Item 4.02. Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.
On March 14, 2023, Porch Group, Inc. (the “Company”) management and the Audit Committee of the Board of Directors of the Company (the “Audit Committee”) concluded that the previously issued unaudited condensed consolidated financial statements as of and for the quarters ended March 31, 2022, June 30, 2022 and September 30, 2022 (the “2022 quarterly financial statements”) of the Company included in the Company’s Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission (“SEC”) on May 10, 2022, August 9, 2022, and November 9, 2022, respectively, require restatement and should no longer be relied upon. In addition, any previously issued or filed earnings releases, investor presentations or other communications describing the Company’s quarterly financial statements and other related financial information covering the quarters ended March 31, 2022, June 30, 2022 and September 30, 2022 should no longer be relied upon.
Under the Company’s third-party quota share reinsurance program, the Company’s insurance subsidiary has ceded some, but not all, the liabilities related to losses and loss adjustment expenses (LAE) to third-party reinsurers. The losses ceded to third-party reinsurance companies are subject to certain terms, which vary by participating reinsurer, which impact the amount of losses that the Company can cede under those respective terms. The Company identified an error in the accounting for these arrangements, in that the terms were not fully considered in the calculation of losses ceded to third party reinsurance companies. As a result of this error, the Company determined that the cost of revenue was misstated during the interim periods as follows: $4.0 million understated for the three months ended March 31, 2022; $0.7 million understated for the three months ended June 30, 2022 (for a total of $4.7 million understated for the six months ended June 30, 2022); and $0.3 million overstated for the three months ended September 30, 2022 (for a net total understatement of $4.4 million for the nine months ended September 30, 2022).
In connection with this restatement, the Company is also correcting for other immaterial errors related to revenue, selling and marketing expenses, interest expense, prepaid expenses and other current assets, goodwill, deferred revenue, refundable customer deposits, and current debt. The restatement of the 2022 quarterly financial statements does not impact the Company’s reported cash position.
The Company does not intend to file amended Quarterly Reports on Form 10-Q for the 2022 quarterly financial statements. However, the restated financial information related to such periods is attached as Exhibit 99.2 to this Current Report on Form 8-K and will be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”), which the Company expects to file on March 16, 2023. The Company will also effect the restatement of its 2022 quarterly financial statements in connection with the future filings of its Quarterly Reports on Form 10-Q in 2023.
The Company’s management had previously concluded and disclosed that the Company’s disclosure controls and procedures were not effective at December 31, 2021 due to the existence of material weaknesses in internal control over financial reporting. The Company’s management will also report ineffective internal control over financial reporting in the 2022 Form 10-K and will give consideration to the effect of the restatements described above.
The Company’s management and the Audit Committee have discussed the matters disclosed in this Current Report on Form 8-K pursuant to this Item 4.02 with Ernst & Young LLP, the Company’s independent registered public accounting firm.