NOTE TO EDITORS: The Following is An Investment Opinion Issued by Spruce Point Capital Management
Warns Investors That Prior To Going Public Via A SPAC In December 2020, Porch Was Hemorrhaging Cash, In Technical Default With Lenders, And Has Concealed Numerous Business Dealings from 2017-2021 Critical To Investors’ Evaluation of The Company
Expresses Concern That Porch Recorded A $33 Million Transaction On Its Books – One We Believe Allowed Porch To Avoid A Staggering Goodwill Impairment – That Had Absolutely Nothing To Do With The Company And Made Conflicting Statements About It To The SEC
Highlights That Spruce Point’s Founder Helped Expose A Flawed Business Strategy and Accounting Shenanigans Occurring At The Active Network, Where Porch CEO Matt Ehrlichman Previously Served As Chief Strategy Officer
Spruce Point Capital Management, LLC ("Spruce Point" or "we" or "us"), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled "A Porch On A Flimsy Foundation" that outlines why shares of Porch Group, Inc. (NASDAQ: PRCH) ("Porch" or the "Company"), face up to 70% downside risk. Download or view the report by visiting www.SprucePointCap.com and follow us on Twitter @SprucePointCap for additional information and exclusive updates.
Ben Axler, Spruce Point’s Founder and Chief Investment Officer, commented:
"Despite a clear appetite in the red-hot SPAC market with 2021 SPACs already outpacing total capital raised in 2020, we believe investors should proceed with caution before investing in companies hyped as technology disruptors. Many of these companies completely lack any strategy, opting to throw spaghetti on the wall to find a business model. We firmly believe that Porch is The Active Network 2.0, a successful short from years past, where Porch’s CEO Matt Ehrlichman was Chief Strategy Officer and promoted the Company in public, while privately hatching Porch. We believe The Active Network pursued a similar business and financial strategy to Porch in its hopes of becoming the ‘everything’ software portal with expanding vertical solutions to group-based activities. The Active Network failed as a public company. Now almost 10 years since its founding, we believe Porch has been unable to find a business model proven to generate positive cash flow and took full advantage of the frothy SPAC market in July 2020 as it was in default of debt covenants with a going concern warning. We believe that Porch’s recent uptick in share price is correlated to new home sales and home remodeling – COVID-19 tailwinds that look to become headwinds as the economy re-opens and mortgage rates rise. For these reasons, and many others we detail in our full report, Spruce Point recommends investors exercise extreme caution and urge shareholders to closely examine why we believe Porch is a Strong Sell."
Spruce Point Report Overview
We urge investors to review key findings in Spruce Point’s report and hold management accountable for answers to the following issues:
We believe Porch’s CEO Matt Ehrlichman has unethically portrayed his biography to investors when at The Active Network (formerly NYSE: ACTV) by concealing his involvement in HelpScore, the predecessor to Porch.com, and at worse committed securities misrepresentation. Mr. Ehrlichman’s biography claims he was responsible for 85% of ACTV’s P&L – an impressive feat for a high-ranking executive – but we believe it would be more accurate to state 85% of its financial losses and failure as a public company are attributable to him. In addition, Mr. Ehrlichman claims he helped grow revenues from $65 million to $420 million and takes credit for a 2011 IPO. However, we believe this is also misleading. Mr. Ehrlichman’s employment did not commence until March 2007 and trailing 12 months revenues at the 2011 IPO reached $289 million, not $420 million. Mr. Ehrlichman mysteriously disappeared as an executive at ACTV before it ever achieved $420 million of sales. Further, ACTV never announced his resignation, and his name last appeared in an S-1 filed January 20, 2012 and completely disappeared in the 2012 10-K. Yet, according to his biography, he founded Porch in 2011. We believe these significant inconsistencies in Porch’s CEO’s biography should give investors serious pause and concern.
Evidence shows that Porch has concealed or obscured numerous business activities from 2017–2021. As a result, we believe investors cannot see how miserably Porch failed in its corporate partnerships such as eBay, Wayfair and Overstock and through its acquisition strategy. For example, Porch is currently being sued for fraud by Kandela for allegedly selling "Vaporwear" or services that do not exist. Kandela details in its lawsuit allegations that Porch exaggerated its capabilities and figures in a reckless manner. In the context of our recent findings that experts believe Porch’s claimed customer lead economics are 40% less in reality, we believe investors should exercise extreme caution. Additionally, Spruce Point finds evidence indicating the Company is obscuring another service offering that does not exist. When we called Cinch to verify its partnership with Porch, a customer service representative had never heard of it.
We believe Porch recorded a $33 million transaction on its books – one we believe allowed Porch to avoid a staggering goodwill impairment – that had absolutely nothing to do with the Company and made conflicting statements about it to the SEC. In our opinion, Porch gave a long-winded and non-sensical explanation as to why it booked $33 million as a stock-based compensation expense when Lowe’s sold a portion of Porch equity to CEO Mr. Ehrlichman for just $4 million ($0.25 per share). Porch wants investors to believe that Lowe’s would irrationally sell its equity at $33 million below fair value and that it should receive a $33 million credit add-back to Adjusted EBITDA as a result of the transaction. But months later, when discussing the CEO’s compensation for 2019, the Company explicitly stated it was not a party to the Lowe’s stock transaction, and thus did not view the $33 million as part of his compensation. This bold statement contradicts what Porch told the SEC earlier, which was that the transaction should be viewed as stock compensation. If Porch was not a party to the transaction, why is it recorded in Porch’s financial statements?
We believe Porch understates competitive threats. A close look at Porch’s prospectus reveals limited discussion of its competitive landscape. In fact, Porch does not provide one single, specific company which it competes against. Spruce Point believes Porch is failing to address the elephant in the room: Google and Amazon. Google was listed as a Porch partner, but both companies launched local home service businesses. In fact, Inc. Magazine labeled the home service market as "Low-Tech", while Porch tries to convince investors it’s a high growth SaaS business. In addition, we learned that Porch also competes with Red Ventures, Updater and HomeGauge (a subsidiary of American Family Insurance, an $11 billion insurance company). Red Ventures is backed by Silver Lake, a $79 billion technology investment firm. We also believe new competition will eventually enter the home inspection software space from InspectionGo, led by a former key Porch employee.
Porch positions gross margin as a key metric it should be valued on. Following expert interviews and a forensic review of its accounting, we believe Porch has artificially inflated the value of inspection business leads and its gross margin. Porch books revenues for selling leads to home service companies but does not account for the cost of these leads which are effectively barter transactions. Barter transactions have historically come under immense scrutiny by the SEC, resulting in many accounting fraud cases. We conservatively estimate Porch booked $8.1 million of revenue in 2019 with zero cost associated with it and therefore estimate gross margins are overstated by at least 230 basis points. Our research also finds that experts familiar with Porch disagree with its home inspection economic assumptions, a major pillar of its growth strategy. Porch claims each lead is worth $25 but experts indicate the real value is $14 - $15, or 40% lower. In addition, Porch claims it receives $4 per inspection, but that is the maximum possible amount assuming no volume discounts. An expert confirmed that Porch has many large inspection agencies as clients that receive discounts.
Evidence indicates that Porch has never made money and its recent uptick in share price is likely correlated to short-term COVID-19 tailwinds, including new home sales and house remodeling. We find tremendous problems with Porch’s recent spree of low-quality acquisitions made for 2x sales and believe new competition is coming. Porch wants investors to believe it is a high-growth, high-margin SaaS company deserving of a 9x sales multiple. However, we believe investors will begin to see Porch for what it truly is: a low-quality lead generation business and another attempt by Mr. Ehrlichman to recreate The Active Network vertical software story, which ultimately failed and was taken private at 2x forward sales. 2x forward sales are also instructive prices paid for Red Ventures home services businesses. Applying a generous 2x – 4x multiple range on Porch’s 2021E sales puts its stock value at $5.06 - $8.56 per share, a (50% - 70%) downside.
Please note that the items summarized in this press release are expanded upon and supported with data, public filings and records, and images in Spruce Point’s full report. As a reminder, our full report, along with its investment disclaimers, can be downloaded and viewed at www.SprucePointCap.com.
As disclosed, Spruce Point has a short position in Porch and owns derivative securities that stand to net benefit if its share price falls.
About Spruce Point
Spruce Point Capital Management, LLC is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities. Spruce Point Capital Management, LLC is a member of the Financial Industry Regulatory Authority, CRD number 288248.
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