Notes to Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands, except share and per share information or unless otherwise noted)
1. Organization and business operations
On July 28, 2021 (the “Closing Date”), Capitol Investment Corp. V (“Capitol”) consummated a business combination (the “Business Combination”) with Doma Holdings, Inc., a Delaware corporation (“Old Doma”), pursuant to the agreement and plan of merger, dated March 2, 2021, by and among Capitol, Capitol V Merger Sub, Inc., a wholly owned subsidiary of Capitol (“Merger Sub”), and Old Doma (as amended on March 18, 2021, the “Agreement”). In connection with the closing of the Business Combination, Old Doma changed its name to States Title Holding, Inc. (“States Title”), Capitol changed its name to Doma Holdings, Inc. (“Doma”) and Old Doma became a wholly owned subsidiary of Doma. Doma continues the existing business operations of Old Doma as a publicly traded company. See Note 3 for additional information on the Business Combination.
Unless the context otherwise requires, references herein to “company,” “Company,” “Doma,” “we,” “us,” “our” and similar terms refer to Doma Holdings, Inc. (f/k/a Capitol Investment Corp. V) and its consolidated subsidiaries. References to “Capitol” refer to our legal predecessor company prior to the consummation of the Business Combination. References to “Old Doma” refer to Old Doma prior to the Business Combination and to States Title, the wholly owned subsidiary of Doma, upon the consummation of the Business Combination.
Headquartered in San Francisco, California, Doma is a real estate technology company that is architecting the future of real estate transactions. Using machine intelligence and our proprietary technology solutions, we are creating a vastly more simple, efficient, and affordable real estate closing experience for current and prospective homeowners, lenders, title agents and real estate professionals. We are licensed to underwrite title insurance in 42 states and the District of Columbia.
Old Doma was initially formed as a wholly-owned subsidiary of States Title Inc. (“Legacy States Title”) to combine the operations of Legacy States Title and the retail agency and title insurance underwriting business (the “Acquired Business”) of North American Title Group, LLC (“NATG”), a subsidiary of Lennar Corporation (“Lennar”). We completed the acquisition of the Acquired Business on January 7, 2019, which we refer hereinafter as the “North American Title Acquisition.” Old Doma survived the North American Title Acquisition as the parent company and now wholly owns the businesses operated by Legacy States Title and the Acquired Business.
We conduct our operations through two reportable segments, (1) Distribution and (2) Underwriting. See further discussion in Note 7 for additional information regarding segment information.
2. Summary of significant accounting policies
Basis of presentation
The accompanying condensed consolidated balance sheet as of March 31, 2022 and the condensed consolidated statements of operations, condensed consolidated statements of comprehensive loss, condensed consolidated statements of changes in stockholders’ equity and the condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2021 are unaudited.
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s balance sheet as of March 31, 2022 and its results of operations, including its comprehensive income, stockholders’ equity and cash flows for the three months ended March 31, 2022 and 2021. All adjustments are of a normal recurring nature. The results for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for any subsequent quarter or for the
fiscal year ending December 31, 2022. These unaudited interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements and related notes.
References to the Accounting Standard Codification (“ASC”) and Accounting Standard Updates (“ASU”) included hereinafter refer to the Accounting Standards Codification and Updates issued by the Financial Accounting Standards Board (“FASB”) as the source of authoritative U.S. GAAP. The accompanying condensed consolidated financial statements include the accounts of the Company and the accounts of the Company’s wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from the estimates made by management. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively.
Significant items subject to such estimates and assumptions include, but are not limited to, reserves for incurred but not reported claims, the useful lives of property and equipment, accrued net premiums written from Third-Party Agent (as defined in Item 2) referrals, fair value measurements, and the valuations of stock-based compensation arrangements and the Sponsor Covered Shares liability (as defined below).
Title plants
Title plants are carried at cost, with costs incurred to maintain, update and operate title plants expensed as incurred. Because properly maintained title plants have indefinite lives and do not diminish in value with the passage of time, no provision has been made for depreciation or amortization. The Company analyzes the title plants for impairment when events or circumstances indicate that the carrying amount may not be recoverable. This analysis includes, but is not limited to, the effects of obsolescence, duplication, demand and other economic factors. There were no impairments of title plants for the three months ended March 31, 2022 and 2021.
Reinsurance
The Company utilizes excess of loss and quota share reinsurance programs to limit its maximum loss exposure by reinsuring certain risks with other insurers. The Company has two reinsurance treaties: the Excess of Loss Treaty and the Quota Share Treaty.
Under the Excess of Loss Treaty, we cede liability over $15.0 million on all files. Excess of loss reinsurance coverage protects the Company from a large loss from a single loss occurrence. The Excess of Loss Treaty provides for ceding liability above the retention of $15.0 million for all policies up to a liability cap of $500.0 million.
Under the Quota Share Treaty, during the period from January 1, 2021 to February 23, 2021 the Company ceded 100% of its instant underwriting policies. Effective February 24, 2021, the Company cedes 25% of the written premium on our instantly underwritten policies.
Payments and recoveries on reinsured losses for the Company’s title insurance business were immaterial during the three months ended March 31, 2022 and 2021.
Ceding commission from reinsurance transactions are presented as revenue within the “Escrow, other title-related fees and other” revenue line item in the consolidated statements of operations.
Total premiums ceded in connection with reinsurance are netted against the written premiums in the consolidated statements of operations. Gross premiums written and ceded premiums are as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Gross premiums written | 97,242 | | | 110,611 | |
| Ceded premiums | (1,576) | | | (2,619) | |
| Net premiums written | 95,666 | | | 107,992 | |
| Percentage of amount assumed to net | 98.4 | % | | 97.6 | % |
Income taxes
Our effective tax rate for the three months ended March 31, 2022 and 2021 was (1)% and (1)%, respectively, as a result of our recording a full valuation allowance against the deferred tax assets. In determining the realizability of the net U.S. federal and state deferred tax assets, we consider numerous factors including historical profitability, estimated future taxable income, prudent and feasible tax planning strategies, and the industry in which we operate. As of March 31, 2022 and December 31, 2021, the Company carried a valuation allowance against deferred tax assets as management believes it is more likely than not that the benefit of the net deferred tax assets covered by that valuation allowance will not be realized. A net deferred tax liability has been recorded as of March 31, 2022 and December 31, 2021 of $1.7 million and $1.8 million, respectively, and is included in accrued expenses and other liabilities within the accompanying condensed consolidated balance sheets. Management reassesses the realization of the deferred tax assets each reporting period. The Company has approximately $0.2 million of pre-2018 federal net operating losses subject to expiration beginning in 2036. The remainder of the federal net operating losses have no expiration. The Company’s state net operating losses are subject to various expirations, beginning in 2030. The Company’s 2018 through 2020 tax years remain open to federal examinations. The Company’s 2017 through 2020 tax years remain open to state tax examinations. The Company believes that as of March 31, 2022 it had no material uncertain tax positions. Interest and penalties related to unrecognized tax expenses (benefits) are recognized in income tax expense, when applicable. There were no material liabilities for interest and penalties accrued as of March 31, 2022.
Leases
The Company determines if a contract contains a lease at inception of the contract. The Company's inventory of leases primarily consists of operating office space and office equipment leases which are recorded as a lease obligation liability and as a lease right-of-use asset on the the accompanying condensed consolidated balance sheet. The lease right-of-use asset represents the Company's right to use each underlying asset for the lease term and the lease obligation liability represents the Company's obligation over the lease term. The Company's lease obligation is recorded at the present value of the lease payments based on the term of the lease. The Company applies an incremental borrowing rate of interest as of the effective date of adoption or the lease effective date equivalent to a collateralized borrowing rate with similar terms. The discount rate used to calculate the present value of our future minimum lease payments is based, where appropriate, on the Company's incremental borrowing rate of its current loan and security agreement.
Lease expenses for lease payments, where appropriate, are recognized on a straight-line basis over the lease term. Short-term leases of 12 months or less are recorded in the condensed consolidated balance sheet and lease payments are recognized on the condensed consolidated statement of operations. The Company accounts for agreements with lease and non-lease components as a single lease component. For more information on leases, refer to Note 17 of this Quarterly Report.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in financial institutions and our investment portfolio. The Company has not experienced losses on the cash accounts and management believes the Company is not exposed to significant risks on such accounts.
Additionally, we manage the exposure to credit risk in our investment portfolio by investing in high quality securities and diversifying our holdings. Our investment portfolio is comprised of corporate debt, certificates of deposit, single-family residential mortgage loans, U.S. government agency obligations and U.S. Treasuries.
Emerging Growth Company and Smaller Reporting Company
Subsequent to the Business Combination described in Note 3, the Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s condensed financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Additionally, subsequent to the Business Combination described in Note 3, the Company is a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements.
Recently issued and adopted accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326). The amendments in this and the related ASUs introduce broad changes to accounting for credit impairment of financial instruments. The primary updates include the introduction of a new current expected credit loss (“CECL”) model that is based on expected rather than incurred losses for instruments measured at amortized cost and amends the accounting for impairment of held-to-maturity securities and available-for-sale securities. This model incorporates past experience, current conditions and reasonable and supportable forecasts affecting collectability of these instruments. The amendments in this update are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For all other entities, the amendment is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The early adoption of this new guidance on January 1, 2022 required the Company to record an allowance for credit losses for the Company’s held-to-maturity investment portfolio, which resulted in an allowance of $0.4 million and a corresponding $0.4 million adjustment for the cumulative effect of a change in accounting principle, net of income taxes. For more information on the held-to-maturity allowance for credit losses, refer to Note 4 of this Quarterly Report. Prior to the adoption of the new guidance, the Company utilized an aging model to estimate credit losses on accounts receivable. As this aging model is allowed under the new guidance, there is no impact to the Company’s allowance for credit losses for accounts receivable. The adoption of this new standard did not have a significant impact on the condensed consolidated statements of operations or the condensed consolidated statements of cash flows. The guidance also requires additional disclosures regarding the Company’s held-to-maturity allowance for credit losses, which have been included within Note 4.
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on an
effective interest rate method or on a straight-line basis over the term of the lease. Modified or new leases subsequent to the effective date will follow ASC 2016-02. Accounting for lessors remains largely unchanged from current U.S. GAAP. Under ASU 2020-05, the effective date for adoption of ASU 2016-02 is fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. We early adopted this new guidance on January 1, 2022 under a modified retrospective transition approach using the cumulative-effect adjustment transition method approved by the FASB, which results in reporting for the comparative periods presented in accordance with the previous lease guidance under ASC 840. We elected the package of practical expedients but did not adopt the hindsight practical expedient as of January 1, 2022. The package of practical expedients allowed the Company not to reassess whether the arrangement contains a lease, lease classification and whether previously capitalized costs qualify as initial direct costs. The practical expedients allowed the Company to continue classifying all of its leases as operating leases as they were previously classified under ASC 840. The Company recognized lease liabilities of $24.4 million and corresponding right-of-use assets of $23.8 million in our consolidated balance sheet on January 1, 2022. The difference between the lease liabilities and corresponding right-of-use assets related to prepaid rent and deferred lease obligations recognized in prepaid expenses, deposits and other assets and accrued expenses and other liabilities, respectively, in our consolidated balance sheet on January 1, 2022, resulting in no cumulative-effect adjustment to opening equity. The new standard did not have a significant impact on the condensed consolidated statements of operations or the condensed consolidated statements of cash flows. The guidance also requires additional disclosures regarding the Company’s lease portfolio, which have been included within Note 17.
In January 2020, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. Specifically, ASU 2019-12 eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 is effective for annual periods beginning after December 15, 2020, and interim periods beginning after December 15, 2020. ASU 2019-12 is effective for private entities for annual periods beginning after December 15, 2021, and interim periods beginning after December 15, 2022, with early adoption permitted. The Company adopted ASU 2019-12 under the private company transition guidance beginning January 1, 2022, and the adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements or disclosures given the Company has a full valuation allowance and the scenarios for which the guidance offer simplification are not significant for the Company.
Recently issued but not adopted accounting pronouncements
In August 2018, the FASB issued ASU 2018-12, Financial Services-Insurance (Topic 944), Targeted Improvements to the Accounting for Long-Duration Contracts, effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. In June of 2020, the FASB deferred the effective date of ASU 2018-12 for one-year in response to implementation challenges resulting from COVID-19. This update requires insurance companies to annually review and update the assumptions used for measuring the liability under long-duration contracts. The amendments in this ASU may be early adopted as of the beginning of an annual reporting period for which financial statements have not yet been issued, including interim financial statements. We do not currently expect to early adopt this standard. Although we have long-duration contracts, this specific guidance is not expected to impact our title insurance operations; therefore, we do not expect this standard to have a material impact on our condensed consolidated financial statements.
3. Business Combination
As described in Note 1, on March 2, 2021, Old Doma entered into the Agreement with Capitol, a blank check company incorporated in the State of Delaware and formed for the purpose of effecting a merger. Pursuant to the Agreement, a newly formed subsidiary of Capitol was merged with and into Old Doma, and the Business Combination was completed on July 28, 2021. The Business Combination was accounted for as a reverse recapitalization and Capitol was treated as the acquired company for financial statement reporting purposes. Old Doma was deemed the predecessor for financial reporting purposes and Doma was deemed the successor SEC registrant, meaning that Old Doma’s financial statements for periods prior to the consummation of the Business
Combination are disclosed in the financial statements included within this Quarterly Report and will be disclosed in Doma’s future periodic reports. No goodwill or other intangible assets were recorded, in accordance with GAAP. At the Closing Date, Doma received gross cash consideration of $345.0 million as a result of the reverse recapitalization from Capitol’s trust account, which was then reduced by the redemption of Class A common stock of $294.9 million. In addition, existing Old Doma stockholders and option holders received cash payments from the settlement of the net proceeds of the Business Combination totaling $20.1 million.
In connection with the Business Combination, Capitol entered into subscription agreements with certain investors, whereby Doma issued 30,000,000 shares of common stock at $10.00 per share for an aggregate purchase price of $300.0 million (the “PIPE Investment”), which closed simultaneously with the consummation of the Business Combination.
Upon the Closing Date, holders of Old Doma common stock, par value $0.0001 per share (“Old Doma Common Stock”) received shares of our common stock in an amount determined by the exchange ratio of approximately 5.994933 to 1 (the “Exchange Ratio”), which was based on the implied price per share prior to the Business Combination established within the Agreement. Reported shares and earnings per share available to holders of Old Doma’s Common Stock, prior to the Business Combination, have been retroactively restated reflecting the Exchange Ratio. Applicable share activity within the statement of changes in stockholder’s equity were also retroactively converted to our common stock at the Exchange Ratio.
Old Doma recorded the net assets acquired from Capitol. The total estimated transaction costs directly attributable to the Business Combination are approximately $67.0 million, consisting of advisory, legal, share registration and other professional fees. $12.1 million of these fees represent underwriter fees incurred by Capitol prior to the Business Combination related to their initial public offering.
Immediately after the Closing Date, 1,325,664 shares of common stock held by the Sponsor became subject to vesting, contingent upon the price of Doma’s common stock, par value 0.0001 (“Doma common stock”) exceeding certain thresholds (the “Sponsor Covered Shares”).
Immediately after giving effect to the Business Combination and the PIPE Investment, there were 321,461,822 shares of common stock outstanding, which excludes the 1,325,664 of Sponsor Covered Shares. The Company is authorized to issue 2,000,000,000 shares of common stock having a par value of $0.0001 per share. Additionally, the Company is authorized to issue 100,000,000 shares of preferred stock having a par value of $0.0001 per share. As of March 31, 2022, there were 324,348,254 and 0 shares of common stock and preferred stock issued and outstanding, respectively, which excludes the 1,325,664 of Sponsor Covered Shares.
On December 4, 2020, Capitol consummated its initial public offering, which included the issuance of 11,500,000 redeemable warrants (the “Public Warrants”). Simultaneously with the closing of the initial public offering, Capitol completed the private sale of 5,833,333 warrants (the “Private Placement Warrants”). These Warrants remain outstanding following the Business Combination and each whole warrant entitles the holder to purchase one share of our common stock at a price of $11.50 (see Note 16 for additional information).
Immediately after the Closing Date, 20% of the aggregate of our common stock held by certain investors (collectively, the “Sponsor”) became subject to vesting, contingent upon the price of our common stock exceeding certain thresholds. The Sponsor Covered Shares will vest in two tranches: (i) one-half of such shares shall vest if the last reported sale price of the common stock equals or exceeds $15.00 for any 20 trading days within any 30-day trading period ending on or before the tenth anniversary of the Closing Date, and (ii) one-half of such shares shall vest if the last reported sale price of the common stock equals or exceeds $17.50 for any 20 trading days within any 30-day trading period ending on or before the tenth anniversary of the Closing Date. The Sponsor is also entitled to the Sponsor Covered Shares if a covered strategic transaction or change in control, as defined by the sponsor support agreement dated as of March 2, 2021 (the “Sponsor Support Agreement”) by and among the sponsors named thereto, Capitol and Old Doma, occurs prior to the ten (10)-year anniversary of the Closing Date. As of March 31, 2022, the Sponsor Covered Shares were legally outstanding; however, since none of the conditions were met, no related shares are included in the Company's condensed consolidated balance sheets and condensed consolidated statement of changes in stockholders’ equity or for the purposes of calculating earnings per share.
Also following the Closing Date, the Sellers have the contingent right to receive up to an additional number of shares equal to 5% of the sum of (i) the aggregate number of outstanding shares of our common stock (including restricted common stock, but excluding Sponsor Covered Shares), plus (ii) the maximum number of shares underlying our options that are vested and the maximum number of shares underlying warrants to purchase shares of Doma common stock issued as replacement warrants for Old Doma warrants, in each case of these clauses (i) and (ii), as of immediately following the Closing Date (the “Seller Earnout Shares”). The Seller Earnout Shares are contingently issuable to the Sellers in two tranches: (i) one-half of such shares shall be issued if the last reported sale price of the common stock equals or exceeds $15.00 for any 20 trading days within any 30-day trading period ending on or before the fifth anniversary of the Closing Date, and (ii) one-half of such shares shall be issued if the last reported sale price of the common stock equals or exceeds $17.50 for any 20 trading days within any 30-day trading period ending on or before the fifth anniversary of the Closing Date. Since none of the conditions of the Seller Earnout Shares were met as of March 31, 2022, no related shares are included in the Company’s condensed consolidated statements of changes in stockholders’ equity as of March 31, 2022 or for purposes of calculating earnings per share.
Unless the context otherwise requires or otherwise indicates, share counts of Doma common stock provided in this Quarterly Report exclude both the Sponsor Covered Shares and the Seller Earnout Shares.
4. Investments and fair value measurements
Held-to-maturity debt securities
The cost basis, fair values and gross unrealized gains and losses of our held-to-maturity debt securities are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Corporate debt securities(1) | $ | 55,727 | | | $ | 42 | | | $ | (906) | | | $ | 54,863 | | | $ | 62,078 | | | $ | 459 | | | $ | (207) | | | $ | 62,330 | |
| U.S. Treasury securities | 6,834 | | | — | | | (98) | | | 6,736 | | | 4,849 | | | — | | | (16) | | | 4,833 | |
| Certificates of deposit | 237 | | | — | | | — | | | 237 | | | 237 | | | — | | | — | | | 237 | |
| Total | $ | 62,798 | | | $ | 42 | | | $ | (1,004) | | | $ | 61,836 | | | $ | 67,164 | | | $ | 459 | | | $ | (223) | | | $ | 67,400 | |
_______________
(1)Includes both U.S. and foreign corporate debt securities.
The cost basis of held-to-maturity debt securities includes an adjustment for the amortization of premium or discount since the date of purchase. Held-to-maturity debt securities valued at approximately $4.5 million and $4.2 million were on deposit with various governmental authorities at March 31, 2022 and December 31, 2021, respectively, as required by law.
The change in net unrealized gains and losses on held-to-maturity debt securities for the three months ended March 31, 2022 and 2021 was $(1.2) million and $(0.1) million, respectively.
Net realized gains of held-to-maturity debt securities are computed using the specific identification method and are included in the condensed consolidated statements of operations.
The following table presents certain information regarding contractual maturities of our held-to-maturity debt securities:
| | | | | | | | | | | | | | | | | | | | | | | |
| Maturity | March 31, 2022 |
| Amortized Cost | | % of Total | | Fair Value | | % of Total |
One year or less | $ | 30,051 | | | 48 | % | | $ | 29,973 | | | 48 | % |
After one year through five years | $ | 32,747 | | | 52 | % | | $ | 31,863 | | | 52 | % |
| Total | $ | 62,798 | | | 100 | % | | $ | 61,836 | | | 100 | % |
There were no held-to-maturity debt securities with contractual maturities after five years. Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Net unrealized losses on held-to-maturity debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Corporate debt securities | | U.S. Treasury securities | | Certificate of deposits | | Total | | Corporate debt securities | | U.S. Treasury securities | | Certificate of deposits | | Total |
Less than 12 months | | | | | | | | | | | | | | | |
Fair value | $ | 40,973 | | | $ | 6,571 | | | $ | — | | | $ | 47,544 | | | $ | 18,309 | | | $ | 4,667 | | | $ | — | | | $ | 22,976 | |
Unrealized losses | $ | (836) | | | $ | (98) | | | $ | — | | | $ | (934) | | | $ | (192) | | | $ | (16) | | | $ | — | | | $ | (208) | |
| Greater than 12 months | | | | | | | | | | | | | | | |
| Fair value | $ | 1,085 | | | $ | — | | | $ | — | | | $ | 1,085 | | | $ | 605 | | | $ | — | | | $ | — | | | $ | 605 | |
| Unrealized losses | $ | (70) | | | $ | — | | | $ | — | | | $ | (70) | | | $ | (15) | | | $ | — | | | $ | — | | | $ | (15) | |
| Total | | | | | | | | | | | | | | | |
| Fair value | $ | 42,058 | | | $ | 6,571 | | | $ | — | | | $ | 48,629 | | | $ | 18,914 | | | $ | 4,667 | | | $ | — | | | $ | 23,581 | |
| Unrealized losses | $ | (906) | | | $ | (98) | | | $ | — | | | $ | (1,004) | | | $ | (207) | | | $ | (16) | | | $ | — | | | $ | (223) | |
We believe that any unrealized losses on our held-to-maturity debt securities at March 31, 2022 are temporary based upon our current analysis of the issuers of the securities that we hold and current market conditions. We have no intent to sell, and it is more likely than not that we will not be required to sell, these securities until the fair value recovers to at least equal our cost basis or the securities mature.
Under the new CECL model, the Company recognizes credit losses for its held-to-maturity debt securities by setting up an allowance which is remeasured each reporting period, with changes in the allowance recorded in the condensed consolidated statements of operations. The Company establishes an allowance for credit losses based on a number of factors including the current economic conditions, management's expectations of future economic conditions and performance indicators, such as credit agency ratings and payment and default history. As of March 31, 2022, credit agency ratings on our U.S. Treasury and corporate debt securities ranged from AAA through B1.
For our held-to-maturity debt securities, the Company's model estimates expected credit loss by multiplying the exposure at default by both the probability of default and loss given default (“LGD”). The probability of default and LGD percentages are estimated after considering historical experience with global default rates and unsecured bond recovery rates for horizons aligning to the Company’s held-to-maturity debt security portfolio. The calculated
allowance is recorded as an offset to held-to-maturity debt securities in the condensed consolidated balance sheets and in the investment, dividend and other income line on the condensed consolidated statements of operations.
| | | | | | | | | |
| Rollforward of Credit Loss Allowance for Held-to-Maturity Debt Securities | | |
Beginning balance, January 1, 2022 | $ | 399 | | | | | |
Current-period provision (reduction) for expected credit losses | (17) | | | | | |
Write-off charged against the allowance, if any | — | | | | | |
Recoveries of amounts previously written off, if any | — | | | | | |
Ending balance of the allowance for credit losses, March 31, 2022 | $ | 382 | | | | | |
The current-period provision for expected credit losses is due to changes in portfolio composition and the maturity of certain securities.
Available-for-sale debt securities
The change in net unrealized gains on available-for-sale debt securities for the three months ended 2021 was $(0.9) million. The Company disposed all available-for-sale debt securities in the three months ended March 31, 2021 and therefore had no unrealized gain or loss as of March 31, 2022 and no change in net unrealized gains on available-for-sale debt securities for the three months ended March 31, 2022.
The following table reflects the composition of net realized gains or losses for the sales of the available-for-sale securities:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2022 | | 2021 | | | | |
| Realized gains (losses): | | | | | | | |
Available-for-sale debt securities: | | | | | | | |
Gains | $ | — | | | $ | 768 | | | | | |
Losses | — | | | (90) | | | | | |
Net | $ | — | | | $ | 678 | | | | | |
Net realized gains on disposition of available-for-sale debt securities are computed using the specific identification method and are included in the condensed consolidated statements of operations.
Equity securities
The Company disposed of all equity securities in the three months ended March 31, 2021.
Mortgage loans
The mortgage loan portfolio as of March 31, 2022 is comprised entirely of single-family residential mortgage loans. During the three months ended March 31, 2022, the Company did not purchase any new mortgage loans.
Mortgage loans, which include contractual terms to maturity of thirty years, are not categorized by contractual maturity as borrowers may have the right to call or prepay obligations with, or without, call or prepayment penalties.
The cost and estimated fair value of mortgage loans are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Cost | | Estimated Fair Value | | Cost | | Estimated Fair Value |
Mortgage loans | $ | 1,141 | | | $ | 1,141 | | | $ | 2,022 | | | $ | 2,022 | |
Total | $ | 1,141 | | | $ | 1,141 | | | $ | 2,022 | | | $ | 2,022 | |
Investment income
Investment income from securities consists of the following:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2022 | | 2021 | | | | |
Available-for-sale debt securities | $ | — | | | $ | 773 | | | | | |
Held-to-maturity debt securities | 389 | | | 394 | | | | | |
Equity investments | — | | | (89) | | | | | |
Mortgage loans | 22 | | | 46 | | | | | |
Other | 44 | | | 60 | | | | | |
Total | $ | 455 | | | $ | 1,184 | | | | | |
Accrued interest receivable
Accrued interest receivable from investments is included in receivables, net in the condensed consolidated balance sheets. The following table reflects the composition of accrued interest receivable for investments:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Corporate debt securities | $ | 409 | | | $ | 874 | |
U.S. Treasury securities | 20 | | | 12 | |
Accrued interest receivable on investment securities | $ | 429 | | | $ | 886 | |
Mortgage loans | 8 | | | 13 | |
Accrued interest receivable on investments | $ | 437 | | | $ | 899 | |
The Company does not recognize an allowance for credit losses for accrued interest receivable, which is recorded in the receivables line in the condensed consolidated balance sheets, because the Company writes off accrued investment timely. The Company writes off accrued interest receivables after three months by reversing interest income.
Fair value measurement
ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”) establishes a fair value hierarchy that prioritizes and ranks the level of observability of inputs used to measure financial assets or liabilities at fair value. The observability of inputs is impacted by a number of factors, including the type of asset or liability, characteristics specific to the asset or liability, market conditions and other factors. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under ASC 820 are as follows:
| | | | | | | | |
| Level 1 | | Quoted prices (unadjusted) in active markets for identical asset or liability at the measurement date are used. |
| | |
| Level 2 | | Pricing inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 pricing inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| | |
| Level 3 | | Pricing inputs are unobservable and include situations where there is little, if any, market activity for the asset or liability. The inputs used in determination of fair value require significant judgment and estimation. |
When fair value inputs fall within different levels of the fair value hierarchy, the level in the fair value hierarchy within which the asset or liability is categorized in its entirety is determined based on the lowest level input that is
significant to the asset or liability. Assessing the significance of a particular input to the valuation of an asset or liability in its entirety requires judgment and considers factors specific to the asset or liability. The categorization of an asset or liability within the hierarchy is based upon the pricing transparency of the asset or liability and does not necessarily correspond to the perceived risk of that asset or liability.
The following table summarizes the Company’s investments measured at fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets |
| Corporate debt securities | | U.S. Treasury securities | | Mortgage loans | | Certificate of deposits | | Total |
| March 31, 2022 | | | | | | | | | |
Level 1 | $ | — | | | $ | 6,736 | | | $ | — | | | $ | — | | | $ | 6,736 | |
Level 2 | 54,863 | | | — | | | — | | | 237 | | | 55,100 | |
Level 3 | — | | | — | | | 1,141 | | | — | | | 1,141 | |
Total | $ | 54,863 | | | $ | 6,736 | | | $ | 1,141 | | | $ | 237 | | | $ | 62,977 | |
| | | | | | | | | |
| December 31, 2021 | | | | | | | | | |
Level 1 | $ | — | | | $ | 4,833 | | | $ | — | | | $ | — | | | $ | 4,833 | |
Level 2 | 62,330 | | | — | | | — | | | 237 | | | 62,567 | |
Level 3 | — | | | — | | | 2,022 | | | — | | | 2,022 | |
Total | $ | 62,330 | | | $ | 4,833 | | | $ | 2,022 | | | $ | 237 | | | $ | 69,422 | |
The Company classifies U.S. Treasury bonds within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. Corporate debt securities and certificates of deposit are classified within Level 2 because they are valued using inputs other than quoted prices that are directly or indirectly observable in the market, including readily available pricing sources for the identical underlying security which may not be actively traded. The Company classifies mortgage loans as Level 3 due to the reliance on significant unobservable valuation inputs.
The Company’s liabilities in the following table are recorded at fair value on the accompanying condensed consolidated balance sheets. The following table summarizes the Company’s liabilities measured at fair value:
| | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities |
| Public Warrants | | Private Placement Warrants | | Sponsor Covered Shares | | Total |
| March 31, 2022 | | | | | | | |
Level 1 | $ | 4,025 | | | $ | — | | | $ | — | | | $ | 4,025 | |
Level 2 | — | | | 2,042 | | | — | | | 2,042 | |
Level 3 | — | | | — | | | 1,916 | | | 1,916 | |
Total | $ | 4,025 | | | $ | 2,042 | | | $ | 1,916 | | | $ | 7,983 | |
| | | | | | | |
| December 31, 2021 | | | | | | | |
Level 1 | $ | 10,925 | | | $ | — | | | $ | — | | | $ | 10,925 | |
Level 2 | — | | | 5,542 | | | — | | | 5,542 | |
Level 3 | — | | | — | | | 5,415 | | | 5,415 | |
Total | $ | 10,925 | | | $ | 5,542 | | | $ | 5,415 | | | $ | 21,882 | |
The Company considers the Public Warrants to be Level 1 liabilities due to the use of an observable market quote in an active market under the ticker DOMA.WS. For the Private Placement Warrants, the Company considers the fair value of each Private Placement Warrant to be equivalent to that of each Public Warrant, with an immaterial
adjustment for short-term marketability restrictions. As such, the Private Placement Warrants are classified as Level 2.
The fair value of the Sponsor Covered Shares was determined using a Monte Carlo simulation valuation model using a distribution of potential stock price outcomes on a daily basis over the 10-year vesting period. The unobservable significant inputs to the valuation model were as follows:
| | | | | |
| | March 31,
2022 |
| Current stock price | $ | 2.17 | |
| Expected volatility | 60.0 | % |
| Risk-free interest rate | 2.32 | % |
| Expected term | 9.3 years |
| Expected dividend yield | — | % |
| Annual change in control probability | 2.0 | % |
The changes for Level 3 items measured at fair value on a recurring basis using significant unobservable inputs are as follows:
| | | | | |
| Sponsor Covered Shares |
Fair value as of December 31, 2021 | $ | 5,415 | |
| Change in fair value of Sponsor Covered Shares | (3,499) | |
Fair value as of March 31, 2022 | $ | 1,916 | |
There were no transfers of assets or liabilities between Level 1 and Level 2 during the three months ended March 31, 2022 and the year ended December 31, 2021. There were no transfers involving Level 3 assets or liabilities during the three months ended March 31, 2022 and the year ended December 31, 2021.
Cash and cash equivalents, restricted cash, receivables, prepaid expenses and other assets, accounts payable, and accrued expenses and other liabilities approximate fair value and are therefore excluded from the leveling table above. The cost basis is determined to approximate fair value due to the short term duration of these financial instruments.
5. Revenue recognition
Disaggregation of revenue
Our revenue consists of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three months ended
March 31, | | |
| | | | | | 2022 | | 2021 | | | | |
| Revenue Stream | | Statements of Operations Classification | | Segment | | Total Revenue | | |
| Revenue from insurance contracts: | | | | | | | | | | | | |
Direct Agents title insurance premiums | | Net premiums written | | Underwriting | | $ | 22,413 | | | $ | 24,573 | | | | | |
| Direct Agents title insurance premiums | | Net premiums written | | Elimination | | — | | | (770) | | | | | |
Third-Party Agent title insurance premiums | | Net premiums written | | Underwriting | | 73,253 | | | 84,189 | | | | | |
Total revenue from insurance contracts | | | | | | $ | 95,666 | | | $ | 107,992 | | | | | |
| Revenue from contracts with customers: | | | | | | | | | | | | |
Escrow fees | | Escrow, title-related and other fees | | Distribution | | $ | 11,832 | | | $ | 13,380 | | | | | |
Other title-related fees and income | | Escrow, title-related and other fees | | Distribution | | 22,448 | | | 24,266 | | | | | |
Other title-related fees and income | | Escrow, title-related and other fees | | Underwriting | | 803 | | | 1,409 | | | | | |
Other title-related fees and income | | Escrow, title-related and other fees | | Elimination(1) | | (18,970) | | | (20,480) | | | | | |
Total revenue from contracts with customers | | | | | | $ | 16,113 | | | $ | 18,575 | | | | | |
| Other revenue: | | | | | | | | | | | | |
Interest and investment income (2) | | Investment, dividend and other income | | Distribution | | 41 | | | 50 | | | | | |
Interest and investment income (2) | | Investment, dividend and other income | | Underwriting | | 410 | | | 451 | | | | | |
Realized gains and losses, net | | Investment, dividend and other income | | Distribution | | (27) | | | (4) | | | | | |
Realized gains and losses, net | | Investment, dividend and other income | | Underwriting | | 4 | | | 732 | | | | | |
Total other revenues | | | | | | $ | 428 | | | $ | 1,229 | | | | | |
Total revenues | | | | | | $ | 112,207 | | | $ | 127,796 | | | | | |
_________________
(1)Premiums retained by Direct Agents are recognized as income to the Distribution segment, and expense to the Underwriting segment. Upon consolidation, the impact of these internal segment transactions is eliminated. See Note 7. Segment information for additional breakdown.
(2)Interest and investment income consists primarily of interest payments received on held-to-maturity debt securities, available-for-sale debt securities and mortgage loans.
6. Liability for loss and loss adjustment expenses
A summary of the changes in the liability for loss and loss adjustment expenses for the three months ending March 31, 2022 and 2021 is as follows:
| | | | | | | | | | | |
| March 31, |
| 2022 | | 2021 |
Balance at the beginning of the year | $ | 80,267 | | $ | 69,800 | |
| | | |
| Provision for claims related to: | | | |
Current year | $ | 5,656 | | $ | 6,490 | |
Prior years | (1,045) | | (3,241) | |
Total provision for claims | $ | 4,611 | | $ | 3,249 | |
| | | |
| Paid losses related to: | | | |
Current year | $ | (548) | | $ | (222) | |
Prior years | (1,796) | | (2,176) | |
Total paid losses | $ | (2,344) | | $ | (2,398) | |
| | | |
Balance at the end of the period | $ | 82,534 | | $ | 70,651 | |
| | | |
Provision for claims as a percentage of net written premiums | 4.8 | % | | 3.0 | % |
We continually update our liability for loss and loss adjustment expense estimates as new information becomes known, new loss patterns emerge, or as other contributing factors are considered and incorporated into the analysis. Estimating future title loss payments is difficult because of the complex nature of title claims, the long periods of time over which claims are paid, significantly varying dollar amounts of individual claims, and other factors.
Current year incurred and paid losses includes current year reported claims as well as estimated future losses on such claims.
For the three months ended March 31, 2022, the prior year’s provision for claims release of $1.0 million is due to reported loss emergence which was lower than expected. Historically, this favorable loss experience has resulted in a decrease in the projection of ultimate loss for past policy years. Most recently, our favorable loss experience resulted in a decrease in the projection of ultimate loss for policy years 2018-2020. For the three months ended March 31, 2021, the provision for claims reserve release related to prior years of $3.2 million is due to reported loss emergence which was lower than expected. This has resulted in a decrease in the projection of ultimate loss for policy years 2017-2020. The actuarial assumptions underlying the Company’s selected ultimate loss estimates place more consideration on title insurance industry benchmarks for more recent policy years. These title insurance benchmarks are based on industry long-term average loss ratios. As the Company’s claims experience matures, we refine those estimates to put more consideration to the Company’s actual claims experience. For the three months ended March 31, 2022 and 2021, the Company’s actual claims experience reflects lower loss ratios than industry benchmarks from a current positive underwriting cycle and resulted in the favorable development.
Current year incurred and paid losses includes current year reported claims as well as estimated future losses on such claims.
The liability for loss and loss adjustment expenses of $82.5 million and $80.3 million, as of March 31, 2022 and December 31, 2021, respectively, includes $0.5 and $0.1 million, respectively, of reserves for the settlement of claims which the Company has deemed to be directly related to its escrow or agent related activities. The reserves for the settlement of claims related to escrow or agent related activities are not actuarially determined.
7. Segment information
The Company’s chief operating decision maker reviews financial performance and makes decisions about the allocation of resources for our operations through two reportable segments, (1) Distribution and (2) Underwriting. The Company’s reportable segments offer different products and services that are marketed through different channels for real estate closing transactions. They are managed separately because of the unique technology, service requirements and regulatory environment.
A description of each of our reportable segments is as follows.
•Distribution: Our Distribution segment reflects our Direct Agents operations of acquiring customer orders and providing title and escrow services for real estate closing transactions. We acquire customers through our partnerships with realtors, attorneys and non-centralized loan originators via a 108-branch footprint across ten states as of March 31, 2022 (“Local”) and our partnerships with national lenders and mortgage originators that maintain centralized lending operations representing our Doma Enterprise accounts (“Doma Enterprise”).
•Underwriting: Our Underwriting segment reflects the results of our title insurance underwriting business, including policies referred through our Direct Agents and Third-Party Agents channels. The referring agents typically retain approximately 82% - 84% of the policy premiums in exchange for their services. The retention varies by state and agent.
We use adjusted gross profit as the primary profitability measure for making decisions regarding ongoing operations. Adjusted gross profit is calculated by subtracting direct costs, such as premiums retained by agents, direct labor, other direct costs, and provision for claims, from total revenue. Our chief operating decision maker evaluates the results of the aforementioned segments on a pre-tax basis. Segment adjusted gross profit excludes certain items which are included in net loss, such as depreciation and amortization, corporate and other expenses, change in the fair value of Warrant and Sponsor Covered Shares liabilities, interest expense, and income tax expense, as these items are not considered by the chief operating decision maker in evaluating the segments’ overall operating performance. Our chief operating decision maker does not review nor consider assets allocated to our segments for the purpose of assessing performance or allocating resources. Accordingly, segments’ assets are not presented.
The following table summarizes the operating results of the Company’s reportable segments:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2022 |
| Distribution | | Underwriting | | Eliminations | | Consolidated total |
Net premiums written | $ | — | | | $ | 95,666 | | | $ | — | | | $ | 95,666 | |
Escrow, other title-related fees and other (1) | 34,280 | | | 803 | | | (18,970) | | | 16,113 | |
Investment, dividend and other income | 14 | | | 414 | | | — | | | 428 | |
Total revenue | $ | 34,294 | | | $ | 96,883 | | | $ | (18,970) | | | $ | 112,207 | |
| | | | | | | |
Premiums retained by agents (2) | $ | — | | | $ | 79,572 | | | $ | (18,970) | | | $ | 60,602 | |
Direct labor (3) | 25,553 | | | 2,245 | | | — | | | 27,798 | |
Other direct costs (4) | 6,059 | | | 2,767 | | | — | | | 8,826 | |
| Provision for claims | 599 | | | 4,012 | | | — | | | 4,611 | |
Adjusted gross profit | $ | 2,083 | | | $ | 8,287 | | | $ | — | | | $ | 10,370 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2021 |
| Distribution | | Underwriting | | Eliminations | | Consolidated total |
Net premiums written | $ | — | | | $ | 108,762 | | | $ | (770) | | | $ | 107,992 | |
Escrow, other title-related fees and other (1) | 37,646 | | | 1,409 | | | (20,480) | | | 18,575 | |
Investment, dividend and other income | 46 | | | 1,183 | | | — | | | 1,229 | |
Total revenue | $ | 37,692 | | | $ | 111,354 | | | $ | (21,250) | | | $ | 127,796 | |
| | | | | | | |
Premiums retained by agents (2) | $ | — | | | $ | 91,588 | | | $ | (21,250) | | | $ | 70,338 | |
Direct labor (3) | 16,107 | | | 1,872 | | | — | | | 17,979 | |
Other direct costs (4) | 5,317 | | | 1,792 | | | — | | | 7,109 | |
Provision for claims | 559 | | | 2,690 | | | — | | | 3,249 | |
Adjusted gross profit | $ | 15,709 | | | $ | 13,412 | | | $ | — | | | $ | 29,121 | |
(1)Includes fee income from closings, escrow, title exams, ceding commission income, as well as premiums retained by Direct Agents.
(2)This expense represents a deduction from the net premiums written for the amounts that are retained by Direct Agents and Third-Party Agents as compensation for their efforts to generate premium income for our Underwriting segment. The impact of premiums retained by our Direct Agents and the expense for reinsurance or co-insurance procured on Direct Agent sourced premiums are eliminated in consolidation.
(3)Includes all compensation costs, including salaries, bonuses, incentive payments, and benefits, for personnel involved in the direct fulfillment of title and/or escrow services.
(4)Includes title examination expense, office supplies, and premium and other taxes.
The following table provides a reconciliation of the Company’s total reportable segments’ adjusted gross profit to its total loss before income taxes:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2022 | | 2021 | | | | |
Adjusted gross profit | $ | 10,370 | | | $ | 29,121 | | | | | |
Depreciation and amortization | 3,236 | | | 2,707 | | | | | |
Corporate and other expenses (1) | 66,668 | | | 34,687 | | | | | |
| Change in fair value of Warrant and Sponsor Covered Shares liabilities | (13,900) | | | — | | | | | |
Interest expense | 4,207 | | | 3,360 | | | | | |
Loss before income taxes | $ | (49,841) | | | $ | (11,633) | | | | | |
_________________
(1)Includes corporate and other costs not allocated to segments including corporate support function costs, such as legal, finance, human resources, technology support and certain other indirect operating expenses, such as sales and management payroll, and incentive related expenses.
As of March 31, 2022 and December 31, 2021 the Distribution segment had allocated goodwill of $88.1 million and the Underwriting segment had allocated goodwill of $23.4 million. There were no additions from acquisitions, impairments, or adjustments to goodwill resulting from prior year acquisitions in either segment for the three months ended March 31, 2022 and 2021.
8. Debt
Senior secured credit agreement
On December 31, 2020, Old Doma executed a loan and security agreement with Hudson Structured Capital Management Ltd. (“HSCM”), providing for a $150.0 million senior secured term loan (“Senior Debt”) that was funded by the lenders, which are affiliates of HSCM, on January 29, 2021 (“Funding Date”). The Senior Debt matures five years from the Funding Date. Under the agreement, the Senior Debt will bear interest of 11.25% per annum, 5.0% of which will be paid on a current cash basis and the remainder to accrue and be added to the outstanding principal balance. Interest shall be compounded quarterly. If at any time Old Doma (now known as
States Title) is in an event of default under the Senior Debt, outstanding amounts shall bear interest at the default interest rate of 15.00%. Upon funding, Old Doma issued penny warrants to affiliates of HSCM equal to 1.35% of Old Doma’s fully diluted shares. The warrants were net exercised on the Closing Date and such affiliates of HSCM received the right to receive approximately 4.2 million shares of our common stock. The Senior Debt is secured by a first-priority pledge and security interest in substantially all of the assets (tangible and intangible) of our wholly owned subsidiary States Title (which represent substantially all of our assets) and any of its existing and future domestic subsidiaries (in each case, subject to customary exclusions, including the exclusion of regulated insurance company subsidiaries). States Title is subject to customary affirmative, negative and financial covenants, including, among other things, minimum liquidity of $20.0 million (as of the last day of any month), minimum consolidated annual revenue of $130.0 million, limits on the incurrence of indebtedness, restrictions on asset sales outside the ordinary course of business and material acquisitions, limitations on dividends and other restricted payments. States Title was in compliance with the Senior Debt covenants as of March 31, 2022. The Senior Debt also includes customary events of default for facilities of this type and provides that, if an event of default occurs and is continuing, the Senior Debt will amortize requiring regular payments on a straight-line basis over the subsequent 24-month calendar period, but not to extend beyond the maturity date.
The estimated fair value of the Senior Debt at March 31, 2022 was $160.7 million. No active or observable market exists for the Senior Debt and, as a result, this is a Level 3 fair value measurement. Therefore, the estimated fair value of the Senior Debt is based on the income valuation approach, which is a valuation technique that converts future amounts (for example, cash flows or income and expenses) to a single current (that is, discounted) amount.
9. Stock compensation expense
The Company issued stock options (incentive stock options (“ISOs”) and non-statutory stock options (“NSOs”) and restricted stock awards (“RSAs”) to employees and key advisors under the Company’s 2019 Equity Incentive Plan, which has been approved by the board of directors. Granted stock options do not expire for 10 years and have vesting periods ranging from 7 to 60 months. The holder of one stock option may purchase one share of common stock at the underlying strike price.
The Company issues restricted stock units (“RSUs”) and performance restricted stock units (“PRSUs”) under the 2021 Omnibus Incentive Plan. The RSUs are subject to time-based vesting, with a majority of the RSUs vesting 25% on the first anniversary of the award date and ratably thereafter for twelve quarters, such that the RSUs will be fully vested on the fourth anniversary of their award date. Eligible participants in the PRSUs will receive a number of earned shares based on growth in retained premiums and fees and adjusted gross profit during the performance period, as established by the Company’s board of directors. Earned shares for the PRSUs will fully vest in three equal annual installments after the performance period based on continuous employment. The RSUs and PRSUs are measured at fair market value on the grant date and stock-based compensation expense is recognized as the shares vest with a corresponding offset credited to additional paid-in-capital.
Stock-based compensation expense for the three months ended March 31, 2022 and 2021 was $11.4 million and $2.3 million, respectively.
Stock options (ISO and NSO)
During the three months ended March 31, 2022, the Company had the following stock option activity:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Stock Options | | Weighted Average Exercise Price ($) | | Weighted Average Remaining Contractual Life (In years) | | Aggregate Intrinsic Value ($) |
| | | | | | | |
Outstanding as of December 31, 2021 | 24,255,204 | | | $ | 0.51 | | | 7.91 | | $ | 109,061 | |
Granted | — | | | — | | | 0 | | |
Exercised | (924,717) | | | 0.52 | | | 7.55 | | |
Cancelled or forfeited | (241,210) | | | 0.68 | | | 8.16 | | |
Outstanding as of March 31, 2022 | 23,089,277 | | | $ | 0.59 | | | 7.66 | | $ | 36,586 | |
| | | | | | | |
Options exercisable as of March 31, 2022 | 11,853,819 | | | $ | 0.53 | | | 7.38 | | $ | 19,403 | |
As of March 31, 2022, there was $24.0 million of stock-based compensation expense that had yet to be recognized related to nonvested stock option grants.
RSAs, RSUs and PRSUs
During the three months ended March 31, 2022, the Company had the following non-vested RSA, RSU and PRSU activity:
| | | | | | | | | | | |
| Number of RSAs, RSUs and PRSUs | | Average Grant Date Fair Value ($) |
Non-vested at December 31, 2021 | 18,579,930 | | | $ | 6.11 | |
Granted | 29,551,401 | | | 2.17 | |
Vested | (174,352) | | | 2.54 | |
Cancelled or Forfeited | (584,181) | | | 6.22 | |
Non-vested at March 31, 2022 | 47,372,798 | | | $ | 3.67 | |
As of March 31, 2022, there was $157.1 million of stock-based compensation expense that had yet to be recognized related to nonvested RSAs, RSUs and PRSUs.
10. Earnings per share
The calculation of the basic and diluted EPS is as follows:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2022 | | 2021 | | | | |
Numerator | | | | | | | |
Net loss attributable to Doma Holdings, Inc. | $ | (50,026) | | | $ | (11,758) | | | | | |
| | | | | | | |
Denominator | | | | | | | |
Weighted-average common shares – basic and diluted | 323,890,562 | | | 67,418,142 | | | | | |
| | | | | | | |
Net loss per share attributable to stockholders | | | | | | | |
Basic and diluted | $ | (0.15) | | | $ | (0.17) | | | | | |
As we have reported net loss for each of the periods presented, all potentially dilutive securities are antidilutive. The following potential outstanding shares of common stock were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive: | | | | | | | | | | | |
| As of March 31, |
| 2022 | | 2021 |
Old Doma preferred stock | — | | | 183,159,138 | |
Outstanding stock options | 23,089,277 | | | 28,137,947 | |
Warrants for common and preferred stock | 18,022,750 | | | 33,896,874 | |
RSA’s, RSU’s and PRSU’s | 47,372,798 | | | 1,338,016 | |
Total antidilutive securities | 88,484,825 | | | 246,531,975 | |
11. Related party transactions
Equity held by Lennar
In connection with the North American Title Acquisition, subsidiaries of Lennar were granted equity in the Company. As of March 31, 2022, Lennar, through its subsidiaries, held 25.4% of the Company on a fully diluted basis.
Transactions with Lennar
In the routine course of its business, Doma Title Insurance, Inc. (“DTI”) underwrites title insurance policies for a subsidiary of Lennar. The Company recorded the following revenues and premiums retained by Third-Party Agents from these transactions, which are included within our Underwriting segment:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Revenues | $ | 27,668 | | | $ | 24,650 | |
Premiums retained by Third-Party Agents | 22,460 | | | 19,884 | |
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Net receivables | $ | 3,549 | | | $ | 3,883 | |
These amounts are included in receivables, net in the Company’s condensed consolidated balance sheets.
12. Commitments and contingencies
Legal matters
The Company is subject to claims and litigation matters in the ordinary course of business. Management does not believe the resolution of any such matters will have a materially adverse effect on the Company’s financial position or results of operations.
Commitments and other contingencies
The Company also administers escrow deposits as a service to customers, a substantial portion of which are held at third-party financial institutions. These escrow deposits amounted to $230.3 million and $204.8 million at March 31, 2022 and December 31, 2021, respectively. Such deposits are not reflected in the condensed consolidated balance sheets, but the Company could be contingently liable for them under certain circumstances (for example, if the Company disposes of escrowed assets). Such contingent liabilities have not materially impacted the results of operations or financial condition to date and are not expected to do so in the future.
See Note 17 in our condensed consolidated financial statements for information on our operating lease obligations.
13. Accrued expenses and other liabilities
Accrued expenses and other liabilities include the following:
| | | | | | | | | | | |
| March 31,
2022 | | December 31,
2021 |
Employee compensation and benefits | $ | 23,719 | | | $ | 32,756 | |
Other | 11,758 | | | 21,393 | |
Total accrued expenses and other liabilities | $ | 35,477 | | | $ | 54,149 | |
14. Employee benefit plan
The Company sponsors a defined contribution 401(k) plan for its employees (the “Retirement Savings Plan”). The Retirement Savings Plan is a voluntary contributory plan under which employees may elect to defer compensation for federal income tax purposes under Section 401(k) of the Internal Revenue Code of 1986. All full-time employees age 18+ are eligible to enroll in the plan on their first day of employment. Company matching contributions begin upon employee enrollment in the Retirement Savings Plan. Prior to January 1, 2022, the Company provided an employer match up to 50% of the first 6% of elective contributions, and there were no matching contributions in excess of 3% of compensation. Effective January 1, 2022, the Company provides an employer match up to 100% on the first 1% of elective contributions and 50% on the next 5% of elective contributions. The maximum matching contribution is 3.5% of compensation.
For the three months ended March 31, 2022 and 2021, the Company made contributions for the benefit of employees of $1.2 million and $0.7 million, respectively, to the Retirement Savings Plan.
15. Research and development
For the three months ended March 31, 2022 and 2021, the Company recorded the following related to research and development expenses and capitalized internally developed software costs:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Research and development expenses incurred | $ | 5,603 | | | $ | 2,327 | |
Capitalized internally developed software costs | 8,352 | | | 4,133 | |
Research and development spend, inclusive of capitalized internally developed software cost | $ | 13,955 | | | $ | 6,460 | |
Our research and development costs reflect certain payroll-related costs of employees directly associated with such activities and certain software subscription costs, which are included in personnel costs on the condensed consolidated statements of operations. Capitalized internally developed software and acquired software costs are included in fixed assets, net in the condensed consolidated balance sheets.
16. Warrant liabilities
As a result of the Business Combination, the Company assumed, as of the Closing Date, Public Warrants to purchase an aggregate of 11,500,000 shares of our common stock and Private Placement Warrants to purchase an aggregate of 5,833,333 shares of our common stock. Each whole Warrant entitles the holder to purchase one share of common stock at a price of $11.50.
The Warrants became exercisable commencing on December 4, 2021, which is one year from the closing of the initial public offering of Capitol; provided, that we maintain an effective registration statement under the Securities Act of 1934, as amended (the “Securities Act”), covering our common stock.
Redemption of Public Warrants when the price per share of our common stock equals or exceeds $18.00
The Company may call the Public Warrants for redemption:
•in whole and not in part;
•at a price of $0.01 per Public Warrant;
•upon not less than 30 days’ prior written notice of redemption to each Public Warrant holder; and
•if, and only if, the last reported sale price of our common stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like and for certain issuances of common stock and equity-linked securities as described above) for any 20 trading days within a 30-trading day period ending three business days before the Company sends to the notice of redemption to the Public Warrant holders.
The Company will not redeem the Public Warrants as described above unless a registration statement under the Securities Act covering the issuance of the shares of common stock issuable upon a cashless exercise of the Public Warrants is then effective and a current prospectus relating to those shares of common stock is available throughout the 30-day redemption period, except if the Public Warrants may be exercised on a cashless basis and such cashless exercise is exempt from registration under the Securities Act.
Redemption of Public Warrants when the price per share of our common stock equals or exceeds $10.00
The Company may redeem the outstanding Public Warrants:
•in whole and not in part;
•at $0.10 per Public Warrant upon a minimum of 30 days’ prior written notice of redemption; provided that holders will be able to exercise their Public Warrants prior to redemption and receive a number of shares based on the redemption date and the “fair market value” of common stock except as otherwise described below;
•if, and only if, the last reported sale price of our common stock equals or exceeds $10.00 per share (as adjusted per stock splits, stock dividends, reorganizations, reclassifications, recapitalizations and the like and for certain issuances of common stock and equity-linked securities as described above) on the trading day prior to the date on which the Company sends the notice of redemption to the Public Warrant holders; and
•if, and only if, the last reported sale price of common stock is less than $18.00 per share (as adjusted for stock for stock splits, stock dividends, reorganizations, recapitalizations and the like and for certain issuances of common stock and equity-linked securities), the Private Placement Warrants are also concurrently called for redemption on the same terms as the outstanding Public Warrants, as described above.
Beginning on the date the notice of redemption is given until the Public Warrants are redeemed or exercised, holders may elect to exercise their Public Warrants on a cashless basis. The “fair market value” of our common stock will mean the volume-weighted average price of our common stock for the ten trading days immediately following the date on which the notice of redemption is sent to the holders of Public Warrants. In no event will the Public Warrants be exercisable in connection with this redemption feature for more than 0.361 shares of common stock per Public Warrant (subject to adjustment).
The Private Placement Warrants are identical to the Public Warrants except that the Private Placement Warrants, (i) subject to limited exceptions, are not redeemable by us, (ii) may be exercised for cash or on a cashless basis and (iii) are entitled to registration rights (including the shares of our common stock issuable upon exercise of the Private Placement Warrants), in each case, so long as they are held by the initial purchasers or any of their permitted transferees (as further described in the warrant agreement, dated as of December 1, 2020, between the Company and Continental Stock Transfer & Trust Company, a New York corporation, as warrant agent (the “Warrant Agreement”). If the Private Placement Warrants are held by holders other than the initial purchasers or any
of their permitted transferees, they will be redeemable by us and exercisable by the holders on the same basis as the Public Warrants.
On September 3, 2021, the Company filed a Registration Statement on Form S-1 (No. 333-258942), as amended, with the SEC (which was declared effective on September 8, 2021; and the Company subsequently filed a post-effective amendment thereto, which was declared effective on March 30, 2022), which related to, among other things, the issuance of an aggregate of up to 17,333,333 shares of common stock issuable upon the exercise of the Warrants. As of March 31, 2022, the aggregate values of the Public and Private Warrants were $4.0 million and $2.0 million, respectively, representing Warrants outstanding to purchase 11,500,000 shares and 5,833,333 shares, respectively, of our common stock. As of December 31, 2021, the aggregate values of the Public and Private Warrants were $10.9 million and $5.5 million, respectively, representing Warrants outstanding to purchase 11,500,000 shares and 5,833,333 shares, respectively, of our common stock. The Warrants are accounted for as liabilities in accordance with ASC 815-40 and are presented within warrant liabilities in the condensed consolidated balance sheets. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of Warrants and Sponsor Covered Shares liabilities in the condensed consolidated statements of operations.
17. Leases
The Company has operating leases consisting of office space and office equipment. Lease terms and options vary in the Company's operating leases dependent upon the underlying leased asset. We exclude options to extend or terminate a lease from our recognition as part of our right-of-use assets and lease liabilities until those options are known and/or executed, as we typically do not exercise options to purchase the underlying leased asset. As of March 31, 2022, we have leases with remaining terms of 1 month to 7.5 years, some of which may include no options for renewal and others with options to extend the lease terms from 1 year to 5 years. The components of our operating leases were as follows:
| | | | | |
| March 31, 2022 |
| Components of lease expense: | |
| Operating lease expense | $ | 2,972 | |
| Less sublease income | (89) | |
| Net lease expense | 2,883 | |
| |
| Cash flow information related to leases: | |
| Operating cash inflow from operating leases | $ | 2,774 | |
| | | | | |
| March 31, 2022 |
Right-of-use assets obtained during the three months ended March 31, 2022 in exchange for new operating lease liabilities | $ | 4,676 | |
| Weighted average remaining lease term | 4.57 years |
| Weighted average discount rate | 10 | % |
| | | | | |
| Maturities of lease liabilities: | March 31, 2022 |
| 2022 | $ | 6,498 | |
| 2023 | 8,071 | |
| 2024 | 6,774 | |
| 2025 | 5,045 | |
| 2026 | 4,061 | |
| Thereafter | 4,184 | |
| Total lease payments | 34,633 | |
| Less imputed interest | (6,974) | |
| Lease liabilities | $ | 27,659 | |
18. Subsequent events
On May 5, 2022, the Company committed to a workforce reduction plan (the “Reduction”) to improve cost efficiency and align with strategic investments in the Doma Intelligence platform.
The Reduction includes the elimination of approximately 310 positions across the Company, or approximately 15% of the Company’s current workforce. The Company estimates that it will incur approximately $3.7 million in charges in connection with the Reduction, including cash expenditures for employee benefits, severance payments, payroll taxes and related facilitation costs offset by forfeitures of bonus and stock-based compensation. The Company expects the execution of the Reduction, including cash payments, will be substantially complete in the second quarter of 2022.
In the preparation of the accompanying condensed consolidated financial statements, the Company has evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition or disclosure in the Company's financial statements, noting no subsequent events or transactions that require disclosure, aside from those previously discussed.