. We expect general and administrative expenses to increase as we incur the costs of compliance associated with being a publicly traded company, including legal, audit, insurance and consulting fees.
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.
 
23

Income Taxes
We have not recorded income tax benefits for the net losses we have incurred in the three or nine months ended September 30, 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, 2019, we had federal net operating loss carryforwards of $31.1 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 $22.1 million do not expire but may be limited in their usage to an annual deduction equal to 80% of annual taxable income. As of December 31, 2019, we had state net operating loss carryforwards of $25.8 million, which may be available to offset future taxable income and expire at various dates beginning in 2027. As of December 31, 2019, we also had federal and state research and development tax credit carryforwards of $3.5 million and $1.9 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 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.
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 items that we exclude in the calculation of Adjusted EBITDA. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects.
Adjusted EBITDA is not prepared in accordance with GAAP and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of Adjusted EBITDA rather than net income (loss), which is the most directly comparable financial measure calculated and presented in accordance with GAAP. Some of these limitations are:
 
   
Adjusted EBITDA excludes stock-based compensation expense as it has recently been, and will continue to be for the foreseeable future, a significant
recurring non-cash expense
for our business;
 
   
Adjusted EBITDA excludes depreciation and amortization expense and, although this is
a non-cash expense,
the assets being depreciated and amortized may have to be replaced in the future;
 
   
Adjusted EBITDA excludes acquisition-related costs that affect cash available to us;
 
   
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.
 
24

The following table reconciles Adjusted EBITDA to net income (loss), the most directly comparable financial measures calculated and presented in accordance with GAAP.
Reconciliation of Net Loss to Adjusted EBITDA:
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
    
2020
    
2019
    
2020
    
2019
 
     (in thousands)      (in thousands)  
Net income (loss)
   $ (3,184    $ 173      $ (7,434    $ (6,183
Stock-based compensation
     7,200        3,269        17,990        9,257  
Depreciation and amortization
     731        588        2,174        1,593  
Acquisition-related costs
     480        —          480        —    
Interest income
     (18      (168      (176      (536
  
 
 
    
 
 
    
 
 
    
 
 
 
Adjusted EBITDA
   $ 5,209      $ 3,862      $ 13,034      $ 4,131  
  
 
 
    
 
 
    
 
 
    
 
 
 
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2020 and 2019
The following table sets forth our results of operations for the periods shown:
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
        2020        
   
        2019        
   
        2020        
   
        2019        
 
    (in thousands)     (in thousands)  
Statement of Operations Data:
       
Revenue(1)
  $ 89,977     $ 67,112     $ 249,643     $ 175,012  
 
 
 
   
 
 
   
 
 
   
 
 
 
Cost and operating expenses(2):
       
Cost of revenue
    5,378       4,052       15,690       11,222  
Sales and marketing
    73,598       53,212       204,663       143,358  
Research and development
    8,149       5,596       21,574       14,685  
General and administrative
    6,141       4,334       15,614       12,641  
 
 
 
   
 
 
   
 
 
   
 
 
 
Total cost and operating expenses
    93,266       67,194       257,541       181,906  
 
 
 
   
 
 
   
 
 
   
 
 
 
Loss from operations
    (3,289     (82     (7,898     (6,894
 
 
 
   
 
 
   
 
 
   
 
 
 
Other income:
       
Interest income
    18       168       176       536  
Other income
    87       87       288       175  
 
 
 
   
 
 
   
 
 
   
 
 
 
Total other income
    105       255       464       711  
 
 
 
   
 
 
   
 
 
   
 
 
 
Net income (loss)
  $ (3,184   $ 173     $ (7,434   $ (6,183
 
 
 
   
 
 
   
 
 
   
 
 
 
Other Financial and Operational Data:
       
Quote requests
    6,291       5,516       20,460       14,148  
Variable marketing margin
  $ 29,428     $ 20,912     $ 76,721     $ 51,480  
Adjusted EBITDA(3)
  $ 5,209     $ 3,862     $ 13,034     $ 4,131  
 
(1)
Comprised of revenue from the following distribution channels:
 
    
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
    
    2020    
   
    2019    
   
    2020    
   
    2019    
 
Direct channels
     93     95     93     94
Indirect channels
     7     5     7     6
  
 
 
   
 
 
   
 
 
   
 
 
 
     100     100     100     100
  
 
 
   
 
 
   
 
 
   
 
 
 
 
25

(2)
Includes stock-based compensation expense as follows:
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
    
    2020    
    
    2019    
    
    2020    
    
    2019    
 
     (in thousands)      (in thousands)  
Cost of revenue
   $ 111      $ 52      $ 253      $ 139  
Sales and marketing
     3,080        991        7,322        2,676  
Research and development
     2,228        1,061        5,366        2,914  
General and administrative
     1,781        1,165        5,049        3,528  
  
 
 
    
 
 
    
 
 
    
 
 
 
   $ 7,200      $ 3,269      $ 17,990      $ 9,257  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
(3)
See “—Non-GAAP Financial
Measure” for information regarding our use of Adjusted EBITDA and a reconciliation of such measure to the comparable GAAP financial measure.
Revenue:
 
    
Three Months Ended September 30,
    
Change
   
Nine Months Ended September 30,
    
Change
 
    
        2020        
    
        2019        
    
Amount
    
%
   
        2020        
    
        2019        
    
Amount
    
%
 
     (dollars in thousands)     (dollars in thousands)  
Revenue
   $ 89,977      $ 67,112      $ 22,865        34.1   $ 249,643      $ 175,012      $ 74,631        42.6
The increase in revenue in the three months ended September 30, 2020 was due to an increase of $17.5 million and $5.4 million from our automotive and other insurance marketplace verticals, respectively. The increase in revenue in the nine months ended September 30, 2020 was due to an increase of $54.9 million and $19.7 million from our automotive and other insurance marketplace verticals, respectively. The increase in revenue from our automotive vertical in the three months ended September 30, 2020 was primarily due to an increase in revenue per quote request. The increase in revenue from our automotive vertical in the nine months ended September 30, 2020 was due to an increase in quote requests resulting from increased advertising to attract consumers and an increase in revenue per quote request. The increase in revenue in the three and nine months ended September 30, 2020 from other verticals was 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
 
    
Three Months Ended September 30,
   
Change
   
Nine Months Ended September 30,
   
Change
 
    
        2020        
   
        2019        
   
Amount
    
%
   
        2020        
   
        2019        
   
Amount
    
%
 
     (dollars in thousands)     (dollars in thousands)  
Cost of revenue
   $ 5,378     $ 4,052     $ 1,326        32.7   $ 15,690     $ 11,222     $ 4,468        39.8
Percentage of revenue
     6.0     6.0          6.3     6.4     
Cost of revenue increased in the three and nine months ended September 30, 2020 primarily due to increased third-party call center costs of $0.2 million and $1.4 million, respectively, due primarily to increased volume of call referrals and to increased hosting costs of $0.6 million and $1.1 million, respectively. Technical services increased by $0.3 million and $0.9 million in the three and nine months ended September 30, 2020, respectively, due primarily to increased volume of consumer referrals. Depreciation and amortization expense also increased by $0.1 million and $0.6 million, respectively, in the three and nine months ended September 30, 2020.
 
26

Sales and Marketing
 
    
Three Months Ended September 30,
   
Change
   
Nine Months Ended September 30,
   
Change
 
    
        2020        
   
        2019        
   
Amount
    
%
   
        2020        
   
        2019        
   
Amount
    
%
 
     (dollars in thousands)     (dollars in thousands)  
Sales and marketing expense
   $ 73,598     $ 53,212     $ 20,386        38.3   $ 204,663     $ 143,358     $ 61,305        42.8
Percentage of revenue
     81.8     79.3          82.0     81.9     
Sales and marketing expenses increased in the three and nine months ended September 30, 2020 primarily due to an increase in advertising expenditures of $14.3 million and $49.4 million, respectively, and an increase in personnel-related costs of $4.7 million and $9.2 million, respectively. Personnel-related costs for the three months ended September 30, 2020 and 2019 included stock-based compensation expense of $3.1 million and $1.0 million, respectively. Personnel-related costs for the nine months ended September 30, 2020 and 2019 included stock-based compensation expense of $7.3 million and $2.7 million, respectively.
Research and Development
 
    
Three Months Ended September 30,
   
Change
   
Nine Months Ended September 30,
   
Change
 
    
        2020        
   
        2019        
   
Amount
    
%
   
        2020    
   
        2019        
   
Amount
    
%
 
     (dollars in thousands)     (dollars in thousands)  
Research and development expense
   $ 8,149     $ 5,596     $ 2,553        45.6   $ 21,574     $ 14,685     $ 6,889        46.9
Percentage of revenue
     9.1     8.3          8.6     8.4     
Research and development expenses in the three and nine months ended September 30, 2020 increased primarily due to an increase in personnel-related costs 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 three months ended September 30, 2020 and 2019 included stock-based compensation expense of $2.2 million and $1.1 million, respectively. Personnel-related costs for the nine months ended September 30, 2020 and 2019 included stock-based compensation expense of $5.4 million and $2.9 million, respectively.
General and Administrative
 
    
Three Months Ended September 30,
   
Change
   
Nine Months Ended September 30,
   
Change
 
    
        2020        
   
        2019        
   
Amount
    
%
   
        2020        
   
        2019        
   
Amount
    
%
 
     (dollars in thousands)     (dollars in thousands)  
General and administrative expense
   $ 6,141     $ 4,334     $ 1,807        41.7   $ 15,614     $ 12,641     $ 2,973        23.5
Percentage of revenue
     6.8     6.5          6.3     7.2     
General and administrative expenses increased in the three and nine months ended September 30, 2020 primarily due to an increase in personnel-related costs of $1.2 million and $2.5 million, respectively. We also incurred $0.5 million of acquisition-related costs in the three and nine months ended September 30, 2020 related to our acquisition of Crosspointe. Insurance costs increased by $0.2 million and $0.4 million in the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019. These increases were partially offset by a decrease in our provision for bad debt of $0.1 million and $0.5 million in the three and nine months ended September 30, 2020, respectively, and a decrease in legal fees related to the settlement of prior litigation. Personnel-related costs for the three months ended September 30, 2020 and 2019 included stock-based compensation expense of $1.8 million and $1.2 million, respectively. Personnel-related costs for the nine months ended September 30, 2020 and 2019 included stock-based compensation expense of $5.0 million and $3.5 million, respectively.
Other Income
Interest income was less than $0.1 million in the three months ended September 30, 2020, compared to $0.2 million in the three months ended September 30, 2019 and was $0.2 million in the nine months ended September 30, 2020 compared to $0.5 million in the nine months ended September 30, 2019. The decreases in interest income were primarily due to lower interest rates on invested cash balances. Other income included sublease income of $0.1 million in each of the three months ended September 30, 2020 and 2019, and $0.3 million and $0.2 million in the nine months ended September 30, 2020 and 2019, respectively.
 
27

Quote Requests
 
    
Three Months Ended September 30,
    
Change
   
Nine Months Ended September 30,
    
Change
 
    
        2020        
    
        2019        
    
Amount
    
%
   
        2020        
    
        2019        
    
Amount
    
%
 
     (in thousands except percentages)     (in thousands except percentages)  
Quote requests
     6,291        5,516        775        14.1     20,460        14,148        6,312        44.6
Quote requests increased for the three and nine months ended September 30, 2020 due to increased spending on advertising and improvements in our traffic acquisition.
Variable Marketing Margin
 
   
Three Months Ended
September 30,
   
Change
   
Nine Months Ended
September 30,
   
Change
 
   
        2020        
   
        2019        
   
Amount
   
%
   
        2020        
   
        2019        
   
Amount
   
%
 
    (dollars in thousands)     (dollars in thousands)  
Revenue
  $ 89,977     $ 67,112     $ 22,865       34.1   $ 249,643     $ 175,012     $ 74,631       42.6
Less: total advertising expense (a component of sales and marketing expense)
    60,549       46,200           172,922       123,532      
 
 
 
   
 
 
       
 
 
   
 
 
     
Variable marketing margin
  $ 29,428     $ 20,912     $ 8,516       40.7   $ 76,721     $ 51,480     $ 25,241       49.0
 
 
 
   
 
 
       
 
 
   
 
 
     
Percentage of revenue
    32.7     31.2         30.7     29.4    
The increase in variable marketing margin was due primarily to an increased volume of quote requests and, in the three months ended September 30, 2020, an increase in revenue per quote request.
Liquidity and Capital Resources
Since our inception, we have primarily funded our operations through issuances of shares of redeemable convertible preferred stock and common stock, debt, including a revolving line of credit with Western Alliance Bank, which we renewed in August 2020, cash flows from operations and proceeds from our IPO. As of September 30, 2020, we had cash and cash equivalents of $45.9 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. 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. Our future capital requirem