The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our audited consolidated financial
statements and the related notes appearing elsewhere in this Annual Report on
Form 10-K. This discussion contains forward-looking statements that are based
upon current plans, expectations, and beliefs that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements. You should review the section titled
"Special Note Regarding Forward-Looking Statements" for a discussion of
forward-looking statements and the section titled "Risk Factors" for a
discussion of factors that could cause actual results to differ materially from
the results described in or implied by the forward-looking statements contained
in the following discussion and analysis and elsewhere in this Annual Report on
Form 10-K. Our historical results are not necessarily indicative of the results
that may be expected for any period in the future.
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Overview
Blend Labs, Inc. was founded in 2012, with a vision to bring simplicity and
transparency to financial services, so everyone can gain access to the capital
they need to lead better lives. To realize this vision, we have built a
market-leading cloud-based software platform for financial services firms that
is designed to power the end-to-end consumer journey for any banking product.
Our software platform was built in an extensible, modular, and configurable
fashion to support continued product expansion. We have technology, data, and
service providers on our software platform, including an extensive marketplace
of insurance carriers, realtors, and settlement agencies. Our products and
marketplaces provide multiple opportunities for us to serve financial services
firms and consumers and drive revenue growth.
Our rapid growth reflects continued product innovation and increased transaction
volume as we continue to attract financial services firms to our software
platform and grow with them as they serve consumers. Financial services firms
have been shifting for years to a digital-first approach to acquiring consumers,
delivering products, and deepening existing consumer relationships. This
imperative to compete through digital-first consumer experiences creates a
compelling opportunity for Blend. We believe there is a large, untapped
opportunity to provide additional product offerings and drive increased
transaction volume for financial institutions and consumers using our software
platform.
We are continually seeking to enhance the end-to-end banking journeys we power
through our software platform. To accelerate the adoption of innovations in our
mortgage and home equity products, on June 30, 2021 we acquired 90.1% ownership
of Title365 , a leading title insurance agency that offers title, escrow and
other trustee services.
Our Business Model
Our success-based business model is designed to align our growth with the
interests of our customers. We offer our products through software-as-a-service
agreements where fees are assessed based on completed transactions, such as a
funded loan, new account opening, or closing transaction. We do not charge for
abandoned applications or rejected applications, even though they cause us to
incur costs related to these applications. Completed transaction fees are
determined by the number and type of software platform components that are
needed to support each product offering. Completed transaction fees are not
impacted by the dollar size of transactions; however, we provide volume-based
discounts to customers as they complete a higher volume of transactions on our
software platform. Customers also have the opportunity to secure discounts by
agreeing to contractual minimums. With our success-based business model, we are
focused on driving revenue growth by enabling our customers to more efficiently
process and complete transactions using our software platform.
We focus on customer success to drive transaction volumes and opportunities for
follow-on sales. Our products are sold through a direct sales force that
continues to manage customer relationships on an ongoing basis post-sale.
Customers often complete an initial deployment for one or two products and then
add more products over time. The length of the sales cycle for our products
generally declines for the second and subsequent products we sell to a financial
services firm, highlighting our high customer satisfaction.
We also earn revenue through commissions or service fees when consumers use our
integrated marketplaces to select a real estate agent, property and casualty
insurance carrier, or our software-enabled title and settlement services entity,
which excludes revenue from Title365 . These commissions or service fees are
generated from consumers and are incremental to what we earn from our financial
services firm customers on completed transactions. Our marketplaces are intended
to provide greater consumer choice and flexibility and to help financial
services firms by providing them with a more complete offering in partnership
with Blend. As we drive adoption of our software platform, we expect these
commissions and service fees to comprise a larger part of our revenue.
The acquisition of Title365 has enabled our customers to streamline the title,
settlement, and closing process at scale for mortgages, home equity lines of
credit, and home equity loans, and we plan to continue to invest in improving
and integrating settlement services into those banking products. In performing
title search services, Title365 serves as an agent to place and bind title
insurance policies with third-party underwriters. Title365 escrow, closing and
settlement services are primarily associated with managing the closing of real
estate transactions, including the processing of funds on behalf of the
transaction participants, gathering and recording the required closing
documents, and providing notary and other real estate or title-related
activities. Title365 also provides title services in connection with a borrower
default and with the issuance of home equity lines of credit and home equity
loans.
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Recent Developments
Initial Public Offering
OnJuly 20, 2021 , we completed our IPO, with a subsequent partial exercise of the underwriters' option to purchase additional shares onAugust 17, 2021 . We issued and sold an aggregate of 22,468,111 shares of Class A common stock, par value$0.00001 , at an offering price of$18.00 per share. We received aggregate net proceeds of$366.7 million , after deducting underwriters' discounts and commissions of$27.3 million and offering expenses of$10.4 million .
Acquisition of
OnJune 30, 2021 , we acquired 90.1% ownership ofTitle365 , a leading title insurance agency that offers title, escrow and other trustee services.Title365 has enabled our customers to streamline the title, settlement, and closing process at scale for mortgages, home equity lines of credit, and home equity loans. COVID-19 As a result of the COVID-19 pandemic, we temporarily closed our offices, required our employees and contractors to work remotely, and implemented travel restrictions, all of which represent a significant disruption in how we operate our business. The operations of our prospects, partners, and customers have likewise been disrupted. While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the duration and spread of the outbreak and the extent and effectiveness of containment actions, it has already had an adverse effect on the global economy, and the ultimate societal and economic impact of the COVID-19 pandemic remains unknown. We believe that demand for our software platform and our results of operations have not been adversely affected by the COVID-19 pandemic thus far. Throughout the COVID-19 pandemic, we have continued to partner with our financial services customers to expand the scope and availability of products through our software platform. For the year endedDecember 31, 2021 , we have seen a 50% increase in banking transactions on our software platform compared to the year endedDecember 31, 2020 , and we attribute a portion of this increase to the accelerating need for digital transformation at financial services firms. We believe that the COVID-19 pandemic is accelerating the transformation of financial services firms into digital businesses, is causing the regulatory environment to shift in favor of digitization (such as through the use of digital signatures and online notarization), and is driving consumer behavior away from traditional branches and toward digital channels for banking services, which we expect will generate additional opportunities for us in the future. The future impact of the COVID-19 pandemic on our business remains uncertain. See the section titled "Risk Factors" for further discussion of the challenges and risks we have encountered and could encounter related to the COVID-19 pandemic. Key Factors Affecting Our Performance
Ability to Increase Transaction Volume
Our success-based business model results in our revenue growing as we increase
our transaction volume. We increase transaction volume on our software platform
in part by attracting new customers and growing our relationships with existing
customers. Our success is in part based on our ability to address the evolving
needs of our customers and increase their usage of our software platform. Under
our "Customer First" model, we focus on building successful long-term
relationships and aligning revenue growth with value delivery. We invest in our
customers' success, beginning with an initial onboarding and rollout plan for
each customer. We also monitor utilization rates by customers on our software
platform to manage expanded use over time. Our proven ability to grow
transaction volume has been a function of product depth, technological
excellence, and the ability of our sales and marketing teams to match our
solutions with the strategic objectives of our customers. Our software platform
enables customers to process transaction volumes more effectively and create a
better consumer experience.
By increasing transaction volume on our software platform, we also enable and
drive our marketplace business. Our curated set of integrated marketplaces
enable consumers to shop for products and services at the precise moment of need
as they apply for loans and other products. These marketplaces enable consumers
to find real estate agents, insurance carriers, and automobiles for sale online
by quickly locating service providers and compare the rates. As we enable a
greater volume and diversity of transactions on our software platform, we can
help a greater number of consumers locate competitive service providers and
build trust with the Blend brand. Revenue from our marketplace business is
driven by our transaction volume and success of matching consumers with service
providers.
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Because our revenue growth is dependent on transaction volume growth, if our
transaction volume growth rate declines for any reason, including but not
limited to, reduced demand for our products and services, insufficient growth in
the number of financial services firms that utilize our products and services or
the lack of expansion of products and services within our existing customer
base, transaction volume and mix, particularly with our significant customers,
increased competition, or a decrease in the growth or reduction in size of our
overall market, our revenue growth rate would decline accordingly. In the last
quarter of 2021, we have seen industry estimates of mortgage transaction volume
showing greater than 30% decline year-over-year, which impacts both of our
segments. These industry estimates forecast a continued decline in total market
transaction volume in the next 12 to 24 months. In our Title365 segment, we have
already experienced lower than anticipated title transaction volume since the
closing of the acquisition and may experience further reductions in the future.
Investments in Growth
Our ability to maintain a differentiated platform and offering is dependent upon our speed of innovation. We will invest in our software platform to drive innovation and maintain our position as a leading provider of software for financial services firms for any banking product. To drive adoption and increase penetration within our customer base, we will continue to rapidly introduce new products and features. While we focus today on consumer banking, we believe we can rapidly expand our library of modular components to support commercial banking products as well. In addition, our low-code, drag-and-drop design tools will enable our customers to bring new, innovative products to market quickly and positions us with what we believe is a market-leading combination of platform capabilities and out-of-the-box product offerings. We believe that investment in research and development will contribute to our long-term growth but will also negatively impact our short-term profitability.
Developments in the Macroeconomic Environment
A large portion of our revenue is driven by mortgage and mortgage related transaction volumes. These volumes affect our mortgage business, title business and marketplace offerings. We expect the volumes of loans and financial products closed using our software platform and the volume of issued title insurance policies will continue to drive a large portion of our revenue for the foreseeable future. As those volumes are influenced by numerous macroeconomic factors, including interest rates, our business' performance will be impacted as the macro environment changes. For instance, as interest rates rise, we would expect to see a lower volume of refinance transactions, and in particular refinance mortgage transactions. InJanuary 2022 , theMortgage Bankers Association ("MBA") released theU.S mortgage originations forecast which indicated that the residential mortgage originations are expected to steadily decline in 2022 and 2023 before leveling out in 2024 as interest rates are expected to rise. InMarch 2022 , theU.S. Federal Reserve raised interest rates and has indicated it expects to raise interest rates again in the future. Declines in the mortgage origination volumes are likely to adversely affect our revenue, as we expect that our overall mortgage transaction volumes will decline in the near term due to the rising mortgage interest rates. Our revenue in the future periods will continue to be subject to these and other factors that are beyond our control and, as a result, are likely to fluctuate. We anticipate that as our platform grows and more consumer banking transactions occur on our software platform over the coming years, we will be less exposed to fluctuations in the macroeconomic environment. Key Business Metrics
In addition to the measures presented in our consolidated financial statements,
we use the following key business metrics to help us evaluate our business,
identify trends affecting our business, formulate business plans, and make
strategic decisions.
Blend Platform – Number of Transactions
Our success in the Blend Platform segment depends in part on increasing the
volume of mortgage and consumer banking transactions that take place on our
software platform. This occurs as we add new customers and complete more
transactions with existing customers, including when our existing customers
adopt additional products. Our software platform is built to be extensible,
modular, and configurable, so that our customers can easily utilize our
pre-built workflow technology, our marketplaces, and our integrations with
technology, data, and service providers. We design our new offerings to be
highly complementary to existing ones in order to increase the speed of adoption
and efficiently scale our revenue. This increasing attachment contributes
further to our growth.
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In ourTitle365 segment, closed orders represent the number of orders for title insurance or escrow services that were successfully fulfilled in each period with the issuance of a title insurance policy or provision of escrow services. The volume of closed orders is affected by the overall level of real estate activity, which is cyclical in nature and is affected by a number of factors, including the availability of mortgage credit, the cost of real estate, interest rate volatility, consumer confidence, employment and family income levels, and general economic conditions. We believe that the continued growth in commercial use of the internet will lead to the continued migration of traditional offline markets and industries online. Accordingly, we expect there to be a migration of theTitle365 legacy business to our software-enabled platform over time, and as a result, we expect theTitle365 closed orders within theTitle365 segment to decrease in future periods and the volume of software-enabled title, escrow, and settlement orders within the Blend Platform segment to increase.
The following tables set forth our key business metrics:
Year Ended December 31,
2021 2020 2019
(In thousands)
Blend Platform banking transactions:
Mortgage banking transactions(1) 1,811 1,316 448 Consumer banking transactions(1) 300 87 36 Total Blend Platform banking transactions 2,111 1,403 484 Title365 closed orders(2) 80 N/A N/A
(1) Includes estimated transactions for funded loans not yet reported for
the fourth quarter 2021.
(2) Represents the number of closed origination orders from the
acquisition date through
Key Components of Results of Operations
Revenue
Blend Platform
In our Blend Platform segment, we generate revenue from fees paid by customers
to access our platform. Fees are assessed based on completed transactions, such
as a funded loan, new account opening, or closing transaction. We do not charge
for abandoned applications or rejected applications, even though they cause us
to incur costs related to these applications. Arrangements with our customers do
not provide the contractual right to take possession of our software at any
point in time. Revenue is recognized when access to our platform is provisioned
to our customers for an amount that reflects the consideration we expect to be
entitled to in exchange for those services. To a lesser extent, we generate
revenue from professional services related to the deployment of our platform,
premium support services, and consulting services. We also earn revenue through
commissions or service fees when consumers use our Blend Platform integrated
marketplaces to select a real estate agent, property and casualty insurance
carrier, or title and settlement services entity.
Our customers have the ability to access our platform under subscription
arrangements, in which customers commit to a minimum number of completed
transactions at specified prices over the contract term, or under usage-based
arrangements, in which customers pay in arrears a variable amount for completed
transactions at specified prices. Our subscription arrangements are generally
noncancelable, and we may also earn additional overage fees if the number of
completed transactions exceeds the contractual amounts. Our usage-based
arrangements generally can be terminated at any time by the customer. We
recognize revenue ratably for our subscription arrangements because the customer
receives and consumes the benefits of our platform throughout the contract
period. We recognize fees for usage-based arrangements as the completed
transactions are processed using our platform. Revenue from usage-based
arrangements represented 29%, 12% and 12% of our Blend Platform segment revenue
for the years ended December 31, 2021 , 2020 and 2019, respectively.
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In ourTitle365 segment, we earn revenue from title search services for title insurance policies, escrow and other closing and settlement services. In performing title search services, we act as an agent to place and bind title insurance policies with third-party underwriters that ultimately provide the title insurance policy to our customers. Revenue related to title insurance is recognized net of the amount of consideration paid to the third-party insurance underwriters. Our revenues from escrow, closing and settlement services are primarily associated with managing the closing of real estate transactions, including the processing of funds on behalf of the transaction participants, gathering and recording the required closing documents, and providing notary and other real estate or title-related activities. Revenue related to these services is recognized at the closing of the underlying real estate transaction. We also offer title services in connection with a borrower default and with the issuance of a home equity lines of credit and home equity loans. Revenue for default title services and home equity services is recognized at the time of delivery of the title report. In future periods, due to our acquisition ofTitle365 , we expect that total revenue will increase significantly in dollar amounts, and that our revenue growth rate will increase in the near term due to the inclusion ofTitle365 revenue, which was not included in prior periods. We expect, however, that in periods subsequent to the twelve months following the closing of the acquisition ofTitle365 , our revenue growth rate will decline. We also expect that rising mortgage interest rates in the near term will drive down transaction volume, which will adversely affect both Blend Platform andTitle365 revenue. While we believe that the Blend Platform segment will continue to deliver positive growth, we expect that the title insurance and other services revenue within theTitle365 segment will face significant headwinds to growth and potentially short-term decline due to the projected industry mortgage origination volume decline. Cost of Revenue Blend Platform In our Blend Platform segment, cost of revenue consists primarily of costs of subscribed hosting, support, and professional services. Costs of subscribed hosting services and support revenue consist primarily of expenses related to hosting our services, third-party fees related to platform connectivity services, which include verification of income, assets, and employment, software licenses, amortization of internal use software development costs, and expenses related to providing support to our customers. Costs of professional services consist primarily of personnel-related expenses, including stock-based compensation expense, expenses associated with delivering implementation and other services, travel expenses, and allocated overhead costs. For each application submission, we incur third-party costs as described above, including costs for incomplete transactions for which we do not charge fees to our customers. The timing of those costs may not be aligned with the revenue recognized. We expect our cost of revenue to continue to increase in dollar amounts as we grow our business and revenue and decrease as a percentage of our revenue over the long term as we achieve greater scale in our business, although the percentage may fluctuate from period to period.
In ourTitle365 segment, cost of revenue consists of costs of title, escrow and other trustee services, which represent primarily personnel-related expenses of ourTitle365 segment as well as title abstractor, notary, and recording service expense provided by external vendors. In future periods, due to our acquisition ofTitle365 , we expect that cost of revenue will increase significantly in dollar amounts and that cost of revenue as a percentage of revenue will increase in the near term. Operating Expenses Research and Development Research and development expenses consist primarily of personnel-related expenses, including stock-based compensation expense, associated with our engineering personnel responsible for the design, development, and testing of new products and features, professional and outside services fees, software and hosting costs, and allocated overhead costs. Research and development costs are expensed as incurred. We expect that our research and development expenses will increase in dollar amount as our business grows but will decrease as a percentage of our revenue over the long term as we achieve greater scale in our business, although the percentage may fluctuate from period to period depending on the timing and extent of our research and development activities. 65 --------------------------------------------------------------------------------
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related expenses, including stock-based compensation expense, costs of general marketing activities and promotional activities, travel-related expenses, and allocated overhead costs. Sales commissions that are incremental costs of acquiring a contract with a customer as well as associated payroll taxes, are deferred and amortized on a straight-line basis over the estimated period of benefit, which we have determined to be three years. Sales commissions that are not incremental costs of acquiring a contract with a customer are expensed in the period incurred. We plan to increase the dollar amount of our investment in sales and marketing for the foreseeable future, primarily for increased headcount for our direct sales organization and investment in brand and product marketing efforts. We expect, however, that our sales and marketing expenses will decrease as a percentage of our revenue over time as we achieve greater scale in our business, although the percentage may fluctuate from period to period depending on fluctuations in the timing and extent of our sales and marketing activities.
General and Administrative
General and administrative expenses consist primarily of personnel-related expenses, including stock-based compensation expense (which includes amounts related to the stand-alone stock option award granted to our Co-Founder and Head of Blend inMarch 2021 ) for our finance, accounting, legal and compliance, human resources, and other administrative teams as well as for certain executives and professional fees, including audit, legal and compliance, and recruiting services. We expect to increase the size of our general and administrative function to support the growth of our business. Following our IPO, which was completed inJuly 2021 , we have incurred, and expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to publicly listed companies and costs related to compliance and reporting obligations pursuant to the rules and regulations of theSEC . As a public company, we have incurred, and expect to continue to incur increased expenses in the areas of insurance, investor relations, internal audit, and professional services. In addition, general and administrative expenses have increased, and we expect will continue to increase as a result of integrating and operatingTitle365 . As a result, we expect the dollar amount of our general and administrative expenses to increase for the foreseeable future. We expect, however, that our general and administrative expenses will decrease as a percentage of our revenue as we achieve greater scale in our business, although the percentage may fluctuate from period to period depending on the timing and extent of our general and administrative activities.
Amortization of acquired intangible assets
Amortization of acquired intangible assets relates to customer relationships
acquired in connection with the
amortized over the estimated useful life on a straight-line basis.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income earned from
our investment portfolio.
Interest Expense Interest expense relates primarily to debt financing used to fund our acquisition ofTitle365 and includes interest payable under the terms of the credit agreement entered into in connection with the closing of the acquisition ofTitle365 and amortization of debt discounts and debt issuance costs.
Provision for Income Taxes
Provision for income taxes consists primarily ofU.S. state income taxes and adjustments to the valuation allowance. We maintain a full valuation allowance on our net federal and state deferred tax assets as we have concluded that it is not more likely than not that such net deferred tax assets will be realized. For the year endedDecember 31, 2021 , we recognized a benefit for income taxes associated with the partial release of our historical valuation allowance resulting from the recognition of a deferred tax liability in connection with theTitle365 acquisition. 66 -------------------------------------------------------------------------------- Results of Operations
The following tables set forth our results of operations for the periods
presented in dollars and as a percentage of our revenue:
Year Ended December 31,
2021 2020 2019
(In thousands)
Revenue $ 234,495 $ 96,029 $ 50,671
Cost of revenue(1) 118,506 34,289 19,547
Gross profit 115,989 61,740 31,124
Operating expenses:
Research and development(1) 92,216 55,503 48,597
Sales and marketing(1) 84,077 51,420 37,660
General and administrative(1) 128,802 30,108 26,589
Amortization of acquired intangible assets 8,136 - -
Total operating expenses 313,231 137,031 112,846
Loss from operations (197,242) (75,291) (81,722)
Interest expense (11,279) - -
Other income (expense), net 493 700 283
Loss before income taxes (208,028) (74,591) (81,439)
Income tax benefit (expense) 38,886 (26) (13)
Net loss $ (169,142) $ (74,617) $ (81,452)
(1)Includes stock-based compensation as follows:
Year Ended December 31,
2021 2020 2019
(In thousands)
Cost of revenue $ 753 $ 79 $ 46
Research and development 13,184 4,250 3,431
Sales and marketing 7,167 3,675 966
General and administrative 49,740 2,120 5,446
Total stock-based compensation $ 70,844 $ 10,124 $ 9,889
Year Ended December 31,
2021 2020 2019
(as a % of revenue)*
Revenue 100 % 100 % 100 %
Cost of revenue 51 36 39
Gross margin 49 64 61
Operating expenses:
Research and development 39 58 96
Sales and marketing 36 54 74
General and administrative 55 31 52
Amortization of acquired intangible assets 3 - -
Total operating expenses 134 143 223
Loss from operations (84) (78) (161)
Interest expense (5) - -
Other income (expense), net - 1 1
Loss before income taxes (89) (78) (161)
Income tax benefit (expense) 17 - -
Net loss (72) % (78) % (161) %
____________
*Certain percentages may not foot due to rounding
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Comparison of the Years Ended December 31, 2021 and 2020
Revenue and Cost of Revenue
Year Ended December 31,
2021 2020 $ Change % Change
(In thousands)
Segment revenue:
Blend Platform:
Mortgage Banking $ 108,264 $ 80,061 $ 28,203 35 %
Consumer Banking and Marketplace 23,120 12,624 10,496 83 %
Professional Services 4,178 3,344 834 25 %
Total Blend Platform 135,562 96,029 39,533 41 %
Title365 98,933 - 98,933 100 %
Total revenue $ 234,495 $ 96,029 $ 138,466 144 %
Segment cost of revenue:
Blend Platform $ 49,917 $ 34,289 $ 15,628 46 %
Title365 68,589 - 68,589 100 %
Total cost of revenue $ 118,506 $ 34,289 $ 84,217 246 %
Segment gross profit:
Blend Platform $ 85,645 $ 61,740 $ 23,905 39 %
Title365 30,344 - 30,344 100 %
Total gross profit $ 115,989 $ 61,740 $ 54,249 88 %
Revenue increased $138.5 million , or 144%, for the year ended December 31, 2021
compared to the year ended December 31, 2020 , primarily due to an increase of
$98.9 million related to the inclusion of revenue from Title365 as well as an
increase in Blend Platform revenue of $39.5 million , or 41%. Within Blend
Platform revenue, Mortgage Banking revenue increased $28.2 million , or 35%,
primarily due to the higher volume of banking transactions with our customers,
and Consumer Banking and Marketplace revenue increased $10.5 million , or 83%,
primarily due to an increase in revenue from our integrated consumer banking
software solutions, adjacent products and marketplace offerings. Professional
Services revenue increased $0.8 million or 25%, primarily due to an increase in
demand for services associated with the deployment and support of our platform.
Cost of revenue increased $84.2 million , or 246%, for the year ended December
31, 2021 compared to the year ended December 31, 2020 , primarily resulting from
the inclusion of $68.6 million in Title365 operating costs. Additionally, Blend
Platform cost of revenue increased by $15.6 million , or 46%, primarily due to a
$8.9 million increase in personnel-related expenses primarily attributable to
increased headcount, a $4.6 million increase in third-party hosting costs and
software licenses relating to additional hosting services correlating with
increased revenue growth, and a $2.8 million increase in professional and
outside services to support our continued growth and expanded operations. The
increases were partially offset by a $1.9 million decrease in amortization of
previously capitalized internal-use software costs.
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Operating Expenses
Year Ended December 31,
2021 2020 $ Change % Change
(In thousands)
Operating expenses:
Research and development $ 92,216 $ 55,503 $ 36,713 66 %
Sales and marketing 84,077 51,420 32,657 64 %
General and administrative 128,802 30,108 98,694 328 %
Amortization of acquired intangible assets 8,136 - 8,136 100 %
Total operating expenses $ 313,231 $ 137,031 $ 176,200 129 %
Research and Development
Research and development expenses increased $36.7 million , or 66%, for the year
ended December 31, 2021 compared to the year ended December 31, 2020 , driven
primarily by an increase in Blend Platform research and development costs. This
increase was attributable to a $23.1 million increase in personnel and related
expenses due to an increase in research and development headcount dedicated to
the ongoing investment in our products, a $8.9 million increase in stock-based
compensation, a $1.7 million increase in software and hosting services to
support the growing business and increased volume of transactions on our
platform, and a $2.1 million increase in professional and outside services
relating to contractors to augment the engineering team and consulting services
to formulate technology.
Sales and Marketing
Sales and marketing expenses increased $32.7 million , or 64%, for the year ended
December 31, 2021 compared to the year ended December 31, 2020 , driven by an
increase in Blend Platform sales and marketing costs of $28.9 million , and an
increase of $3.8 million due to the inclusion of costs associated with the
operations of Title365 . The increase in Blend Platform sales and marketing costs
was primarily due to a $16.4 million increase in personnel and related expenses
attributable to increased sales and marketing headcount, a $3.4 million increase
in stock-based compensation, a $1.7 million increase in expense related to trade
shows and conferences, a $3.5 million increase in commissions, and a $1.5
million increase in advertising and promotion expenses.
General and Administrative
General and administrative expenses increased$98.7 million , or 328% for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , driven by an increase in Blend Platform general and administrative costs of$90.6 million , and an increase of$8.1 million due to the inclusion of costs associated with the operations ofTitle365 . The increase in Blend Platform general and administrative costs was primarily due to a$47.4 million increase in stock-based compensation, of which$38.8 million related to the stock option award with market-based performance targets granted to our Co-Founder and Head of Blend, including a catch up expense recognized upon the completion of the IPO, a$11.0 million increase in professional and other consulting services, a$12.0 million increase in transaction and integration costs associated with theTitle365 acquisition, a$16.7 million increase in personnel and related expenses attributable to increased administrative, finance and accounting, legal, and human resources headcount necessary to support the growth in our business and responsibilities of a public company, and a$2.0 million increase in software and hosting services to support our growing business and increased volume of transactions on our platform.
Amortization of acquired intangible assets
Amortization of acquired intangible assets increased$8.1 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , due to the amortization of the customer relationships intangible asset acquired in theTitle365 business combination. 69 -------------------------------------------------------------------------------- Comparison of the Years EndedDecember 31, 2020 and 2019
Revenue and Cost of Revenue
Year Ended December 31,
2020 2019 $ Change % Change
(In thousands)
Segment revenue:
Blend Platform:
Mortgage Banking $ 80,061 $ 40,311 $ 39,750 99 %
Consumer Banking and Marketplace 12,624 6,333 6,291 99 %
Professional Services 3,344 4,027 (683) (17 %)
Total revenue $ 96,029 $ 50,671 $ 45,358 90 %
Segment cost of revenue:
Blend Platform $ 34,289 $ 19,547 $ 14,742 75 %
Total cost of revenue $ 34,289 $ 19,547 $ 14,742 75 %
Segment gross profit:
Blend Platform $ 61,740 $ 31,124 $ 30,616 98 %
Total gross profit $ 61,740 $ 31,124 $ 30,616 98 %
Revenue increased $45.4 million , or 90%, for the year ended December 31, 2020
compared to the year ended December 31, 2019 . Within Blend Platform, Mortgage
Banking revenue increased $39.8 million , or 99%, primarily due to the higher
volume of banking transactions with our customers, Consumer Banking and
Marketplace revenue increased $6.3 million , or 99%, primarily due to an increase
in revenue from our integrated software solutions outside of mortgage, including
ancillary products and marketplace offerings, and Professional Services revenue
decreased by $0.7 million or 17%, primarily due to a decrease in professional
services associated with the deployment and support of our platform.
Cost of revenue increased $14.7 million , or 75%, for the year ended December 31,
2020 compared to the year ended December 31, 2019 . The increase was primarily
due to a $7.9 million increase in third-party hosting costs and software
licenses to support continued growth and expanded operations, and a $6.1 million
increase in third-party fees, primarily related to platform connectivity
services.
Operating Expenses
Year Ended December 31,
2020 2019 $ Change % Change
(In thousands)
Operating expenses:
Research and development $ 55,503 $ 48,597 $ 6,906 14 %
Sales and marketing 51,420 37,660 13,760 37 %
General and administrative 30,108 26,589 3,519 13 %
Total operating expenses $ 137,031 $ 112,846 $ 24,185 21 %
Research and Development
Research and development expenses increased $6.9 million , or 14%, for the year
ended December 31, 2020 compared to the year ended December 31, 2019 . The
increase was primarily due to a $4.0 million increase in personnel-related
expenses primarily attributable to an increase in research and development
headcount, a $2.8 million increase in professional and outside services, and a
$1.6 million increase in software and hosting services to support the growing
business and increased volume of transactions. The overall increase was
partially offset by a $1.0 million decrease in allocated overhead due to changes
in employee mix and reduction of facility costs due to the COVID-19 pandemic.
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Sales and Marketing
Sales and marketing expenses increased$13.8 million , or 37%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The increase was primarily due to an$11.4 million increase in personnel-related expenses primarily attributable to an increase in sales and marketing headcount, inclusive of a$1.5 million increase in stock-based compensation attributable to secondary sales in 2020, a$3.3 million increase in commission expense, and a$0.8 million increase in software and hosting costs. The overall increase was partially offset by a$3.1 million decrease in travel, entertainment, trade shows, conferences, and general advertising as a result of canceled in-person events because of restrictions from the COVID-19 pandemic.
General and Administrative
General and administrative expenses increased$3.5 million , or 13%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The increase was primarily due to a$2.4 million increase in professional fees and a$1.3 million increase in personnel-related expenses primarily attributable to an increase in our administrative, finance and accounting, legal, and human resources headcount necessary to support the growth in our business. The increase in personnel-related expenses was net of a$4.1 million decrease in stock-based compensation attributable to a decrease in secondary sales as compared to 2019. The overall increase was partially offset by a$0.3 million decrease in travel and related expenses as a result of restrictions from the COVID-19 pandemic. Liquidity and Capital Resources As ofDecember 31, 2021 , our principal sources of liquidity were cash, cash equivalents, marketable securities of$547.2 million , and availability of credit under our$25.0 million senior secured revolving credit facility. Cash and cash equivalents are comprised of bank deposits and money market funds. Marketable securities are comprised ofU.S. treasury and agency securities, commercial paper, and corporate debt securities. Most of our cash and cash equivalents are held inthe United States . Since our inception, we have financed our operations primarily through proceeds from the issuance of our stock and warrants and cash generated from the sale of our product offerings. We have generated significant losses from operations and negative cash flows from operating activities in the past as reflected in our accumulated deficit of$442.8 million as ofDecember 31, 2021 . We expect to continue to incur operating losses for the foreseeable future due to the investments that we intend to make in our business and, as a result, we may require additional capital resources to grow our business. During the year endedDecember 31, 2021 , we issued 22,418,562 shares of Series G convertible preferred stock at$13.827822 per share for total gross proceeds of approximately$310.0 million . All shares of Series G convertible preferred stock converted into an equal number of shares of Class A common stock upon completion of the IPO. OnJuly 20, 2021 , we completed our IPO, with a subsequent partial exercise of the underwriters' option to purchase additional shares onAugust 17, 2021 . We issued and sold an aggregate of 22,468,111 shares of Class A common stock, par value$0.00001 , at an offering price of$18.00 per share. We received aggregate net proceeds of$366.7 million , after deducting underwriters' discounts and commissions of$27.3 million and offering expenses of$10.4 million .
Credit Agreement
In connection with our acquisition ofTitle365 , onJune 30, 2021 , we entered into a credit agreement that provides for a$225.0 million term facility and a$25.0 million revolving facility. The term facility was funded onJuly 1, 2021 , and was fully drawn upon to provide, in part, the acquisition consideration being paid in connection with the purchase of a 90.1% interest inTitle365 . The revolving facility is currently available and undrawn.
There is no amortization of the outstanding principal amount under our credit
facility; all principal amounts thereunder are payable on the maturity date
(which is the fifth anniversary of the closing of the credit facility).
The obligations under our credit facility are guaranteed by all of our domestic subsidiaries (other thanTitle365 and its direct and indirect subsidiaries, and subject to certain thresholds and other exceptions), and secured by a lien on substantially all of our and our subsidiaries' assets (other than the equity issued by, and the assets of,Title365 and its direct and indirect subsidiaries and subject to certain thresholds and other exceptions). 71 -------------------------------------------------------------------------------- Our credit facility subjects us to certain affirmative and negative covenants, financial reporting obligations, and a minimum liquidity threshold that is tested quarterly. It also requires mandatory prepayment of all or a portion of the outstanding debt thereunder in certain circumstances.
Material Cash Requirements
Our material cash requirements arising from known contractual and other obligations primarily relate to our obligations under our Credit Agreement, leases for our office locations, and purchase commitments. As ofDecember 31, 2021 , our principal contractual cash obligations consisted of the following: Total Next 12 Months Beyond 12 Months (In thousands) Term Loan - principal$ 225,000 - $ 225,000 Term Loan - interest 87,915 19,543 68,372 Term Loan - exit fee 4,500 - 4,500 Operating lease obligations 21,739 4,780 16,959 Purchase commitments 12,602 8,376 4,226 Total$ 351,756 $ 32,699 $ 319,057 We believe that current cash, cash equivalents, marketable securities, and the availability of credit under our revolving credit facility will be sufficient to fund our operations for at least the next 12 months. Our future capital requirements, however, will depend on continued growth in our customer base, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and features, and the continuing market adoption of Blend's software platform. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. In the event that additional financing is required from outside sources, we may seek to raise additional funds at any time through equity, equity-linked arrangements, and debt. If we are unable to raise additional capital when desired and at reasonable rates, our business, results of operations, and financial condition would be adversely affected. See the section titled "Risk Factors-Risks Related to Our Business-Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies in the future could reduce our ability to compete successfully and harm our results of operations."
Cash Flows
The following table summarizes our cash flows for the periods presented:
Year Ended December 31,
2021 2020 2019
(In thousands)
Net cash used in operating activities $ (127,504) $ (65,013) $ (58,939)
Net cash used in investing activities (633,908) (7,917) (65,513)
Net cash provided by financing activities 933,573 90,756 132,666
Effect of exchange rates on cash, cash equivalents and
restricted cash
(9) - -
Net increase in cash, cash equivalents, and restricted
cash
$ 172,152
Cash Used in Operating Activities
Our largest source of operating cash is cash collections from our customers. Our
primary uses of cash from operating activities are for employee-related
expenditures, sales and marketing expenses, and third-party hosting costs.
Historically, we have generated negative cash flows from operating activities
and have supplemented working capital requirements through net proceeds from the
sale of equity securities.
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During the year ended December 31, 2021 , we used $127.5 million in cash for
operating activities. The primary factors affecting our operating cash flows
during this period were our net loss of $169.1 million , impacted by $94.0
million of non-cash charges, offset by a $39.3 million change in deferred taxes
primarily driven by the release of historical valuation allowance, and $13.1
million cash used as a result of changes in our operating assets and
liabilities. The non-cash charges primarily consisted of $70.8 million in
stock-based compensation, $10.6 million of depreciation and amortization, $5.0
million in amortization of deferred contract costs, $3.2 million of amortization
of our operating lease right-of-use assets, and $1.4 million of amortization of
debt discount and issuance costs. The cash used as a result of changes in our
operating assets and liabilities was primarily due to a $13.9 million increase
in prepaid expenses and other assets, a $5.6 million decrease in deferred
revenue, a $3.2 million decrease in operating lease liabilities, and a $5.8
million increase in accounts receivable, partially offset by a $7.1 million
increase in other liabilities, a $1.6 million increase in accounts payable, a
$1.2 million decrease in deferred contract costs, non-current, and $5.6 million
increase in accrued compensation costs.
During the year ended December 31, 2020 , we used $65.0 million in cash for
operating activities. The primary factors affecting our operating cash flows
during this period were our net loss of $74.6 million , impacted by $20.8 million
non-cash charges, and $11.2 million of cash used due to changes in our operating
assets and liabilities. The non-cash charges primarily consisted of $10.1
million in stock-based compensation, $4.0 million of depreciation and
amortization, $3.6 million in amortization of deferred contract costs, and $2.4
million of non-cash operating lease expense. The cash used due to changes in our
operating assets and liabilities was primarily due to a $12.2 million increase
in trade and other receivables, a $6.5 million increase in prepaid expenses and
other assets, a $2.6 million decrease in operating lease liabilities, and a $2.0
million increase in the non-current portion of deferred contract costs. These
amounts were partially offset by a $5.7 million increase in accrued
compensation, a $4.8 million increase in other liabilities, and a $1.2 million
increase in deferred revenue.
During the year ended December 31, 2019 , we used $58.9 million in cash for
operating activities. The primary factors affecting our operating cash flows
during this period were our net loss of $81.5 million , impacted by $18.5 million
non-cash charges, and $4.0 million of cash provided by changes in our operating
assets and liabilities. The non-cash charges primarily consisted of $9.9 million
in stock-based compensation, $4.8 million of depreciation and amortization, $2.3
million in amortization of deferred contract costs, and $1.2 million in
amortization related to a discount on a convertible note. The cash provided by
changes in our operating assets and liabilities was primarily due to a $5.7
million increase in deferred revenue, a $2.6 million increase in accounts
payable, a $2.3 million increase in accrued compensation, and a $1.1 million
increase in other liabilities. These amounts were partially offset by a $7.1
million decrease in prepaid expenses and other current assets and a $0.8 million
decrease in deferred contract costs.
Cash Used in Investing Activities
Net cash used in investing activities during the year endedDecember 31, 2021 was$633.9 million , which was primarily due to$400.0 million cash used in connection with our acquisition ofTitle365 ,$351.6 million used in purchases of marketable securities, partially offset by maturities of marketable securities of$125.1 million , an investment via issuance of note receivable of$3.0 million , and an investment in non-marketable equity securities of$2.5 million . Net cash used in investing activities during the year endedDecember 31, 2020 was$7.9 million , which was primarily the result of purchases of marketable securities of$174.0 million and property and equipment purchases of$1.3 million , partially offset by sales and maturities of marketable securities of$167.4 million . Net cash used in investing activities during the year endedDecember 31, 2019 was$65.5 million , which was primarily the result of purchases of marketable securities of$150.7 million and property and equipment purchases of$0.6 million , partially offset by sales and maturities of marketable securities of$85.8 million .
Cash Provided by Financing Activities
Net cash provided by financing activities for the year endedDecember 31, 2021 was$933.6 million , reflecting net proceeds from our initial public offering of$366.8 million , net proceeds from debt financing of$218.8 million , net proceeds from issuance of Series G convertible preferred stock of$309.7 million , proceeds from the exercise of convertible preferred stock warrants of$10.2 million , proceeds from the exercises of stock options of$25.4 million , and proceeds from the repayment of an employee promissory note of$2.9 million . Net cash provided by financing activities for the year endedDecember 31, 2020 was$90.7 million , reflecting proceeds from issuance of Series F convertible preferred stock of$76.2 million , proceeds from exercise of Class A common stock warrants of$10.0 million and the exercise of stock options net of repurchases of$4.5 million . 73 -------------------------------------------------------------------------------- Net cash provided by financing activities for the year endedDecember 31, 2019 was$132.7 million , reflecting proceeds from issuance of Series E convertible preferred stock of$124.6 million , proceeds from a convertible note of$5.0 million , the exercise of stock options net of repurchases of$1.6 million , and the exercise of convertible preferred stock warrants of$1.5 million .
Off-Balance Sheet Arrangements
We administer escrow and trust deposits held at third-party financial institutions representing funds received under real estate contracts, escrowed funds received under escrow agreements, and/or undisbursed amounts received for settlement of mortgage and home equity loans. Cash held for these purposes was approximately$27.0 million net of outstanding checks in transit of$56.2 million as ofDecember 31, 2021 . These funds are not considered assets of ours and, therefore, are not included in our consolidated balance sheet; however, we are contingently liable for the disposition of these funds on behalf of consumers. As ofDecember 31, 2021 , we did not have any other relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other purposes.
Employee Compensation
We face significant competition for talent from other technology and high-growth
companies. To attract and retain top talent, we have had to offer, and believe
we will need to continue to offer, highly competitive compensation packages and
provide a range of health, savings, retirement, time-off and wellness benefits
for our employees.
Additionally, we may consider adopting various employee compensation programs
from time to time, including one possible program that would allow employees the
opportunity to annually elect the proportion of their compensation that would be
provided in the form of cash or equity. The details of any such program, and the
extent to which we may implement any such program, have not been determined at
this time. If we do decide to adopt a program like this in the future, it could
result in us paying a greater percentage of our employees' compensation in the
form of cash or equity, depending on how our employees elect to receive their
compensation. This could result in us using a larger amount of our cash reserves
for the payment of compensation in future periods or could result in us granting
a greater number of our shares subject to equity awards, which could increase
our overall dilution, increase our stock-based compensation expense for
financial accounting purposes, and increase our tax withholding and remittance
obligations. How we determine any such tax withholding obligations would be
satisfied could further impact our cash position or increase dilution.
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope
and terms pursuant to which we agree to indemnify customers, vendors, lessors,
business partners, and other parties with respect to certain matters, including,
but not limited to, losses arising out of the breach of such agreements,
services to be provided by us, or from intellectual property infringement claims
made by third parties. In addition, we have entered into indemnification
agreements with our directors and certain officers and employees that require
us, among other things, to indemnify them against certain liabilities that may
arise by reason of their status or service as directors, officers, or employees.
No demands have been made upon us to provide indemnification under such
agreements, and there are no claims that we are aware of that could have a
material effect on our consolidated balance sheets, consolidated statements of
operations and comprehensive loss, or consolidated statements of cash flows.
Critical Accounting Policies and Estimates
Our consolidated financial statements and the related notes thereto included
elsewhere in this Annual Report on Form 10-K are prepared in accordance with the
U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of
our consolidated financial statements in accordance with GAAP requires us to
make estimates, judgments, and assumptions that affect the reported amounts of
assets, liabilities, revenue, costs, and expenses, and related disclosures. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. Our actual results may
differ from these estimates under different assumptions or conditions. To the
extent that there are differences between our estimates and actual results, our
future financial statement presentation, financial condition, results of
operations, and cash flows could be affected.
74
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We believe that of our significant accounting policies, which are described in
Note 2 of the notes to our consolidated financial statements, the following
accounting policies involve a greater degree of judgment and complexity.
Accordingly, these are the policies we believe are the most critical to aid in
fully understanding and evaluating our consolidated financial condition and
results of operations.
Revenue Recognition
Overview
We recognize revenue in accordance with Accounting Standards Codification
(“ASC”) 606, Revenue from Contracts with Customers, which requires application
of the following five-step model:
•Identification of the contract, or contracts, with a customer - A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party's rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance, and (iii) it is determined that collection of substantially all consideration for services that are transferred is probable based on the customer's intent and ability to pay the promised consideration when it is due. •Identification of the performance obligations in the contract - Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the services either on their own or together with other resources that are readily available from third parties or from us, and are distinct within the context of the contract, whereby the transfer of the services is separately identifiable from the other promises in the contract. To the extent that a contract includes multiple promised services, we apply judgment to determine whether promised services are capable of being distinct. •Determination of the transaction price - The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring services to the customer. We estimate and include variable consideration for our subscription arrangements in the transaction price at contract inception to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. In estimating overage fees in subscription arrangements, we consider our historical experience and other external factors that may impact the expectation of future completed transactions beyond a customer's contracted minimum number of completed transactions. The estimated variable consideration is sensitive to the inputs, judgements, and assumptions made by us. Although we believe that our approach to developing estimates of variable consideration is reasonable, actual results could differ, and we may be exposed to increases or decreases in revenue that could be material. Our estimates of variable consideration may prove to be inaccurate, in which case we may have understated or overstated the revenue recognized in a reporting period. The amount of variable consideration recognized to date that remains subject to estimation is included within the prepaid expenses and other current assets and deferred revenue on the consolidated balance sheet. •Allocation of the transaction price to the performance obligations in the contract - We allocate the transaction price to each performance obligation on a relative standalone selling price basis, or SSP. The SSP is the price at which we would sell a promised service separately to a customer. In instances where we do not sell or price a service separately, we estimate the SSP by considering available information such as market conditions, internally approved pricing guidelines, and the underlying cost of delivering the performance obligation. Judgment is required to determine the SSP for each distinct performance obligation.
•Recognition of revenue when, or as, we satisfy a performance obligation – For
each performance obligation identified, we determine at contract inception
whether it satisfies the performance obligation over time or at a point in time.
Blend Platform
We generate revenue from fees paid by our customers to access our platform, and,
to a lesser extent, from professional services related to the deployment of our
platform, support services, and consulting services.
75
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Our customers have the ability to access our platform under subscription
arrangements, in which customers commit to a minimum number of completed
transactions at specified prices over the contract term, or under usage-based
arrangements, in which customers pay a variable amount for completed
transactions at specified prices. Subscription arrangements are generally
non-cancelable during the contract term while usage-based arrangements generally
can be terminated at any time by the customer. Arrangements with customers do
not provide the contractual right to take possession of our software at any
point in time. We begin recognizing revenue when access to our platform is
provisioned to our customers for an amount that reflects the consideration we
expect to be entitled to in exchange for those services.
Access to our platform represents a series of distinct services as we
continually provide access to our platform, and fulfill our obligation to our
customer over the non-cancelable contractual term and the customer receives and
consumes the benefit of our platform throughout the contract period. The series
of distinct services represents a single performance obligation that is
satisfied over time.
Under our subscription arrangements, we typically bill our customers for any
committed amounts quarterly, semi-annually or annually in advance and for
overages beyond a customer's contracted minimum number of completed transactions
on a monthly or quarterly basis in arrears. We recognize fees for subscription
arrangements ratably over the non-cancelable contract term of the arrangement as
subscription services are provided, beginning on the commencement date of each
contract, which is the date services are made available to our customers.
For usage-based arrangements, we typically bill our customers for any completed
transactions on a monthly basis in arrears. We recognize fees for usage-based
arrangements as the completed transactions are processed using our platform.
Revenue from usage-based arrangements represented 29%, 12% and 12% of our Blend
Platform revenue for the years ended December 31, 2021 , 2020 and 2019,
respectively.
Professional services revenue consists of fees for services related to helping
customers deploy, configure, and optimize the use of our technology. These
services include consulting, system integration, data migration, process
enhancement, and training. Our professional services contracts are typically on
a fixed price basis and billed in full at the beginning of the contract term.
Professional services revenue is recognized on a proportional performance basis,
which measures the service hours performed to date relative to the total
expected hours to completion.
Title365 is a title insurance agency that offers title, escrow and other trustee services, including title search procedures for title insurance policies, escrow and other closing and settlement services.Title365 also offers title services in connection with a borrowers default and with the issuance of home equity lines of credit and home equity loans. For title insurance services, we earn a fee for placing and binding title insurance policies with third-party underwriters that ultimately provide the title insurance policy to consumers. We act as an agent to place and bind title insurance policies and satisfy the performance obligation upon the closing of the underlying real estate transaction. Revenue related to title insurance is recognized net of the amount of consideration paid to the third-party insurance underwriters. Escrow fees and fees for other trustee services are primarily associated with managing the closing of real estate transactions, including the processing of funds on behalf of the transaction participants, gathering and recording the required closing documents, and providing notary and other real estate or title-related activities. The transfer of these services is satisfied and revenue is recognized at the closing of the underlying real estate transaction.
Revenues for default title services and home equity services are recognized at
the time of delivery of the title report, as we have no significant ongoing
obligations after delivery.
Business Combinations
OnJune 30, 2021 , we completed our acquisition of 90.1% ownership ofTitle365 . We account for acquisitions in accordance with ASC 805, Business Combinations. Identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquired business are recognized and measured as of the acquisition date at fair value.Goodwill is recognized to the extent by which the aggregate of the acquisition-date fair value of the consideration transferred and any noncontrolling interest in the acquired business exceeds the recognized basis of the identifiable assets acquired, net of assumed liabilities. Transaction costs directly attributable to the acquisition are expensed as incurred. Upon acquisition, the accounts and results of operations of the acquired business are consolidated as of and subsequent to the acquisition date. 76 --------------------------------------------------------------------------------
Goodwill represents the excess of the consideration transferred in a business combination over the aggregate fair value of the identifiable assets acquired and liabilities assumed.Goodwill is not amortized, but rather tested for impairment annually, or more frequently, if events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. Acquired intangible assets are recorded at their estimated fair value at the date of acquisition. Determination of the fair value of the acquired customer relationships and licenses involves significant estimates and assumptions related to revenue forecasts, discount rates, customer attrition rates, and replacement costs. Determination of estimated useful lives of intangible assets requires significant judgment, and the Company regularly evaluates whether events and circumstances have occurred that indicate the useful lives of finite-lived intangible assets may warrant revision. Finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Redeemable Noncontrolling Interest
TheTitle365 stockholders' agreement includes a provision whereby we have a call option to purchase the 9.9% noncontrolling interest at a purchase price equal to the greater of (1)$49.5 million plus an amount of interest calculated using an interest rate of 5.0% per annum compounding annually; or (2) 4.4 multiplied by the trailing 12-month EBITDA multiplied by the noncontrolling interest ownership percentage ("Title365 Call Option"). The Title365 Call Option is exercisable beginning two years following the acquisition closing date. The noncontrolling interest holder also holds an option to compel us to purchase the remaining 9.9% noncontrolling interest at a price calculated in the same manner as theTitle365 Call Option ("Title365 Put Option"). The Title365 Put Option is exercisable beginning five years following the acquisition closing date. Neither the Title365 Call Option nor the Title365 Put Option have an expiration date. As the Title365 Put Option is not solely within our control, we classified this interest as redeemable noncontrolling interest ("RNCI"), within the mezzanine equity section of the consolidated balance sheets. The RNCI is accreted to the redemption value under the interest method from the acquisition date through the date the Title365 Put Option becomes exercisable. At each balance sheet date, RNCI is reported at the greater of the initial carrying amount adjusted for the redeemable noncontrolling interest's share of earnings or losses and other comprehensive income or loss, or its accreted redemption value. The changes in the redemption amount are recorded with corresponding adjustments against retained earnings or, in the absence of retained earnings, additional paid-in-capital. For each reporting period, the entire periodic change in the redemption amount is reflected in the computation of net loss per share under the two-class method as being akin to a dividend.
Stock-Based Compensation
We measure and recognize our stock-based compensation based on estimated fair values for all stock awards, which include stock options and RSUs that vest based upon the satisfaction of a service condition. We recognize stock-based compensation expense for stock options and RSUs that vest only based upon the satisfaction of a service condition on a straight-line basis over the requisite service period, which is generally the vesting period. We account for forfeitures as they occur. For stock option awards, we use the Black-Scholes-Merton option pricing model to determine the grant date fair value of the stock options granted. The Black-Scholes option pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock (for pre-IPO awards), the expected term of the option, the expected volatility of the price of the common stock, risk-free interest rates, and the expected dividend yield of the common stock. The assumptions used to determine the fair value of the option awards represent our estimates, which involve inherent uncertainties and the application of management's judgment. As we continue to accumulate additional data related to our Class A common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense. Prior to our IPO, the fair value of the common stock underlying our stock-based awards has historically been determined by our board of directors, with input from management and contemporaneous third-party valuations. We believe that our board of directors has the relevant experience and expertise to determine the fair value of our common stock. Given the absence of a public trading market of our common stock, and in accordance with theAmerican Institute of Certified Public Accountants Practice Aid , Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock at each grant date. These factors include:
•the results of contemporaneous valuations performed at periodic intervals by a
third-party valuation firm;
•the prices, rights, preferences, and privileges of our convertible preferred
stock relative to those of our common stock;
77 --------------------------------------------------------------------------------
•the prices of our convertible preferred stock and common stock sold to
investors in arms-length transactions;
•our actual operating and financial performance and estimated trends and
prospects for our future performance;
•our stage of development;
•the likelihood of achieving a liquidity event, such as an initial public
offering, direct listing, or sale of our company, given prevailing market
conditions;
•the lack of marketability involving securities in a private company;
•the market performance of comparable publicly traded companies; and
•U.S. and global capital market conditions.
In valuing our common stock, our board of directors determined the equity value of our business generally using the income approach and the market approach valuation methods. In allocating the equity value, we considered and have used a combination of the option pricing method, or OPM, the Probability Weighted Expected Return Method, or PWERM, and the Hybrid Method (which is a combination of the OPM and PWERM). The Hybrid Method involves the estimation of multiple future potential outcomes for us and estimation of the probability of each respective potential outcome. The common stock per share value determined using this approach is ultimately based upon probability-weighted per share values resulting from the various future scenarios. Our scenarios included the use of an initial public offering scenario and a scenario assuming continued operation as a private entity (in which an OPM was applied). After the Equity Value is determined and allocated to the various classes of shares, a discount for lack of marketability, or DLOM, is applied to arrive at the fair value of the common stock. A DLOM is applied based on the theory that as a private company, an owner of the stock has limited opportunities to sell this stock as there is not a readily available market to sell the stock. In addition, we also considered any secondary transactions involving our capital stock. In our evaluation of those transactions, we considered the facts and circumstances of each transaction to determine the extent to which they represented a fair value exchange. Factors considered include transaction volume, timing, whether the transactions occurred among unrelated parties, and whether the transactions involved investors with access to our financial information. Application of these approaches involves the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, and future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.
For valuations after our IPO, the fair value of each share of underlying Class A
common stock is based on the closing price of our Class A common stock as
reported on the date of grant.
Certain stock options granted to our Co-Founder and Head of Blend vest upon the satisfaction of a service condition, liquidity event-related performance condition and performance-based market conditions. InJuly 2021 , the first tranche of the Co-Founder and Head of Blend stock option award vested upon completion of the IPO. The remaining tranches of shares will vest dependent on performance goals tied to the Company's stock price hurdles with specified expiration dates for each tranche.
Segment Information
Our operating segments are defined in a manner consistent with how we manage our operations and how our chief operating decision maker evaluates the results and allocates our resources. Prior to the acquisition ofTitle365 we operated as a single reportable segment. Following the acquisition, Blend Platform, the legacy banking platform business, andTitle365 operate as two separate reportable segments. Recent Accounting Pronouncements
Refer to Note 2, “Summary of Significant Accounting Policies,” of the Notes to
Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
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