SOLUTIONS OFFERPAD INC. Discussion and analysis by management of the financial position and operating results. (form 10-Q)
The following discussion and analysis provides information that Offerpad's management believes is relevant to an assessment and understanding of Offerpad's consolidated results of operations and financial condition. The discussion should be read together with the unaudited interim condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. See "Cautionary Note Regarding Forward-Looking Statements" in this Form 10-Q. Offerpad's actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" in Part II, Item 1A of this Form 10-Q. Unless the context otherwise requires, references to "we", "our" and "the Company" refer to the business and operations ofOfferPad, Inc. and its consolidated subsidiaries prior to the Business Combination and toOfferpad Solutions Inc. and its consolidated subsidiaries, following the consummation of the Business Combination.
Overview
Offerpad was founded in 2015 to create a better residential real estate experience by combining advanced technology solutions with fundamental industry expertise. We provide streamlined, data driven iBuying and real estate solutions for the on-demand customer. Our digital "Solutions Center" platform gives users a holistic, customer-centric experience, enabling them to efficiently sell and buy their homes online with streamlined access to ancillary services such as mortgage and title insurance. Our platform provides a unique dual approach to helping home sellers. In our "Express" offering, sellers can access our website or mobile app to receive a competitive cash offer for their home within 24 hours and quickly close without the major inconveniences associated with traditional real estate selling. In our "Flex" offering, we leverage our technology, scale and logistical expertise to renovate and list a seller's home for sale while also typically providing a backup "Express" cash offer to the seller, thereby providing optionality of process and certainty of outcome. Our platform provides home buyers the opportunity to browse and tour homes online, get instant access to our listings with their mobile devices and submit purchase offers online in a simple process on their own time, with or without an agent. We also offer seamless, integrated access to in-house agents to advise on the purchase of a home as well as access to mortgage services through one of our preferred providers. We believe by offering both "Express" and "Flex" to sellers, and a guided yet flexible and customizable experience to buyers, we have reinvented the home selling and buying experience to meet the digital and on-demand needs of modern consumers. We have created a pioneering iBuying company and leading on-demand real estate marketplace that has transacted on homes representing approximately$4.6 billion of aggregate revenue since inception in 2015 toSeptember 30, 2021 . Our significant growth relative to our limited capital invested is testament to our efficiency and results driven culture, increasing our total contribution margin after interest (per home sold) from approximately$4,900 in 2019 to approximately$9,000 in 2020 and approximately$22,700 in the three months endedSeptember 30, 2021 . Since inception, we have focused on improving the unit economics of our model across our markets, with the added benefit of maximizing operational leverage as we scale. A foundation of our strategic approach to growth has been to prove out our business model first, control costs and refine our valuation automation and logistical operations before we scale into additional markets. Our contribution margin after interest across markets, which was approximately 4% company-wide in 2020, is a testament to our understanding of how to grow efficiently and enter into new markets, improve unit economics and increase operating leverage.
From
As we expand further into our existing markets, launch new markets, and develop a wide range of new ancillary services, we look forward to bringing our mission of providing the best way to buy and sell a home to even more homeowners and prospective home purchasers across the country.
The business combination
OnSeptember 1, 2021 (the "Closing Date"), we consummated the transactions contemplated by the previously announced Agreement and Plan of Merger, datedMarch 17, 2021 (the "Merger Agreement"), by and amongOfferPad, Inc. ("Old Offerpad"),Supernova Partners Acquisition Company, Inc. , aDelaware corporation ("Supernova"), andOrchids Merger Sub, Inc. , aDelaware corporation ("Merger Sub"). Pursuant to these transactions, Merger Sub merged with and into Old Offerpad, with Old Offerpad becoming a wholly owned subsidiary of Supernova (the "Business Combination" and, collectively with the other transactions described in the Merger Agreement, the "Transactions").Offerpad Solutions Inc. | Third Quarter 2021 Form 10-Q | 30 --------------------------------------------------------------------------------
On the Closing Date, and in connection with the closing of the Transactions, Supernova changed its name to
We accounted for the Business Combination as a reverse recapitalization whereby Old Offerpad was determined as the accounting acquirer and Supernova as the accounting acquiree. While Supernova was the legal acquirer in the Business Combination, because Old Offerpad was determined as the accounting acquirer, the historical financial statements of Old Offerpad became the historical financial statements of the combined company, upon the consummation of the Business Combination. Accordingly,Offerpad Solutions , as the parent company of the combined business, is the successorSEC registrant, meaning that our financial statements for previous periods will be disclosed in the registrant's future periodic reports filed with theSEC . The Business Combination had a significant impact on our reported financial position and results as a result of the reverse recapitalization. One of the most significant changes in our reported financial position and results was an increase in cash and cash equivalents. Upon the closing of the Business Combination,Offerpad Solutions received total gross proceeds of$284.0 million , which consisted of$34.0 million from Supernova's trust and operating accounts,$200.0 million in proceeds from the private placement ("PIPE Investment ") and$50.0 million in proceeds from the execution of the forward purchase agreements pursuant to which certain affiliates of Supernova agreed to purchase, upon the closing of the Transactions, an aggregate of 5,000,000 shares of Offerpad Solutions Class A common stock and an aggregate of 1,666,667 warrants to purchase one share of Offerpad Solutions Class A common stock, for an aggregate purchase price of$50,000,000 , or$10.00 per share of Offerpad Solutions Class A common stock and one-third of one warrant to purchase one share of Offerpad Solutions Class A common stock ("Forward Purchase Agreements"). This was partially offset by transaction costs for the Business Combination of approximately$51.2 million , which principally consisted of advisory, legal and other professional fees, and cumulative debt repayments, inclusive of accrued but unpaid interest, of$63.4 million that were paid in conjunction with the close. Additionally, in connection with the Business Combination, we recognized a$26.5 million warrant liability on our condensed consolidated balance sheet for the fair value of the public warrants and private placement warrants that were previously issued by Supernova and assumed in the Business Combination, along with the additional private placement warrants that were issued upon the closing of the Business Combination. We adjust the warrants to fair value at each reporting period. The warrant liabilities are subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our unaudited condensed consolidated statement of operations. As a result of the recurring fair value measurement, our future financial statements and results of operations may fluctuate quarterly, based on factors that are outside of our control. Due to the recurring fair value measurement, we expect that we will recognize non-cash gains or losses on the warrants each reporting period and that the amount of such gains or losses could be material. As a result of the Business Combination, we became anSEC -registered and NYSE listed company, which will require us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual operating expenses as a public company for, among other things, directors' and officers' liability insurance, director fees, and additional internal and external accounting, legal and administrative resources.
Business impact of COVID-19
The COVID-19 pandemic yielded an unprecedented environment, which required swift and thoughtful action to plan for the safety of our employees and customers. InMarch 2020 , we initiated a companywide work from home policy and paused purchasing homes to implement additional safety protocols as well as assess the impact of shelter-in-place and quarantine orders across each of our markets. New safety protocols included PPE supplies for field employees and customers and processes were designed in coordination with a third-party consultant. Once we became comfortable with our ability to purchase homes safely and had a better understanding of the impact of shelter-in-place orders, we resumed purchasing inMay 2020 across all of our markets and increased our acquisition pace through the second half of the year. Despite pausing purchases in March andApril 2020 , we continued to actively sell our inventory through this time of disruption by ensuring we had homes with attractively renovated features that were priced right for each market. In the second half of the year, we quickly recognized the rapid improvement in the overall home selling environment driven by increases in housing demand, low available housing supply and a continued low interest rate environment but maintained a conservative approach to acquiring inventory in light of the uncertainty associated with the COVID-19 pandemic. As ofSeptember 30, 2021 andDecember 31, 2020 , home inventory was$902 million and$171 million , respectively, compared to inventory of$344 million as ofDecember 31, 2019 . After experiencing sequential declines in revenue in the second and third quarters of 2020, we generated sequential increases in revenue in the fourth quarter of 2020 and the first, second and third quarters of 2021, reflective of our ability to manage our inventory portfolio through the pandemic and resume purchasing effectively. Despite the challenging circumstances in 2020, we generated$1.1 billion of revenue for the full year, a decrease of 1% from the prior year. Further, we generated revenue of$540.3 million and$1,202.9 million during the three and nine
Offerpad Solutions Inc. | Third Quarter 2021 Form 10-Q | 31 --------------------------------------------------------------------------------
months ended
Our business model
Income model
Our mission is to provide the best way to buy and sell a home. Period. Offerpad was founded to create a better residential real estate experience by combining advanced technology solutions with fundamental industry expertise. The "Express" cash offer is the flagship offering, allowing customers to sell on their own schedule and without the hassle of showings, open houses, and aligning closing dates with the purchase date of their new home. However, this is only one of several offerings within our Solutions Center designed to meet the unique needs of our customers. With Offerpad "Flex", customers partner with Offerpad to list their home for sale on the open market while utilizing Offerpad's concierge and renovation services, as well as work with an Offerpad Solutions Expert to help them find their next home. Through Offerpad "Flex", our customers essentially dual track a sale by utilizing both our personalized listing services while also having our initial cash offer as a backup option, typically for up to 60 days. We typically acquire homes directly from individual sellers. After purchasing the home, we make necessary repairs and upgrades before listing it for sale on our platforms and Multiple Listing Services ("MLS"). We resell these homes to both individual consumer and institutional investor buyers. Currently, revenues from home sales we purchase through our "Express" cash offer are our primary source of revenue; however, we expect greater contribution from our "Flex" offering as we drive expansion of this offering and from ancillary services in the future as our full product offering expands and matures.
Offers
We generate demand for our services through traditional media, digital media, organic referral, and partnership channels. Partnership channels include relationships with homebuilders, brokerages, and complementary industry partners. Interested home sellers visit our desktop or mobile website or app and fill out a short questionnaire about their home. If the home fits our eligible criteria, an Offerpad employee will reach out within 24 hours via email, phone, or text to deliver and discuss Offerpad's cash purchase offer and review any other services that may be of interest to the customer, including our Flex listing and buyer representation services and our mortgage solutions offerings. If a customer chooses to list their home with Offerpad Flex, once a customer sells a home directly to a buyer using Flex, we earn a service fee, typically as a percentage of the sales price of the home.
Home acquisition and renovation
Once the offer is received and reviewed by the customer, if they choose to proceed, a purchase contract is generated and signed. If the customer is represented by a third party agent, we work directly with such agent in addition to paying the agent's fee. Upon signing, an Offerpad employee and a third-party inspector visit the home (either virtually or in person) to verify the information gathered during underwriting and identify any necessary repairs. Once repairs are agreed upon (if any), the homeowner chooses the closing date that meets their needs. The ability to choose the closing date is a very important feature, as it allows the homeowner to close around buying their next home or other influential events. If renovations were deemed necessary in the underwriting process, anOfferpad Project Manager will begin coordinating the renovation after we close on the home purchase. We utilize a mix of Offerpad employed foreman and crew members as well as third-party specialists to execute necessary renovations. Our renovation strategy is focused on maximizing return through accretive upgrades and ensuring the home is in list-ready condition and is continually refined based on market level trends. We actively manage our vendor network through quality, cost, and timeliness evaluations. Home Resale Post-renovation, an Offerpad employee completes a final walkthrough to ensure the renovation was performed according to plan and quality specifications. Efficiently turning over our inventory is important as we incur holding costs (including property taxes, insurance, utilities, and homeowner association dues) and financing costs while we own the home. However, we routinely make strategic decisions or offer services that are designed to generate improved returns even if resulting in an increase in average inventory holding period. In order to minimize the sales period, we market our homes across a wide variety of websites and platforms to generate buyer demand. This includes the Offerpad website and mobile app, local MLS, and syndication across online real estate portals. Prior to listing the home for sale, an Offerpad Asset Manager will reevaluate the current market and comparable properties using the same underwriting technology as is used in the buying process to price the home accordingly. Our acquisition and resale teams work closely to ensure market level trends are captured and anticipated in pricing decisions. The ultimate goal during the resale process is to maximize return on investment when considering pricing and holding periods.
Offerpad Solutions Inc. | Third Quarter 2021 Form 10-Q | 32 -------------------------------------------------------------------------------- Once a purchase offer is received on a home, we enter into negotiations with the buyer and upon agreement of price, terms and conditions, we enter into a purchase contract. If the buyer is represented by an agent, we work directly with the agent. The buyer then conducts a customary inspection of the home and takes possession of the home upon funding and closing. We pay agent commissions for home buyers out of funds received at closing.
Factors affecting our performance
Market penetration into existing markets
Residential real estate is one of the largest industries with roughly$1.9 trillion in value of homes transacted in 2020 and is highly fragmented with over 100,000 brokerages, according to theNational Association of Realtors (NAR) as of 2019. In 2020, we estimate that we captured roughly 0.4% market share across our then active 14 markets. Given this high degree of fragmentation, we believe that bringing a solutions-oriented approach to the market with multiple buying and selling services to meet the unique needs of customers could lead to continued market share growth and accelerated adoption of the digital model. We have demonstrated higher market share in certain markets, providing the backdrop to grow our overall market penetration as our offerings expand and evolve. By providing a consistent, transparent, and unique experience, we expect to continue to build upon our past success and further strengthen our brand and consumer adoption. Expansion into New Markets Since our launch in 2015, we have expanded into 14 markets as of the end of 2020, and during the first nine months of 2021, we expanded into six additional markets, bringing our total markets served to 20 as ofSeptember 30, 2021 . Further, inOctober 2021 , we announced that we had expanded into an additional market. Our 20 markets as ofSeptember 30, 2021 cover roughly 20% of the 5.6 million existing home transactions in 2020 inthe United States . Given this current coverage, we believe there is significant opportunity to both increase market penetration in our existing markets and to grow our business through new market expansion, although new market expansion typically generates lower initial margins as we begin operations that increase as we scale volumes. Also, because of our strategic approach to renovations, as well as the listing and buyer representation of our Flex product, we believe a significant portion of the total addressable market is serviceable with our business model. While we intend to be flexible in assessing market entry points, we will generally look to expand into new markets with qualities similar to our existing markets, including median price point, annual transaction count, as well as strong presence of new homebuilders and single-family rental companies. We believe the scale and versatility of our platform will allow us to continue to expand into new markets, with our primary barriers to entry consisting largely of capital needed to expand operations and the tendency of consumers to adopt our real estate offerings.
Ancillary products and services
Core to our long-term strategy is a suite of offerings to meet the unique needs of our customers. As such, we view adding both additional products and services as well as additional product specific features as critical to supporting this strategy. We aim to deliver our offerings to customers in a smooth, efficient, digital driven platform, focused on transparency and ease of use. The primary goals is to be able to offer multiple services tied to the core real estate transaction, allowing customers to bundle and save. Although further developing these products and services will require significant investment, growing our current offerings and offering additional ancillary products and services, potentially including stand-alone remodel services, energy efficiency solutions, smart home technology, insurance, moving services, and home warranty services, we believe will strengthen our unit economics and allow us to better optimize pricing. Generally, the revenue and margin profiles of our ancillary products and services are different from our "Express" offering that accounts for the vast majority of our revenue, with most ancillary products and services having a smaller average revenue per transaction than our "Express" offering, but a higher margin.
Below is a summary of our current ancillary products and services:
? Offerpad Flex ? Concierge Listing Service: While partnering with Offerpad, the customer will be provided with complementary list-ready services to prepare their home for market, such as carpet cleaning, landscape and pool maintenance, and handyman services. Customers also have the ability to utilize Offerpad's renovation advance program to complete strategic upgrades to maximize the resale value of the home. ? Buying Service: Whether a customer sells to Offerpad via Express or lists with Offerpad via Flex, they have the ability to work with anOfferpad Solutions Expert-our dedicated in-house agents- to assist with purchasing a new home.Offerpad Solutions Inc. | Third Quarter 2021 Form 10-Q | 33 -------------------------------------------------------------------------------- ? Offerpad Home Loans ("OPHL"): We historically offered in-house mortgage solutions through OPHL, our online joint venture whereby our joint venture partner would underwrite and fund the loans originated by OPHL. Currently, we provide access to mortgage solutions through a brokerage model working with third-party lending partners. ? Title and Escrow: To deliver title and escrow closing services, we have a national relationship with a leading title and escrow company, through which we are able to leverage our size and scale to provide exceptional service with favorable economics.
Economics Unit
We view Contribution Margin and Contribution Margin after Interest (see "-Non-GAAP Financial Measures") as key performance indicators for unit economic performance, which are currently primarily driven by our Express transactions. Future financial performance improvements are expected to be driven by expanding unit level margins through initiatives such as: ? Continued optimization of acquisition, renovation, and resale processes, as we expand our market footprint and increase penetration in existing markets; ? Effectively increasing our Flex business alongside the Express business, optimizing customer engagement and increasing conversion of requests for home purchases; and ? Introducing and scaling additional ancillary services to complement our core Express and Flex products. Operating Leverage We utilize our technology and product teams to design systems and workflows to make our operations teams more efficient and able to support and scale with the business. Many positions are considered volume based, and as we continue to grow, we focus on developing more automation tools to gain additional leverage. Additionally, as we continue to grow the business, we expect to be able to gain operating leverage on portions of our cost structure that are more fixed in nature as opposed to purely variable. These types of cost include general and administrative expenses and certain marketing and information technology expenses, which grow at a slower pace than proportional to revenue growth.
Inventory financing
Our business model requires significant capital to purchase inventory homes. Inventory financing is a key enabler to our growth and we rely on our non-recourse asset-backed financing facilities, which consist of senior and mezzanine secured credit facilities to finance our home purchases. The loss of adequate access to these types of facilities, or the inability to maintain these types of facilities on favorable terms, would impair our performance. See "-Liquidity and Capital Resources-Financing Activities."
Seasonality
The residential real estate market is seasonal and varies from market to market. Typically, the greatest number of transactions occur in the spring and summer, with fewer transactions occurring in the fall and winter. Our financial results, including revenue, margins, inventory, and financing costs, have historically had seasonal characteristics generally consistent with the residential real estate market, a trend we expect to continue in the future.
Risk management
Our business model is based upon acquiring homes at a price which will allow us to provide a competitive offer to the consumer, while being able to add value through the renovation process, and relist the home so that it sells at a profit and in a relatively short period of time. We have invested significant resources into our underwriting and asset management systems. Our software engineering and data science teams focus on underwriting accuracy, portfolio health, and workflow optimization. This allows us to properly assess and adjust to changes in the local housing market conditions based on our technology, analysis and local real estate experience, in order to mitigate our risk exposure. ? We are able to manage our portfolio risk in part by our ability to manage holding periods for our inventory. Traditionally resale housing pricing moves gradually through cycles; therefore, shorter inventory holding periods limit pricing exposure. As we have increased our scale and improved our workflow optimization, our average inventory holding period of homes sold improved from 138 days in 2016 to 95 days in both 2019 and 2020, reducing our pricing risk from holding aged inventory. ? Our underwriting tools are constantly updated with inputs from third party data sources, proprietary data sources as well as internal data to adjust to the latest market conditions. This limits pricing exposure to homes previously acquired and not under contract to be resold. Typically, a large portion of our inventory is under contract to be sold at any given time. ? Our listed homes are in market-ready and move-in ready condition following the repairs and renovations we conduct.Offerpad Solutions Inc. | Third Quarter 2021 Form 10-Q | 34 -------------------------------------------------------------------------------- As ofSeptember 30, 2021 , we operated in 20 markets inthe United States , which diversifies our footprint and inventory concentration, and mitigates the impact of local market supply and demand dynamics.
Non-GAAP financial measures
In addition to our results of operations below, we report certain financial measures that are not required by, or presented in accordance with,U.S. generally accepted accounting principles ("GAAP"). These measures have limitations as analytical tools when assessing our operating performance and should not be considered in isolation or as a substitute for GAAP measures, including gross profit and net income. We may calculate or present our non-GAAP financial measures differently than other companies who report measures with similar titles and, as a result, the non-GAAP financial measures we report may not be comparable with those of companies in our industry or in other industries.
Adjusted gross profit, contribution profit and contribution profit after interest (and associated margins)
To provide investors with additional information regarding our margins, we have included Adjusted Gross Profit, Contribution Profit, and Contribution Profit After Interest (and related margins), which are non-GAAP financial measures. We believe that Adjusted Gross Profit, Contribution Profit, and Contribution Profit After Interest are useful financial measures for investors as they are used by management in evaluating unit level economics and operating performance across our markets. Each of these measures is intended to present the economics related to homes sold during a given period. We do so by including revenue generated from homes sold (and ancillary services) in the period and only the expenses that are directly attributable to such home sales, even if such expenses were recognized in prior periods, and excluding expenses related to homes that remain in inventory as of the end of the period presented. Contribution Profit provides investors a measure to assess Offerpad's ability to generate returns on homes sold during a reporting period after considering home acquisition costs, renovation and repair costs, and adjusting for holding costs and selling costs. Contribution Profit After Interest further impacts gross profit by including interest costs (including senior and mezzanine secured credit facilities) attributable to homes sold during a reporting period. We believe these measures facilitate meaningful period over period comparisons and illustrate our ability to generate returns on assets sold after considering the costs directly related to the assets sold in a presented period.
Adjusted gross profit, contribution profit and contribution profit after interest (and associated margins) are additional measures of our operational performance and have limitations as analytical tools. For example, these measures include costs that have been recorded in previous periods under GAAP and exclude, with respect to houses held in inventory at the end of the period, costs to be recorded under GAAP during the period. the same period.
Therefore, these measures should not be viewed in isolation or as a substitute for analyzing our results as presented under GAAP. We include a reconciliation of these measures to the most directly comparable GAAP financial measure, which is gross margin.
Adjusted gross profit / margin
We calculate Adjusted Gross Profit as gross profit under GAAP adjusted for (1) net inventory impairment plus (2) interest expense associated with homes sold in the presented period and recorded in cost of revenue. Net inventory impairment is calculated by adding back the inventory impairment charges recorded during the period on homes that remain in inventory at period end and subtracting the inventory impairment charges recorded in prior periods on homes sold in the current period. We define Adjusted Gross Margin as Adjusted Gross Profit as a percentage of revenue. We view this metric as an important measure of business performance, as it captures gross margin performance isolated to homes sold in a given period and provides comparability across reporting periods. Adjusted Gross Profit helps management assess performance across the key phases of processing a home (acquisitions, renovations, and resale) for a specific resale cohort.
Contribution Profit / Margin
We calculate Contribution Profit as Adjusted Gross Profit, minus (1) direct selling costs incurred on homes sold during the presented period, minus (2) holding costs incurred in the current period on homes sold during the period recorded in sales, marketing, and operating, minus (3) holding costs incurred in prior periods on homes sold in the current period recorded in sales, marketing, and operating, plus (4) other income which historically is primarily comprised of net income to us from the investment related to our OPHL operations. The composition of our holding costs is described in the footnotes to the reconciliation table below. We define Contribution Margin as Contribution Profit as a percentage of revenue. We view this metric as an important measure of business performance as it captures the unit level performance isolated to homes sold in a given period and provides comparability across reporting periods. Contribution Profit helps management assess inflows and outflow directly associated with a specific resale cohort.Offerpad Solutions Inc. | Third Quarter 2021 Form 10-Q | 35
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Contribution Profit / Margin After Interest
We define Contribution Profit After Interest as Contribution Profit, minus (1) interest expense associated with homes sold in the presented period and recorded in cost of revenue, minus (2) interest expense associated with homes sold in the presented period, recorded in costs of sales, and previously excluded from Adjusted Gross Profit, and minus (3) interest expense under our senior and mezzanine secured credit facilities incurred on homes sold during the period. This includes interest expense recorded in prior periods in which the sale occurred. Our senior and mezzanine secured credit facilities are secured by our homes in inventory and drawdowns are made on a per-home basis at the time of purchase and are required to be repaid at the time the homes are sold. See "-Liquidity and Capital Resources-Financing Activities." We define Contribution Margin After Interest as Contribution Profit After Interest as a percentage of revenue.
We consider this metric to be an important measure of business performance. Contribution profit after interest helps management assess the performance of contribution margin, as discussed above, when fully encumbered with financing costs.
The following table presents a reconciliation of our Adjusted Gross Profit, Contribution Profit and Contribution Profit After Interest to our gross profit, which is the most directly comparable GAAP measure, for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except percentages and homes sold, unaudited) 2021 2020 2021 2020 Gross profit (GAAP)$ 53,122 $ 19,765 $ 137,523 $ 62,524 Gross margin 9.8 % 10.6 % 11.4 % 7.4 % Homes sold 1,673 749 3,950 3,432 Gross profit per home sold 31.8 26.4 34.8 18.2 Adjustments: Inventory impairment - current period (1) 676 28 713 61 Inventory impairment - prior period (2) (152 ) (398 ) (142 ) (842 ) Interest expense capitalized (3) 1,410 426 2,783 2,565 Adjusted gross profit 55,056 19,821 140,877 64,308 Adjusted gross margin 10.2 % 10.6 % 11.7 % 7.6 % Adjustments: Direct selling costs (4) (11,350 ) (5,599 ) (28,172 ) (24,897 ) Holding costs on sales - current period (5)(6) (910 ) (489 ) (2,365 ) (3,827 ) Holding costs on sales - prior period (5)(7) (295 ) (424 ) (214 ) (1,392 ) Other income (8) - 289 248 787 Contribution profit 42,501 13,598 110,374 34,979 Contribution margin 7.9 % 7.3 % 9.2 % 4.2 % Homes sold 1,673 749 3,950 3,432 Contribution profit per home sold 25.4 18.2 27.9 10.2 Adjustments: Interest expense capitalized (3) (1,410 ) (426 ) (2,783 ) (2,565 ) Interest expense on homes sold - current period (9) (2,381 ) (742 ) (5,904 ) (7,250 ) Interest expense on homes sold - prior period (10) (697 ) (899 ) (468 ) (4,167 ) Contribution profit after interest 38,013 11,531 101,219 20,997 Contribution margin after interest 7.0 % 6.2 % 8.4 % 2.5 % Homes sold 1,673 749 3,950 3,432 Contribution profit after interest per home sold 22.7 15.4 25.6 6.1 (1) Inventory impairment - current period is the inventory valuation adjustments recorded during the period presented associated with homes that remain in inventory at period end. (2) Inventory impairment - prior period is the inventory valuation adjustments recorded in prior periods associated with homes that sold in the period presented. (3) Interest expense capitalized represents all interest related costs, including senior and mezzanine secured credit facilities, incurred on homes sold in the period presented that were capitalized and expensed in cost of sales at the time of sale. (4) Direct selling costs represents selling costs incurred related to homes sold in the period presented. This primarily includes broker commissions and title and escrow closing fees. (5) Holding costs primarily include property taxes, insurance, utilities, homeowners association dues, cleaning and maintenance costs. (6) Represents holding costs incurred on homes sold in the period presented and expensed to Sales, marketing, and operating on the Condensed Consolidated Statements of Operations. (7) Represents holding costs incurred in prior periods on homes sold in the period presented and expensed to Sales, marketing, and operating on the Condensed Consolidated Statements of Operations.Offerpad Solutions Inc. | Third Quarter 2021 Form 10-Q | 36 --------------------------------------------------------------------------------
(8)
Other income in 2020 primarily consists of net income to Offerpad from our historical investment in OPHL. In 2021, other income was earned from the sale of certain fixed assets. (9) Represents both senior and mezzanine interest expense incurred on homes sold in the period presented and expensed to interest expense on the Condensed Consolidated Statements of Operations. (10) Represents both senior and mezzanine secured credit facilities interest expense incurred in prior periods on homes sold in the period presented and expensed to Interest expense on the Condensed Consolidated Statements of Operations.
Adjusted net earnings (loss) and adjusted EBITDA
We also present adjusted net income (loss) and Adjusted EBITDA, which are non-GAAP financial measures that our management team uses to assess our underlying financial performance. We believe these metrics provide insight into period-over-period performance, adjusted for non-recurring or non-monetary items.
We calculate Adjusted Net (Loss) Income as GAAP net income (loss) adjusted for the change in fair value of warrant liabilities. We define Adjusted Net (Loss) Income Margin as Adjusted Net (Loss) Income as a percentage of revenue. We calculate Adjusted EBITDA as Adjusted Net (Loss) Income adjusted for interest expense, amortization of capitalized interest, taxes, depreciation and amortization and stock-based compensation expense. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of revenue. Adjusted Net (Loss) Income and Adjusted EBITDA are supplemental to our operating performance measures calculated in accordance with GAAP and have important limitations. For example, Adjusted Net (Loss) Income and Adjusted EBITDA exclude the impact of certain costs required to be recorded under GAAP and could differ substantially from similarly titled measures presented by other companies in our industry or companies in other industries. Accordingly, these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. The following table presents a reconciliation of our Adjusted Net (Loss) Income and Adjusted EBITDA to our GAAP net income (loss), which is the most directly comparable GAAP measure, for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except percentages, unaudited) 2021 2020 2021 2020 Net loss (GAAP)$ (15,303 ) $ (2,944 ) $ (6,346 ) $ (21,799 ) Change in fair value of warrant liabilities 13,185 - 13,185 - Adjusted net (loss) income (2,118 ) (2,944 ) 6,839 (21,799 ) Adjusted net (loss) income margin (0.4 )% (1.6 )% 0.6 % (2.6 )% Adjustments: Interest expense 5,495 1,312 9,670 8,404 Amortization of capitalized interest (1) 1,410 426 2,783 2,565 Income tax expense 81 - 170 - Depreciation and amortization 156 104 433 308 Amortization of stock-based compensation 1,053 337 2,316 875 Adjusted EBITDA 6,077 (765 ) 22,211 (9,647 ) Adjusted EBITDA margin 1.1 % (0.4 )% 1.8 % (1.1 )% (1) Amortization of capitalized interest represents all interest related costs, including senior and mezzanine interest related costs, incurred on homes sold in the period presented that were capitalized and expensed in cost of sales at the time of sale.
Components of our operating results
Returned
We generate revenue primarily from the sale of homes on the open market. Home sales revenue is recognized at the time of the transaction closing when title to and possession of the property are transferred to the buyer. The amount of revenue recognized for each home sale is equal to the sale price of the home net of resale concessions and credits to the buyer.
Cost of income
Cost of revenue consists of the initial home purchase costs, renovation costs, holding costs and interest incurred prior to the date the home is ready for resale and real estate inventory impairments, if any. These costs are accumulated in real estate inventory during the property holding period and charged to cost of revenue under the specific identification method when the property is sold.
Offerpad Solutions Inc. | Third Quarter 2021 Form 10-Q | 37 --------------------------------------------------------------------------------
Operating Expenses
Sales, Marketing and Operating Expenses
Sales, marketing and operating expense consists of real estate agent commissions for home buyers, advertising, and holding costs on homes incurred after the home is ready for resale, which includes utilities, taxes, maintenance and other costs. Sales, marketing and operating expense also includes headcount expenses in support of sales, marketing, and real estate inventory operations such as salaries, benefits, and stock-based compensation. Sales, marketing and operating expenses are charged to operations as incurred.
General and administrative expenses
General and administrative expense consists primarily of headcount expenses, including salaries, benefits and stock-based compensation for our executive, finance, human resources, legal and administrative personnel. General and administrative expense also includes third-party professional service fees and rent expense. We expect to incur additional annual expenses as a public company. See "-The Business Combination" above.
Technology and development costs
Technology and development expenses include workforce expenses, including salaries, benefits, and stock-based compensation expenses for employees and contractors engaged in design, development, and testing website applications, mobile applications and software development. Technology and development costs are charged to earnings when incurred.
Change in fair value of liabilities related to warrants
The change in fair value of warrant liabilities includes gains or losses recorded as a result of revaluing warrant liabilities to fair value at each reporting period.
Interest charges
Interest expense consists primarily of interest on borrowings, including amortization of debt issuance costs related to our secured credit facilities, and other notes payable. Borrowings on certain of these secured credit facilities accrue interest at a rate based on a LIBOR reference rate plus a margin. We expect our interest expense to increase as we build our inventory and expand into additional markets.
Other (income) Expenditure, net
The other (income) expenses, net, mainly consist of the share of the investment income related to OPHL.
Income Tax Expense We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets ("DTAs") and deferred tax liabilities ("DTLs") for the expected future tax consequences of events that have been included in our consolidated financial statements. Under this method, we determine DTAs and DTLs on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on DTAs and DTLs is recognized in income in the period that includes the enactment date. Management assessed the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing DTAs. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period endedDecember 31, 2020 . Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, we recorded a full valuation allowance against the net DTAs as ofSeptember 30, 2021 andDecember 31, 2020 and 2019. The amount of the DTA considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth. If we determine that we would be able to realize our DTAs in the future in excess of their net recorded amount, we would make an adjustment to the DTA valuation allowance, which would reduce our provision for income taxes.
Offerpad Solutions Inc. | Third Quarter 2021 Form 10-Q | 38 --------------------------------------------------------------------------------
Results of operations
The following details our consolidated results of operations and includes a discussion of our operating results and significant items explaining the material changes in our operating results during the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 : Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except $ % $ % percentages) 2021 2020 Change Change 2021 2020 Change Change Revenue$ 540,287 $ 186,365 $ 353,922 189.9 %
1,065,383,778 503,286,880 36.9% Gross margin 53,122 19,765 33,357 168.8%
137,523 62,524 74,999 120.0 % Operating expenses: Sales, marketing and operating 38,727 16,072 22,655 141.0 %
95,398 59,048 36,350 61.6% General and administrative 8,160 3,981 4,179 105.0%
18,031 12,204 5,827 47.7% Technology and development
2,777 1,633 1,144 70.1 %
7,663 5,454 2,209 40.5% Total operating expenses
49,664 21,686 27,978 129.0 %
121,092 76,706 44,386 57.9% Operating profit (loss) 3,458 (1,921) 5,379,280.0%
16,431 (14,182 ) 30,613 215.9 % Other income (expense): Change in fair value of warrant liabilities (13,185 ) - (13,185 ) 100.0 % (13,185 ) - (13,185 ) 100.0 %
Interest expense (5,495) (1,312) (4,183) 318.8%
(9,670) (8,404) (1,266) 15.1% Other net income
- 289 (289 ) (100.0 )% 248 787 (539 ) (68.5 )% Total other expense (18,680 ) (1,023 ) (17,657 ) 1726.0 %
(22,607) (7,617) (14,990) 196.8% Loss before tax (15,222) (2,944) (12,278) (417.1)%
(6,176) (21,799) 15,623 71.7% Tax expense
(81 ) - (81 ) 100.0 % (170 ) - (170 ) 100.0 % Net loss$ (15,303 ) $ (2,944 ) $ (12,359 ) (419.8 )%
Three months ended
Revenue Revenue increased by$353.9 million , or 189.9%, to$540.3 million for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . The increase was primarily attributable to higher sales volumes, and a higher average sales price. We sold 1,673 homes during the three months endedSeptember 30, 2021 compared to 749 homes during the three months endedSeptember 30, 2020 , representing an increase of 123%. Additionally, the average resale home price increased by 31% from$249,000 in the three months endedSeptember 30, 2020 to$323,000 in the three months endedSeptember 30, 2021 . These increases were the result of the increase in number of markets due to our strategic market expansion plans, increase in existing market penetration, and favorable housing market conditions across our markets in the three months endedSeptember 30, 2021 .
Cost of revenue and gross profit
Cost of revenue increased by$320.6 million , or 192.4%, to$487.2 million for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . This increase was primarily attributable to higher sales volumes, and a higher average home acquisition price. Gross profit margins decreased to 9.8% for the three months endedSeptember 30, 2021 compared to 10.6% for the three months endedSeptember 30, 2020 . The decrease in gross profit margin was primarily due to a decrease in the difference between the average resale home price and the average home acquisition price during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . This decrease was primarily due to the impact of our risk mitigation efforts in response to the COVID-19 pandemic in the second quarter of 2020, which resulted in more conservative acquisition underwriting to account for the increased market uncertainty.
Sales, Marketing and Operations
Sales, marketing and operating expense increased by$22.7 million , or 141.0%, to$38.7 million for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . The increase was primarily attributable to a$9.8 million increase in advertising expense as we continued to increase our marketing efforts in the three months endedOfferpad Solutions Inc. | Third Quarter 2021 Form 10-Q | 39 --------------------------------------------------------------------------------September 30, 2021 , higher real estate agent commissions paid to home buyers' agents driven by higher sales volumes, and higher employee compensation costs associated with increased employee headcount compared to the prior year quarter following the impact of our risk mitigation efforts in response to the COVID-19 pandemic in the second quarter of 2020.
General and administrative
General and administrative expense increased by$4.2 million , or 105.0%, to$8.2 million for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . The increase was primarily attributable to higher employee compensation costs associated with increased employee headcount as a result of the current and expected future growth in the business.
Technology and development
Technology and development expense increased by$1.1 million , or 70.1%, to$2.8 million for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . The increase was primarily attributable to higher employee compensation costs associated with increased employee headcount as a result of the current and expected future growth in the business.
Change in fair value of liabilities related to warrants
Change in fair value of warrant liabilities for the three months endedSeptember 30, 2021 represents a$13.2 million loss that was recorded as a result of the fair value adjustment of the warrant liabilities that were assumed in connection with the Business Combination.
Interest charges
Interest expense increased by$4.2 million , to$5.5 million for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . The increase was primarily attributable to an increase in the average outstanding balance of our senior secured credit facilities due to an increase in real estate inventory funded by the facilities, which was partially offset by a reduction in interest rates associated with our senior secured credit facilities.
Other income, net
Other net income during the three months ended
Income tax expense
Our effective tax rate was (0.5)% for the three months endedSeptember 30, 2021 and 0% for the three months endedSeptember 30, 2020 . Our effective tax rate during the three months endedSeptember 30, 2021 differed from the federal statutory rate of 21% primarily due to changes in the valuation allowance, stock-based compensation, and state taxes. We record a full valuation allowance on our DTAs, such that our income tax expense reflects only state taxes which are revenue or commerce based.
Nine months ended
Revenue Revenue increased by$361.9 million , or 43.0%, to$1,202.9 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The increase was primarily attributable to a higher average sales price, and higher sales volumes. The average resale home price increased by 23% from$246,000 in the nine months endedSeptember 30, 2020 to$303,000 in the nine months endedSeptember 30, 2021 . Additionally, we sold 3,950 homes during the nine months endedSeptember 30, 2021 compared to 3,432 homes during the nine months endedSeptember 30, 2020 , representing an increase of 15%. These increases were the result of the increase in number of markets due to our strategic market expansion plans, increase in existing market penetration, and favorable housing market conditions across our markets in the nine months endedSeptember 30, 2021 .
Cost of revenue and gross profit
Cost of revenue increased by$286.9 million , or 36.9%, to$1,065.4 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . This increase was primarily attributable to a higher average home acquisition price, and higher sales volumes. Gross profit margins improved to 11.4% for the nine months endedSeptember 30, 2021 compared to 7.4% for the nine months endedSeptember 30, 2020 . Gross margin improvement was primarily due to attaining higher resale prices as a result of favorable housing market conditions across our markets in the nine months endedSeptember 30, 2021 .
Offerpad Solutions Inc. | Third Quarter 2021 Form 10-Q | 40 --------------------------------------------------------------------------------
Sales, Marketing and Operations
Sales, marketing and operating expense increased by$36.4 million , or 61.6%, to$95.4 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The increase was primarily attributable to a$24.0 million increase in advertising expense as we continued to increase our marketing efforts in the nine months endedSeptember 30, 2021 following the impact of our risk mitigation efforts in response to the COVID-19 pandemic in the second quarter of 2020. The increase was also due to higher employee compensation costs associated with increased employee headcount, and higher real estate agent commissions paid to home buyers' agents driven by higher sales volumes.
General and administrative
General and administrative expense increased by$5.8 million , or 47.7%, to$18.0 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The increase was primarily attributable to higher employee compensation costs associated with increased employee headcount as a result of the current and expected future growth in the business.
Technology and development
Technology and development expense increased by$2.2 million , or 40.5%, to$7.7 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The increase was primarily attributable to higher employee compensation costs associated with increased employee headcount as a result of the current and expected future growth in the business.
Change in fair value of liabilities related to warrants
Change in fair value of warrant liabilities for the nine months endedSeptember 30, 2021 represents a$13.2 million loss that was recorded as a result of the fair value adjustment of the warrant liabilities that were assumed in connection with the Business Combination.
Interest charges
Interest expense increased by$1.3 million , or 15.1%, to$9.7 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The increase was primarily attributable to an increase in the average outstanding balance of our senior secured credit facilities due to an increase in real estate inventory funded by the facilities, which was partially offset by a reduction in interest rates associated with our senior secured credit facilities.
Other income, net
Other income, net during the nine months endedSeptember 30, 2021 principally represents a gain from the disposal of fixed assets. Other income, net during the nine months endedSeptember 30, 2020 principally represents income derived from home loans processed under our investment in OPHL.
Income tax expense
Our effective tax rate was (2.8)% for the nine months endedSeptember 30, 2021 and 0% for the nine months endedSeptember 30, 2020 . Our effective tax rate during the nine months endedSeptember 30, 2021 differed from the federal statutory rate of 21% primarily due to changes in the valuation allowance, stock-based compensation, and state taxes. We record a full valuation allowance on our DTAs, such that our income tax expense reflects only state taxes which are revenue or commerce based.
Liquidity and capital resources
Overview
Cash and cash equivalents balances consist of operating cash on deposit with financial institutions. To preserve our liquidity in response to the COVID-19 pandemic, inMarch 2020 , we temporarily paused hiring, the majority of our advertising spend and reduced other discretionary spending. During the second half of 2020, we began to increase our hiring and marketing and advertising activities and expect to continue to increase these activities throughout 2021. Additionally, we paused home buying in lateMarch 2020 ; however, we resumed buying in all of our markets as ofMay 2020 . Our principal sources of liquidity have historically consisted of cash generated from our operations and financing activities. As ofSeptember 30, 2021 , we had cash and cash equivalents of$116.6 million , an undrawn borrowing capacity of$412.0 million under our senior secured credit facilities and an undrawn borrowing capacity of$43.5 million under our mezzanine secured credit facilities (as described further below).
We have suffered losses every year from the beginning until
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of our operations. These investments include improvements in infrastructure and a continual improvement to our software, as well as investments in sales and marketing as we expand into new markets. We expect our working capital requirements to continue to increase in the immediate future, as we seek to increase our inventory and expand into more markets acrossthe United States . We believe our cash on hand, in addition to the cash we obtained as a result of the Business Combination,PIPE Investment and Forward Purchase Agreement, together with proceeds from the resale of homes and cash from future borrowings available under each of our existing credit facilities or the entry into new financing arrangements, will be sufficient to meet our short-term and long-term working capital and capital expenditure requirements for at least the next twelve months. However, our ability to fund our working capital and capital expenditure requirements will depend in part on general economic, financial, competitive, legislative, regulatory and other conditions that may be beyond our control. Depending on these and other market conditions, we may seek additional financing. Volatility in the credit markets may have an adverse effect on our ability to obtain debt financing. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common stock, or may require us to agree to unfavorable terms, and our existing stockholders may experience significant dilution.
Fundraising activities
Our financing activities include borrowing under our senior secured credit facilities, mezzanine secured credit facilities and new issuances of equity. Historically, we have required access to external financing resources in order to fund growth, expansion into new markets and strategic initiatives, and we expect this to continue in the future. Our access to capital markets can be impacted by factors outside our control, including economic conditions. Buying and selling high-valued assets, such as single-family residential homes, is very cash intensive and has a significant impact on our liquidity and capital resources. We primarily use non-recourse secured credit facilities, consisting of both senior secured credit facilities and mezzanine secured credit facilities, to finance a significant portion of our real estate inventory and related home renovations. Some of our secured credit facilities, however, are not fully committed, meaning the applicable lender may not be obligated to advance new loan funds if they choose not to do so. Our ability to obtain and maintain access to these or similar kinds of credit facilities is significant for us to operate the business.
Senior secured credit facilities
The following table summarizes certain details related to our senior secured credit facilities outstanding as ofSeptember 30, 2021 (in thousands, except interest rates): Weighted- Average Borrowing Outstanding Interest Capacity Amount Rate Maturity Date Senior secured credit facility with financial institution 1$ 400,000 $ 387,186 2.59 % August 2022 Senior secured credit facility with financial institution 2 400,000 65,842 2.58 % March 2024 Senior secured credit facility with a related party 225,000 159,999 4.09 % December 2022$ 1,025,000 $ 613,027 As ofSeptember 30, 2021 , we had three senior secured credit facilities that we use to fund the purchase of homes and build our inventory, two with separate financial institutions and one with a related party, which holds more than 5% of our Class A common stock. Borrowings on the senior secured credit facilities with financial institutions accrue interest at a rate based on a LIBOR reference rate plus a margin of 2.50%. Borrowings on the senior secured credit facility with a related party accrue interest at a rate based on a LIBOR reference rate plus a margin of 4.00%. Borrowings under our senior secured credit facilities are collateralized by the real estate inventory funded by the senior secured credit facility. The lenders have legal recourse only to the assets securing the debt and do not have general recourse against us with limited exceptions. We have, however, provided limited non-recourse carve-out guarantees under our senior and mezzanine secured credit facilities for certain of the SPEs' obligations in situations involving "bad acts" by an Offerpad entity and certain other limited circumstances that are generally under our control. Each senior secured facility contains eligibility requirements that govern whether a property can be financed. When we resell a home, the proceeds are used to reduce the corresponding outstanding balance under both the related senior secured credit facility and the mezzanine secured credit facility.
Mezzanine secured credit facilities
In addition to the senior secured credit facilities, we have utilized mezzanine secured credit facilities which are structurally and contractually subordinated to the related senior secured credit facilities. The following table summarizes certain details related to our mezzanine secured credit facilities as ofSeptember 30, 2021 (in thousands):Offerpad Solutions Inc. | Third Quarter 2021 Form 10-Q | 42 -------------------------------------------------------------------------------- Borrowing Outstanding Capacity Amount
Mezzanine credit facilities
As ofSeptember 30, 2021 , we had three mezzanine secured credit facilities, all of which are with a related party, which holds more than 5% of our Class A common stock. Borrowings for each of the mezzanine secured credit facilities accrue interest at a rate of 13.00% and the mezzanine secured credit facilities have maturity dates ranging fromDecember 2022 throughMarch 2024 . These borrowings are collateralized by a second lien on the real estate inventory funded by the relevant senior secured credit facility. The lenders have legal recourse only to the assets securing the debt, and do not have general recourse against us with limited exceptions. When we resell a home, the proceeds are used to reduce the corresponding outstanding balance under both the related senior secured credit facility and the mezzanine secured credit facility.
Agreements relating to senior secured credit facilities and mezzanine secured credit facilities
The secured credit facilities include customary representations and warranties, covenants and events of default. Financed properties are subject to customary eligibility criteria and concentration limits. The terms of these facilities and related financing documents require us to comply with a number of customary financial and other covenants, such as maintaining certain levels of liquidity, tangible net worth or leverage (ratio of debt to equity). As ofSeptember 30, 2021 , we were in compliance with all covenants.
Senior secured debt – Other
DuringJuly 2021 , we entered into an arrangement with a third-party lender to support additional purchases of real estate inventory ("Senior Secured Debt - Other"). Borrowings on the Senior Secured Debt - Other accrue interest at a rate based on a Secured Overnight Financing Rate plus a margin of 5.74%. The weighted-average interest rate on the Senior Secured Debt - Other as ofSeptember 30, 2021 was 5.79%.
Guaranteed term loan
OnJune 30, 2021 , we entered into a credit agreement with a related party. Under the credit agreement, we borrowed a principal amount of$30.0 million . InAugust 2021 , we amended the credit agreement to borrow an additional$25.0 million . The loan accrued interest at an annual rate of 12.0%. The principal amounts of the loan, together with all accrued but unpaid interest, were repaid inSeptember 2021 in connection with the Closing of the Business Combination. Accordingly, there are no amounts outstanding on this loan as ofSeptember 30, 2021 .
Cash flow
The following summarizes our cash flow for the nine month period ended.
Nine Months EndedSeptember 30, 2021 2020
Net cash (used) provided by operating activities
195 836
Net cash used in investing activities (11,577 ) (67 ) Net cash provided by (used in) financing activities 802,305 (186,169 ) Net change in cash, cash equivalents and restricted cash$ 85,916 $ 9,600 Operating Activities
Nine months ended
Net cash (used in) provided by operating activities was$(704.8) million and$195.8 million for the nine months endedSeptember 30, 2021 and 2020, respectively. For the nine months endedSeptember 30, 2021 , net cash used in operating activities was primarily due to a$722.0 million increase in real estate inventory as a result of the execution of our growth plan, as well as favorable housing market conditions across our markets. This cash outflow related to increased inventory levels was partially offset by a$17.1 million increase in accrued liabilities principally attributable to increased compensation, legal and professional obligations, and marketing accruals, as well as the change in fair value of warrant liabilities of$13.2 million . For the nine months endedSeptember 30, 2020 , net cash provided by operating activities was primarily due to a$214.1 million decrease in real estate inventory due to a significant reduction in inventory levels as a result of operational changes in light of the COVID-19 pandemic in 2020. This cash inflow was partially offset by a net loss of$21.8 million .
Investment activities
Nine months ended
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Net cash used in investing activities was$11.6 million and$0.1 million during the nine months endedSeptember 30, 2021 and 2020, respectively. Net cash used in investing activities during the nine months endedSeptember 30, 2021 represents purchases of property and equipment of$13.6 million , which was partially offset by proceeds from sales of property and equipment of$2.0 million . Net cash used in investing activities during the nine months endedSeptember 30, 2020 represents nominal purchases of property and equipment.
Fundraising activities
Nine months ended
Net cash provided by (used in) financing activities was$802.3 million and($186.2) million during the nine months endedSeptember 30, 2021 and 2020, respectively. Net cash provided by financing activities during the nine months endedSeptember 30, 2021 primarily consisted of$1,702.7 million of borrowings from credit facilities, which was partially offset by$1,130.6 million of repayments of credit facilities and notes payable. This net increase in credit facility funding was directly related to financing the increase in inventory during the period. Net cash provided by financing activities during the nine months endedSeptember 30, 2021 also included$284.0 million of proceeds from the Business Combination, which was offset by issuance costs of$51.2 million . Net cash used in financing activities during the nine months endedSeptember 30, 2020 primarily consisted of$772.0 million of repayments of credit facilities and notes payable, which was partially offset by$556.6 million of borrowings from credit facilities and notes payable. This net decrease in credit facility funding was directly related to financing the decrease in inventory during the period. Cash flows from financing activities during the nine months endedSeptember 30, 2020 also included$29.8 million of proceeds from the issuance of Class C preferred stock.
Obligations and contractual commitments
Contractual obligations are cash amounts that we are obligated to pay as part of certain contracts that we entered into during the normal course of business. Except as described below, there have been no material changes to our contractual obligations from those disclosed in the prospectus that constituted part of the Company's Registration Statement on Form S-1 (File No. 333-259790), which was filed with theSEC onSeptember 24, 2021 and declared effective by theSEC onOctober 1, 2021 (the "Prospectus"). In 2021, we amended our senior secured credit facility agreement with a financial institution, which collectively increased the borrowing capacity from$200 million as ofDecember 31, 2020 to$400 million as ofSeptember 30, 2021 ($100 million of which is uncommitted). InMarch 2021 , we amended our senior secured and mezzanine secured credit facility agreements with a related party. The amendments included an extension of the maturity date on the mezzanine secured credit facility with a$25.0 million borrowing capacity toFebruary 2023 , and an extension of the mezzanine secured credit facility with a borrowing capacity of$43.5 million and the senior secured credit facility toDecember 2022 . InJune 2021 , we increased the borrowing capacity on the mezzanine secured credit facility that previously had a$25.0 million borrowing capacity to$31.3 million . InJune 2021 , we entered into a$30.0 million credit agreement with a related party, which holds more than 5% of our Class A common stock. InAugust 2021 , we entered into an amended credit agreement to borrow an additional$25.0 million . The principal amounts of the loan, together with all accrued but unpaid interest, were repaid inSeptember 2021 connection with the Closing of the Business Combination. InSeptember 2021 , we entered into a Loan and Security Agreement with a financial institution and a related party. The Loan and Security Agreement with a financial institution initially provides for a$300.0 million credit facility available over a 24-month term with an accordion feature providing for additional capacity of$100.0 million (the "Credit Facility"), and a mezzanine facility with a related party of$37.5 million , with an accordion feature providing for additional capacity of$12.5 million (the "Mezzanine Facility"). Borrowings accrue interest at a rate equal to one-month LIBOR plus 2.50% per annum for the Credit Facility. Borrowings accrue interest at a rate equal to 13.00% per annum for the Mezzanine Facility.
Off-balance sheet provisions
Certain off-balance sheet obligations, such as homes purchase commitments and operating leases, are included in the contractual obligations table included in the Prospectus.
Offerpad Solutions Inc. | Third Quarter 2021 Form 10-Q | 44 --------------------------------------------------------------------------------
Critical accounting conventions and estimates
We prepare our consolidated financial statements in accordance with GAAP. In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting estimates, which we discuss below.
We have identified the accounting policies described below as being essential to us. The discussion below is not intended to be a complete list of our accounting policies. Our significant accounting policies are described in more detail in Note 2: “Summary of significant accounting policies” to the consolidated financial statements included in this quarterly report on Form 10-Q.
Inventory
Inventory consists of acquired homes and are stated at the lower of cost or net realizable value, with cost determined by the specific identification of each home. Costs include initial purchase costs, renovation costs, and holding costs incurred during the renovation period, prior to the home being ready for resale. Selling costs, including commissions and holding costs incurred after the home is ready for resale, are expensed as incurred and included in sales, marketing and operating expenses. We review for impairment on at least a quarterly basis and as events or changes in circumstances indicate that the carrying value may not be recoverable. We review our inventory for indicators that net realizable value is lower than cost. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recognized as impairment in cost of revenue and the related inventory is adjusted to its net realizable value. For homes under contract to sell, if the carrying value exceeds the expected sale price less expected selling costs, the carrying value of these homes are adjusted to the expected sales price less expected selling costs. For all other homes, if the carrying value exceeds list price or internal projection price less expected selling costs, the carrying value of these homes are adjusted to list price or projection price less expected selling costs. Changes in our pricing assumptions may lead to a change in the outcome of our impairment analysis, and actual results may also differ from our assumptions.
The inventory is classified into three categories: houses under renovation, houses for sale and houses under contract of sale.
Liabilities related to warrants
We evaluate our financial instruments, including our outstanding warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. We have outstanding public and private warrants, both of which do not meet the criteria for equity classification and are accounted for as liabilities. Accordingly, we recognize the warrants as liabilities at fair value and adjusts the warrants to fair value at each reporting period. The warrant liabilities are subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our unaudited condensed consolidated statement of operations. The fair value of the public warrants is estimated based on the quoted market price of such warrants. The fair value of the private warrants is estimated using the Black-Scholes-Merton option-pricing model based on the following key assumptions and significant inputs as of the valuation date.
Volatility: Expected volatility is estimated using a Monte Carlo simulation model to determine volatility based on the trading price of public warrants and to reflect the likelihood of different outcomes.
Expected life: The expected life of the warrants is assumed to be equivalent to their remaining contractual term.
Risk-free interest rate: The risk-free interest rate is estimated on the basis of the
Expected Dividend Yield: The expected dividend yield assumption considers that we have not historically paid dividends and we do not expect to pay dividends in the foreseeable future. Stock-Based Compensation
Stock-based compensation awards consist of stock options. We use the Black-Scholes-Merton option pricing model to determine the grant date fair value of option grants. Compensation expense for all option grants is recognized on a straight-line basis over the required service life of the grants, which generally corresponds to the vesting period of the option. These amounts are reduced by confiscations as the confiscations occur. This valuation model requires judgment and significant estimates, including expected stock price volatility, option term, risk-free interest rate and dividend yield.
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Expected Duration: The expected duration represents the period of time during which the option grants are expected to be in progress and is estimated using the midpoint between the required service period and the contractual duration of the options.
Risk-free interest rate: The risk-free interest rate is estimated using the rate of return on
Volatility: As our shares have not previously been publicly traded prior to the Business Combination, and have not regularly traded privately, expected volatility for awards granted prior to the Business Combination was estimated based on the average historical volatility of similar entities with publicly traded shares over the relevant vesting or estimated liquidity period. Expected Dividend Yield: The expected dividend yield assumption considers that we have not historically paid dividends and we do not expect to pay dividends in the foreseeable future. Prior to the completion of the Business Combination and listing of the Company's common stock on the public stock exchange, our board of directors considered various factors when determining the fair value of our common stock as of each grant date, including the value determined by an independent third-party valuation firm. Some of the factors considered by our board and directors and the third-party valuation firm include: ? our historical financial performance and capital structure; ? external market conditions that affect the industry in which we operate; ? our current financial position and forecasted operating results; ? the lack of marketability for our common stock; and ? market analysis of similar companies' stock price valuation. The assumptions underlying these valuations represent management's best estimates, which involve inherent uncertainties. Changes in the subjective assumptions can materially affect the estimate of the stock-based compensation expense. Following the consummation of the Business Combination, the fair value of our Class A common stock is determined based on the quoted market price on theNew York Stock Exchange (NYSE).
Income taxes
See “- Components of Our Results of Operations – Income Tax Expense” for a discussion of our accounting policies relating to income taxes.
Consolidation of entities with variable rights holders
We have formed certain special purpose entities (each, an "SPE") to purchase and sell residential properties. Each SPE is our wholly owned subsidiary and a separate legal entity, and neither the assets nor credit of any such SPE are available to satisfy the debts and other obligations of any affiliate or other entity. Our credit facilities are secured by the assets and equity of one or more SPEs. These SPEs are variable interest entities, and we are the primary beneficiary as we have the power to control the activities that most significantly impact the SPEs' economic performance and the obligation to absorb losses of the SPEs or the right to receive benefits from the SPEs that could potentially be significant to the SPEs. The SPEs are consolidated within our consolidated financial statements, and our consolidated financial statements as ofSeptember 30, 2021 andDecember 31, 2020 include the following assets of such variable interest entities: restricted cash,$20.0 million and$6.8 million ; accounts receivable, net,$8.3 million and$1.6 million ; inventory,$900.3 million and$171.2 million , prepaid expenses and other current assets,$2.9 million and$1.0 million ; property & equipment, net,$4.4 million and$2.8 million ; and total assets of$935.9 million and$183.5 million , respectively. See Note 12: "Variable Interest Entities" in the notes to our unaudited interim condensed consolidated financial statements.
Recent accounting positions
For a discussion of recent accounting pronouncements, see “New recently adopted pronouncements” and “New recently issued and not yet adopted pronouncements” in Note 2: “Summary of significant accounting policies” in the notes to our statements condensed consolidated financial statements.
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