BLEND LABS, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

BLEND LABS, INC.  MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our audited consolidated financial
statements and the related notes appearing elsewhere in this Annual Report on
Form 10-K. This discussion contains forward-looking statements that are based
upon current plans, expectations, and beliefs that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements. You should review the section titled
"Special Note Regarding Forward-Looking Statements" for a discussion of
forward-looking statements and the section titled "Risk Factors" for a
discussion of factors that could cause actual results to differ materially from
the results described in or implied by the forward-looking statements contained
in the following discussion and analysis and elsewhere in this Annual Report on
Form 10-K. Our historical results are not necessarily indicative of the results
that may be expected for any period in the future.
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                                    Overview

Blend Labs, Inc. was founded in 2012, with a vision to bring simplicity and
transparency to financial services, so everyone can gain access to the capital
they need to lead better lives. To realize this vision, we have built a
market-leading cloud-based software platform for financial services firms that
is designed to power the end-to-end consumer journey for any banking product.
Our software platform was built in an extensible, modular, and configurable
fashion to support continued product expansion. We have technology, data, and
service providers on our software platform, including an extensive marketplace
of insurance carriers, realtors, and settlement agencies. Our products and
marketplaces provide multiple opportunities for us to serve financial services
firms and consumers and drive revenue growth.

Our rapid growth reflects continued product innovation and increased transaction
volume as we continue to attract financial services firms to our software
platform and grow with them as they serve consumers. Financial services firms
have been shifting for years to a digital-first approach to acquiring consumers,
delivering products, and deepening existing consumer relationships. This
imperative to compete through digital-first consumer experiences creates a
compelling opportunity for Blend. We believe there is a large, untapped
opportunity to provide additional product offerings and drive increased
transaction volume for financial institutions and consumers using our software
platform.

We are continually seeking to enhance the end-to-end banking journeys we power
through our software platform. To accelerate the adoption of innovations in our
mortgage and home equity products, on June 30, 2021 we acquired 90.1% ownership
of Title365, a leading title insurance agency that offers title, escrow and
other trustee services.

                               Our Business Model

Our success-based business model is designed to align our growth with the
interests of our customers. We offer our products through software-as-a-service
agreements where fees are assessed based on completed transactions, such as a
funded loan, new account opening, or closing transaction. We do not charge for
abandoned applications or rejected applications, even though they cause us to
incur costs related to these applications. Completed transaction fees are
determined by the number and type of software platform components that are
needed to support each product offering. Completed transaction fees are not
impacted by the dollar size of transactions; however, we provide volume-based
discounts to customers as they complete a higher volume of transactions on our
software platform. Customers also have the opportunity to secure discounts by
agreeing to contractual minimums. With our success-based business model, we are
focused on driving revenue growth by enabling our customers to more efficiently
process and complete transactions using our software platform.

We focus on customer success to drive transaction volumes and opportunities for
follow-on sales. Our products are sold through a direct sales force that
continues to manage customer relationships on an ongoing basis post-sale.
Customers often complete an initial deployment for one or two products and then
add more products over time. The length of the sales cycle for our products
generally declines for the second and subsequent products we sell to a financial
services firm, highlighting our high customer satisfaction.

We also earn revenue through commissions or service fees when consumers use our
integrated marketplaces to select a real estate agent, property and casualty
insurance carrier, or our software-enabled title and settlement services entity,
which excludes revenue from Title365. These commissions or service fees are
generated from consumers and are incremental to what we earn from our financial
services firm customers on completed transactions. Our marketplaces are intended
to provide greater consumer choice and flexibility and to help financial
services firms by providing them with a more complete offering in partnership
with Blend. As we drive adoption of our software platform, we expect these
commissions and service fees to comprise a larger part of our revenue.

The acquisition of Title365 has enabled our customers to streamline the title,
settlement, and closing process at scale for mortgages, home equity lines of
credit, and home equity loans, and we plan to continue to invest in improving
and integrating settlement services into those banking products. In performing
title search services, Title365 serves as an agent to place and bind title
insurance policies with third-party underwriters. Title365 escrow, closing and
settlement services are primarily associated with managing the closing of real
estate transactions, including the processing of funds on behalf of the
transaction participants, gathering and recording the required closing
documents, and providing notary and other real estate or title-related
activities. Title365 also provides title services in connection with a borrower
default and with the issuance of home equity lines of credit and home equity
loans.


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                              Recent Developments

Initial public offering


On July 20, 2021, we completed our IPO, with a subsequent partial exercise of
the underwriters' option to purchase additional shares on August 17, 2021. We
issued and sold an aggregate of 22,468,111 shares of Class A common stock, par
value $0.00001, at an offering price of $18.00 per share. We received aggregate
net proceeds of $366.7 million, after deducting underwriters' discounts and
commissions of $27.3 million and offering expenses of $10.4 million.

The acquisition of Title365


On June 30, 2021, we acquired 90.1% ownership of Title365, a leading title
insurance agency that offers title, escrow and other trustee services. Title365
has enabled our customers to streamline the title, settlement, and closing
process at scale for mortgages, home equity lines of credit, and home equity
loans.

COVID-19

As a result of the COVID-19 pandemic, we temporarily closed our offices,
required our employees and contractors to work remotely, and implemented travel
restrictions, all of which represent a significant disruption in how we operate
our business. The operations of our prospects, partners, and customers have
likewise been disrupted. While the duration and extent of the COVID-19 pandemic
depends on future developments that cannot be accurately predicted at this time,
such as the duration and spread of the outbreak and the extent and effectiveness
of containment actions, it has already had an adverse effect on the global
economy, and the ultimate societal and economic impact of the COVID-19 pandemic
remains unknown. We believe that demand for our software platform and our
results of operations have not been adversely affected by the COVID-19 pandemic
thus far. Throughout the COVID-19 pandemic, we have continued to partner with
our financial services customers to expand the scope and availability of
products through our software platform. For the year ended December 31, 2021, we
have seen a 50% increase in banking transactions on our software platform
compared to the year ended December 31, 2020, and we attribute a portion of this
increase to the accelerating need for digital transformation at financial
services firms.

We believe that the COVID-19 pandemic is accelerating the transformation of
financial services firms into digital businesses, is causing the regulatory
environment to shift in favor of digitization (such as through the use of
digital signatures and online notarization), and is driving consumer behavior
away from traditional branches and toward digital channels for banking services,
which we expect will generate additional opportunities for us in the future.

The future impact of the COVID-19 pandemic on our business remains uncertain.
See the section titled "Risk Factors" for further discussion of the challenges
and risks we have encountered and could encounter related to the COVID-19
pandemic.

                     Key Factors Affecting Our Performance

Ability to increase trading volume


Our success-based business model results in our revenue growing as we increase
our transaction volume. We increase transaction volume on our software platform
in part by attracting new customers and growing our relationships with existing
customers. Our success is in part based on our ability to address the evolving
needs of our customers and increase their usage of our software platform. Under
our "Customer First" model, we focus on building successful long-term
relationships and aligning revenue growth with value delivery. We invest in our
customers' success, beginning with an initial onboarding and rollout plan for
each customer. We also monitor utilization rates by customers on our software
platform to manage expanded use over time. Our proven ability to grow
transaction volume has been a function of product depth, technological
excellence, and the ability of our sales and marketing teams to match our
solutions with the strategic objectives of our customers. Our software platform
enables customers to process transaction volumes more effectively and create a
better consumer experience.

By increasing transaction volume on our software platform, we also enable and
drive our marketplace business. Our curated set of integrated marketplaces
enable consumers to shop for products and services at the precise moment of need
as they apply for loans and other products. These marketplaces enable consumers
to find real estate agents, insurance carriers, and automobiles for sale online
by quickly locating service providers and compare the rates. As we enable a
greater volume and diversity of transactions on our software platform, we can
help a greater number of consumers locate competitive service providers and
build trust with the Blend brand. Revenue from our marketplace business is
driven by our transaction volume and success of matching consumers with service
providers.
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Because our revenue growth is dependent on transaction volume growth, if our
transaction volume growth rate declines for any reason, including but not
limited to, reduced demand for our products and services, insufficient growth in
the number of financial services firms that utilize our products and services or
the lack of expansion of products and services within our existing customer
base, transaction volume and mix, particularly with our significant customers,
increased competition, or a decrease in the growth or reduction in size of our
overall market, our revenue growth rate would decline accordingly. In the last
quarter of 2021, we have seen industry estimates of mortgage transaction volume
showing greater than 30% decline year-over-year, which impacts both of our
segments. These industry estimates forecast a continued decline in total market
transaction volume in the next 12 to 24 months. In our Title365 segment, we have
already experienced lower than anticipated title transaction volume since the
closing of the acquisition and may experience further reductions in the future.

Investments in growth


Our ability to maintain a differentiated platform and offering is dependent upon
our speed of innovation. We will invest in our software platform to drive
innovation and maintain our position as a leading provider of software for
financial services firms for any banking product. To drive adoption and increase
penetration within our customer base, we will continue to rapidly introduce new
products and features. While we focus today on consumer banking, we believe we
can rapidly expand our library of modular components to support commercial
banking products as well. In addition, our low-code, drag-and-drop design tools
will enable our customers to bring new, innovative products to market quickly
and positions us with what we believe is a market-leading combination of
platform capabilities and out-of-the-box product offerings. We believe that
investment in research and development will contribute to our long-term growth
but will also negatively impact our short-term profitability.

Evolution of the macroeconomic environment


A large portion of our revenue is driven by mortgage and mortgage related
transaction volumes. These volumes affect our mortgage business, title business
and marketplace offerings. We expect the volumes of loans and financial products
closed using our software platform and the volume of issued title insurance
policies will continue to drive a large portion of our revenue for the
foreseeable future. As those volumes are influenced by numerous macroeconomic
factors, including interest rates, our business' performance will be impacted as
the macro environment changes. For instance, as interest rates rise, we would
expect to see a lower volume of refinance transactions, and in particular
refinance mortgage transactions.

In January 2022, the Mortgage Bankers Association ("MBA") released the U.S
mortgage originations forecast which indicated that the residential mortgage
originations are expected to steadily decline in 2022 and 2023 before leveling
out in 2024 as interest rates are expected to rise. In March 2022, the U.S.
Federal Reserve raised interest rates and has indicated it expects to raise
interest rates again in the future. Declines in the mortgage origination volumes
are likely to adversely affect our revenue, as we expect that our overall
mortgage transaction volumes will decline in the near term due to the rising
mortgage interest rates. Our revenue in the future periods will continue to be
subject to these and other factors that are beyond our control and, as a result,
are likely to fluctuate. We anticipate that as our platform grows and more
consumer banking transactions occur on our software platform over the coming
years, we will be less exposed to fluctuations in the macroeconomic environment.

                              Key Business Metrics

In addition to the measures presented in our consolidated financial statements, we use the following key business measures to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions.

Blend Platform – Number of Transactions

Our success in the Blend Platform segment depends in part on increasing the volume of mortgage and consumer banking transactions that take place on our software platform. This happens as we add new customers and conduct more transactions with existing customers, including when our existing customers adopt additional products. Our software platform is designed to be extensible, modular and configurable, so our customers can easily use our prebuilt workflow technology, marketplaces and integrations with technology, data and service providers. We design our new offerings to be highly complementary to existing offerings to accelerate the speed of adoption and effectively increase our revenue. This growing attachment further contributes to our growth.

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Title365 – Orders closed


In our Title365 segment, closed orders represent the number of orders for title
insurance or escrow services that were successfully fulfilled in each period
with the issuance of a title insurance policy or provision of escrow services.
The volume of closed orders is affected by the overall level of real estate
activity, which is cyclical in nature and is affected by a number of factors,
including the availability of mortgage credit, the cost of real estate, interest
rate volatility, consumer confidence, employment and family income levels, and
general economic conditions.

We believe that the continued growth in commercial use of the internet will lead
to the continued migration of traditional offline markets and industries online.
Accordingly, we expect there to be a migration of the Title365 legacy business
to our software-enabled platform over time, and as a result, we expect the
Title365 closed orders within the Title365 segment to decrease in future periods
and the volume of software-enabled title, escrow, and settlement orders within
the Blend Platform segment to increase.

The following tables present our main commercial indicators:

                                                                                Year Ended December 31,
                                                                                        2021                 2020              2019
                                                                                                      (In thousands)

Banking transactions of the Blend platform:

  Mortgage banking transactions(1)                                                     1,811                 1,316              448
  Consumer banking transactions(1)                                                       300                    87               36
Total Blend Platform banking transactions                                              2,111                 1,403              484

Title365 closed orders(2)                                                                 80                      N/A              N/A

(1) Includes estimated transactions for funded loans not yet reported for the fourth quarter of 2021. (2) Represents the number of origination orders closed from the date of acquisition until December 31, 2021.


                    Key Components of Results of Operations

Revenue

Blend Platform

In our Blend Platform segment, we generate revenue from fees paid by customers
to access our platform. Fees are assessed based on completed transactions, such
as a funded loan, new account opening, or closing transaction. We do not charge
for abandoned applications or rejected applications, even though they cause us
to incur costs related to these applications. Arrangements with our customers do
not provide the contractual right to take possession of our software at any
point in time. Revenue is recognized when access to our platform is provisioned
to our customers for an amount that reflects the consideration we expect to be
entitled to in exchange for those services. To a lesser extent, we generate
revenue from professional services related to the deployment of our platform,
premium support services, and consulting services. We also earn revenue through
commissions or service fees when consumers use our Blend Platform integrated
marketplaces to select a real estate agent, property and casualty insurance
carrier, or title and settlement services entity.

Our customers have the ability to access our platform under subscription
arrangements, in which customers commit to a minimum number of completed
transactions at specified prices over the contract term, or under usage-based
arrangements, in which customers pay in arrears a variable amount for completed
transactions at specified prices. Our subscription arrangements are generally
noncancelable, and we may also earn additional overage fees if the number of
completed transactions exceeds the contractual amounts. Our usage-based
arrangements generally can be terminated at any time by the customer. We
recognize revenue ratably for our subscription arrangements because the customer
receives and consumes the benefits of our platform throughout the contract
period. We recognize fees for usage-based arrangements as the completed
transactions are processed using our platform. Revenue from usage-based
arrangements represented 29%, 12% and 12% of our Blend Platform segment revenue
for the years ended December 31, 2021, 2020 and 2019, respectively.

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Title365


In our Title365 segment, we earn revenue from title search services for title
insurance policies, escrow and other closing and settlement services. In
performing title search services, we act as an agent to place and bind title
insurance policies with third-party underwriters that ultimately provide the
title insurance policy to our customers. Revenue related to title insurance is
recognized net of the amount of consideration paid to the third-party insurance
underwriters. Our revenues from escrow, closing and settlement services are
primarily associated with managing the closing of real estate transactions,
including the processing of funds on behalf of the transaction participants,
gathering and recording the required closing documents, and providing notary and
other real estate or title-related activities. Revenue related to these services
is recognized at the closing of the underlying real estate transaction. We also
offer title services in connection with a borrower default and with the issuance
of a home equity lines of credit and home equity loans. Revenue for default
title services and home equity services is recognized at the time of delivery of
the title report.

In future periods, due to our acquisition of Title365, we expect that total
revenue will increase significantly in dollar amounts, and that our revenue
growth rate will increase in the near term due to the inclusion of Title365
revenue, which was not included in prior periods. We expect, however, that in
periods subsequent to the twelve months following the closing of the acquisition
of Title365, our revenue growth rate will decline. We also expect that rising
mortgage interest rates in the near term will drive down transaction volume,
which will adversely affect both Blend Platform and Title365 revenue. While we
believe that the Blend Platform segment will continue to deliver positive
growth, we expect that the title insurance and other services revenue within the
Title365 segment will face significant headwinds to growth and potentially
short-term decline due to the projected industry mortgage origination volume
decline.

Cost of Revenue

Blend Platform

In our Blend Platform segment, cost of revenue consists primarily of costs of
subscribed hosting, support, and professional services. Costs of subscribed
hosting services and support revenue consist primarily of expenses related to
hosting our services, third-party fees related to platform connectivity
services, which include verification of income, assets, and employment, software
licenses, amortization of internal use software development costs, and expenses
related to providing support to our customers. Costs of professional services
consist primarily of personnel-related expenses, including stock-based
compensation expense, expenses associated with delivering implementation and
other services, travel expenses, and allocated overhead costs. For each
application submission, we incur third-party costs as described above, including
costs for incomplete transactions for which we do not charge fees to our
customers. The timing of those costs may not be aligned with the revenue
recognized. We expect our cost of revenue to continue to increase in dollar
amounts as we grow our business and revenue and decrease as a percentage of our
revenue over the long term as we achieve greater scale in our business, although
the percentage may fluctuate from period to period.

Title365


In our Title365 segment, cost of revenue consists of costs of title, escrow and
other trustee services, which represent primarily personnel-related expenses of
our Title365 segment as well as title abstractor, notary, and recording service
expense provided by external vendors. In future periods, due to our acquisition
of Title365, we expect that cost of revenue will increase significantly in
dollar amounts and that cost of revenue as a percentage of revenue will increase
in the near term.

Operating Expenses

Research and Development

Research and development expenses consist primarily of personnel-related
expenses, including stock-based compensation expense, associated with our
engineering personnel responsible for the design, development, and testing of
new products and features, professional and outside services fees, software and
hosting costs, and allocated overhead costs.

Research and development costs are expensed as incurred. We expect that our
research and development expenses will increase in dollar amount as our business
grows but will decrease as a percentage of our revenue over the long term as we
achieve greater scale in our business, although the percentage may fluctuate
from period to period depending on the timing and extent of our research and
development activities.
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Sales and Marketing


Sales and marketing expenses consist primarily of personnel-related expenses,
including stock-based compensation expense, costs of general marketing
activities and promotional activities, travel-related expenses, and allocated
overhead costs. Sales commissions that are incremental costs of acquiring a
contract with a customer as well as associated payroll taxes, are deferred and
amortized on a straight-line basis over the estimated period of benefit, which
we have determined to be three years. Sales commissions that are not incremental
costs of acquiring a contract with a customer are expensed in the period
incurred.

We plan to increase the dollar amount of our investment in sales and marketing
for the foreseeable future, primarily for increased headcount for our direct
sales organization and investment in brand and product marketing efforts. We
expect, however, that our sales and marketing expenses will decrease as a
percentage of our revenue over time as we achieve greater scale in our business,
although the percentage may fluctuate from period to period depending on
fluctuations in the timing and extent of our sales and marketing activities.

General and administrative


General and administrative expenses consist primarily of personnel-related
expenses, including stock-based compensation expense (which includes amounts
related to the stand-alone stock option award granted to our Co-Founder and Head
of Blend in March 2021) for our finance, accounting, legal and compliance, human
resources, and other administrative teams as well as for certain executives and
professional fees, including audit, legal and compliance, and recruiting
services.

We expect to increase the size of our general and administrative function to
support the growth of our business. Following our IPO, which was completed in
July 2021, we have incurred, and expect to continue to incur additional expenses
as a result of operating as a public company, including costs to comply with the
rules and regulations applicable to publicly listed companies and costs related
to compliance and reporting obligations pursuant to the rules and regulations of
the SEC. As a public company, we have incurred, and expect to continue to incur
increased expenses in the areas of insurance, investor relations, internal
audit, and professional services. In addition, general and administrative
expenses have increased, and we expect will continue to increase as a result of
integrating and operating Title365. As a result, we expect the dollar amount of
our general and administrative expenses to increase for the foreseeable future.
We expect, however, that our general and administrative expenses will decrease
as a percentage of our revenue as we achieve greater scale in our business,
although the percentage may fluctuate from period to period depending on the
timing and extent of our general and administrative activities.

Amortization of acquired intangible assets

The amortization of acquired intangible assets relates to customer relationships acquired as part of the Title365 business combinations, which are amortized over their estimated useful life on a straight-line basis.

Other income (expenses), net

Other income (expense), net, primarily includes interest income from our investment portfolio.


Interest Expense

Interest expense relates primarily to debt financing used to fund our
acquisition of Title365 and includes interest payable under the terms of the
credit agreement entered into in connection with the closing of the acquisition
of Title365 and amortization of debt discounts and debt issuance costs.

Provision for income taxes


Provision for income taxes consists primarily of U.S. state income taxes and
adjustments to the valuation allowance. We maintain a full valuation allowance
on our net federal and state deferred tax assets as we have concluded that it is
not more likely than not that such net deferred tax assets will be realized. For
the year ended December 31, 2021, we recognized a benefit for income taxes
associated with the partial release of our historical valuation allowance
resulting from the recognition of a deferred tax liability in connection with
the Title365 acquisition.
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                             Results of Operations

The following tables present our results of operations for the periods presented in dollars and as a percentage of our revenues:

                                                            Year Ended December 31,
                                                                   2021           2020           2019
                                                                             (In thousands)
Revenue                                                        $  234,495      $  96,029      $  50,671
Cost of revenue(1)                                                118,506         34,289         19,547
Gross profit                                                      115,989         61,740         31,124
Operating expenses:
Research and development(1)                                        92,216         55,503         48,597
Sales and marketing(1)                                             84,077         51,420         37,660
General and administrative(1)                                     128,802         30,108         26,589
Amortization of acquired intangible assets                          8,136              -              -
Total operating expenses                                          313,231        137,031        112,846
Loss from operations                                             (197,242)       (75,291)       (81,722)
Interest expense                                                  (11,279)             -              -
Other income (expense), net                                           493            700            283
Loss before income taxes                                         (208,028)       (74,591)       (81,439)
Income tax benefit (expense)                                       38,886            (26)           (13)
Net loss                                                       $ (169,142)     $ (74,617)     $ (81,452)

(1)Includes stock-based compensation as follows:

                                              Year Ended December 31,
                                                       2021          2020         2019
                                                               (In thousands)
Cost of revenue                                     $    753      $     79      $    46
Research and development                              13,184         4,250        3,431
Sales and marketing                                    7,167         3,675          966
General and administrative                            49,740         2,120        5,446
Total stock-based compensation                      $ 70,844      $ 10,124      $ 9,889




                                                                          Year Ended December 31,
                                                                               2021                  2020                 2019
                                                                                            (as a % of revenue)*
Revenue                                                                            100  %               100  %                100  %
Cost of revenue                                                                     51                   36                    39
Gross margin                                                                        49                   64                    61
Operating expenses:
Research and development                                                            39                   58                    96
Sales and marketing                                                                 36                   54                    74
General and administrative                                                          55                   31                    52
Amortization of acquired intangible assets                                           3                    -                     -
Total operating expenses                                                           134                  143                   223
Loss from operations                                                               (84)                 (78)                 (161)
Interest expense                                                                    (5)                   -                     -
Other income (expense), net                                                          -                    1                     1
Loss before income taxes                                                           (89)                 (78)                 (161)
Income tax benefit (expense)                                                        17                    -                     -
Net loss                                                                           (72) %               (78) %               (161) %


____________

*Some percentages may not match due to rounding

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            Comparison of the Years Ended December 31, 2021 and 2020
Revenue and Cost of Revenue

                                          Year Ended December 31,
                                            2021                2020        $ Change       % Change
                                                      (In thousands)
Segment revenue:
Blend Platform:
Mortgage Banking                    $     108,264            $ 80,061      $  28,203           35  %
Consumer Banking and Marketplace           23,120              12,624         10,496           83  %
Professional Services                       4,178               3,344            834           25  %
Total Blend Platform                      135,562              96,029         39,533           41  %
Title365                                   98,933                   -         98,933          100  %
Total revenue                       $     234,495            $ 96,029      $ 138,466          144  %
Segment cost of revenue:
Blend Platform                      $      49,917            $ 34,289      $  15,628           46  %
Title365                                   68,589                   -         68,589          100  %
Total cost of revenue               $     118,506            $ 34,289      $  84,217          246  %
Segment gross profit:
Blend Platform                      $      85,645            $ 61,740      $  23,905           39  %
Title365                                   30,344                   -         30,344          100  %
Total gross profit                  $     115,989            $ 61,740      $  54,249           88  %



Revenue increased $138.5 million, or 144%, for the year ended December 31, 2021
compared to the year ended December 31, 2020, primarily due to an increase of
$98.9 million related to the inclusion of revenue from Title365 as well as an
increase in Blend Platform revenue of $39.5 million, or 41%. Within Blend
Platform revenue, Mortgage Banking revenue increased $28.2 million, or 35%,
primarily due to the higher volume of banking transactions with our customers,
and Consumer Banking and Marketplace revenue increased $10.5 million, or 83%,
primarily due to an increase in revenue from our integrated consumer banking
software solutions, adjacent products and marketplace offerings. Professional
Services revenue increased $0.8 million or 25%, primarily due to an increase in
demand for services associated with the deployment and support of our platform.

Cost of revenue increased $84.2 million, or 246%, for the year ended December
31, 2021 compared to the year ended December 31, 2020, primarily resulting from
the inclusion of $68.6 million in Title365 operating costs. Additionally, Blend
Platform cost of revenue increased by $15.6 million, or 46%, primarily due to a
$8.9 million increase in personnel-related expenses primarily attributable to
increased headcount, a $4.6 million increase in third-party hosting costs and
software licenses relating to additional hosting services correlating with
increased revenue growth, and a $2.8 million increase in professional and
outside services to support our continued growth and expanded operations. The
increases were partially offset by a $1.9 million decrease in amortization of
previously capitalized internal-use software costs.
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Operating Expenses

                                                       Year Ended December 31,
                                                       2021                   2020             $ Change             % Change
                                                                     (In thousands)
Operating expenses:
Research and development                       $      92,216              $  55,503          $  36,713                      66  %
Sales and marketing                                   84,077                 51,420             32,657                      64  %
General and administrative                           128,802                 30,108             98,694                     328  %
Amortization of acquired intangible assets             8,136                      -              8,136                     100  %
Total operating expenses                       $     313,231              $ 137,031          $ 176,200                     129  %


Research and Development

Research and development expenses increased $36.7 million, or 66%, for the year
ended December 31, 2021 compared to the year ended December 31, 2020, driven
primarily by an increase in Blend Platform research and development costs. This
increase was attributable to a $23.1 million increase in personnel and related
expenses due to an increase in research and development headcount dedicated to
the ongoing investment in our products, a $8.9 million increase in stock-based
compensation, a $1.7 million increase in software and hosting services to
support the growing business and increased volume of transactions on our
platform, and a $2.1 million increase in professional and outside services
relating to contractors to augment the engineering team and consulting services
to formulate technology.

Sales and Marketing

Sales and marketing expenses increased $32.7 million, or 64%, for the year ended
December 31, 2021 compared to the year ended December 31, 2020, driven by an
increase in Blend Platform sales and marketing costs of $28.9 million, and an
increase of $3.8 million due to the inclusion of costs associated with the
operations of Title365. The increase in Blend Platform sales and marketing costs
was primarily due to a $16.4 million increase in personnel and related expenses
attributable to increased sales and marketing headcount, a $3.4 million increase
in stock-based compensation, a $1.7 million increase in expense related to trade
shows and conferences, a $3.5 million increase in commissions, and a $1.5
million increase in advertising and promotion expenses.

General and administrative


General and administrative expenses increased $98.7 million, or 328% for the
year ended December 31, 2021 compared to the year ended December 31, 2020,
driven by an increase in Blend Platform general and administrative costs of
$90.6 million, and an increase of $8.1 million due to the inclusion of costs
associated with the operations of Title365. The increase in Blend Platform
general and administrative costs was primarily due to a $47.4 million increase
in stock-based compensation, of which $38.8 million related to the stock option
award with market-based performance targets granted to our Co-Founder and Head
of Blend, including a catch up expense recognized upon the completion of the
IPO, a $11.0 million increase in professional and other consulting services, a
$12.0 million increase in transaction and integration costs associated with the
Title365 acquisition, a $16.7 million increase in personnel and related expenses
attributable to increased administrative, finance and accounting, legal, and
human resources headcount necessary to support the growth in our business and
responsibilities of a public company, and a $2.0 million increase in software
and hosting services to support our growing business and increased volume of
transactions on our platform.

Amortization of acquired intangible assets


Amortization of acquired intangible assets increased $8.1 million for the year
ended December 31, 2021 compared to the year ended December 31, 2020, due to the
amortization of the customer relationships intangible asset acquired in the
Title365 business combination.
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            Comparison of the Years Ended December 31, 2020 and 2019
Revenue and Cost of Revenue

                                            Year Ended December 31,
                                             2020                2019        $ Change      % Change
                                                      (In thousands)
Segment revenue:
Blend Platform:
Mortgage Banking                    $      80,061             $ 40,311      $ 39,750          99  %
Consumer Banking and Marketplace           12,624                6,333         6,291          99  %
Professional Services                       3,344                4,027          (683)        (17  %)

Total revenue                       $      96,029             $ 50,671      $ 45,358          90  %
Segment cost of revenue:
Blend Platform                      $      34,289             $ 19,547      $ 14,742          75  %

Total cost of revenue               $      34,289             $ 19,547      $ 14,742          75  %
Segment gross profit:
Blend Platform                      $      61,740             $ 31,124      $ 30,616          98  %

Total gross profit                  $      61,740             $ 31,124      $ 30,616          98  %



Revenue increased $45.4 million, or 90%, for the year ended December 31, 2020
compared to the year ended December 31, 2019. Within Blend Platform, Mortgage
Banking revenue increased $39.8 million, or 99%, primarily due to the higher
volume of banking transactions with our customers, Consumer Banking and
Marketplace revenue increased $6.3 million, or 99%, primarily due to an increase
in revenue from our integrated software solutions outside of mortgage, including
ancillary products and marketplace offerings, and Professional Services revenue
decreased by $0.7 million or 17%, primarily due to a decrease in professional
services associated with the deployment and support of our platform.

Cost of revenue increased $14.7 million, or 75%, for the year ended December 31,
2020 compared to the year ended December 31, 2019. The increase was primarily
due to a $7.9 million increase in third-party hosting costs and software
licenses to support continued growth and expanded operations, and a $6.1 million
increase in third-party fees, primarily related to platform connectivity
services.

Operating Expenses

                                    Year Ended December 31,
                                     2020               2019         $ Change     % Change
                                              (In thousands)
Operating expenses:
Research and development     $      55,503           $  48,597      $  6,906           14  %
Sales and marketing                 51,420              37,660        13,760           37  %
General and administrative          30,108              26,589         3,519           13  %

Total operating expenses     $     137,031           $ 112,846      $ 24,185           21  %


Research and Development

Research and development expenses increased $6.9 million, or 14%, for the year
ended December 31, 2020 compared to the year ended December 31, 2019. The
increase was primarily due to a $4.0 million increase in personnel-related
expenses primarily attributable to an increase in research and development
headcount, a $2.8 million increase in professional and outside services, and a
$1.6 million increase in software and hosting services to support the growing
business and increased volume of transactions. The overall increase was
partially offset by a $1.0 million decrease in allocated overhead due to changes
in employee mix and reduction of facility costs due to the COVID-19 pandemic.
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Sales and Marketing


Sales and marketing expenses increased $13.8 million, or 37%, for the year ended
December 31, 2020 compared to the year ended December 31, 2019. The increase was
primarily due to an $11.4 million increase in personnel-related expenses
primarily attributable to an increase in sales and marketing headcount,
inclusive of a $1.5 million increase in stock-based compensation attributable to
secondary sales in 2020, a $3.3 million increase in commission expense, and a
$0.8 million increase in software and hosting costs. The overall increase was
partially offset by a $3.1 million decrease in travel, entertainment, trade
shows, conferences, and general advertising as a result of canceled in-person
events because of restrictions from the COVID-19 pandemic.

General and administrative


General and administrative expenses increased $3.5 million, or 13%, for the year
ended December 31, 2020 compared to the year ended December 31, 2019. The
increase was primarily due to a $2.4 million increase in professional fees and a
$1.3 million increase in personnel-related expenses primarily attributable to an
increase in our administrative, finance and accounting, legal, and human
resources headcount necessary to support the growth in our business. The
increase in personnel-related expenses was net of a $4.1 million decrease in
stock-based compensation attributable to a decrease in secondary sales as
compared to 2019. The overall increase was partially offset by a $0.3 million
decrease in travel and related expenses as a result of restrictions from the
COVID-19 pandemic.

                        Liquidity and Capital Resources

As of December 31, 2021, our principal sources of liquidity were cash, cash
equivalents, marketable securities of $547.2 million, and availability of credit
under our $25.0 million senior secured revolving credit facility. Cash and cash
equivalents are comprised of bank deposits and money market funds. Marketable
securities are comprised of U.S. treasury and agency securities, commercial
paper, and corporate debt securities. Most of our cash and cash equivalents are
held in the United States. Since our inception, we have financed our operations
primarily through proceeds from the issuance of our stock and warrants and cash
generated from the sale of our product offerings.

We have generated significant losses from operations and negative cash flows
from operating activities in the past as reflected in our accumulated deficit of
$442.8 million as of December 31, 2021. We expect to continue to incur operating
losses for the foreseeable future due to the investments that we intend to make
in our business and, as a result, we may require additional capital resources to
grow our business.

During the year ended December 31, 2021, we issued 22,418,562 shares of Series G
convertible preferred stock at $13.827822 per share for total gross proceeds of
approximately $310.0 million. All shares of Series G convertible preferred stock
converted into an equal number of shares of Class A common stock upon completion
of the IPO.

On July 20, 2021, we completed our IPO, with a subsequent partial exercise of
the underwriters' option to purchase additional shares on August 17, 2021. We
issued and sold an aggregate of 22,468,111 shares of Class A common stock, par
value $0.00001, at an offering price of $18.00 per share. We received aggregate
net proceeds of $366.7 million, after deducting underwriters' discounts and
commissions of $27.3 million and offering expenses of $10.4 million.

credit agreement


In connection with our acquisition of Title365, on June 30, 2021, we entered
into a credit agreement that provides for a $225.0 million term facility and a
$25.0 million revolving facility. The term facility was funded on July 1, 2021,
and was fully drawn upon to provide, in part, the acquisition consideration
being paid in connection with the purchase of a 90.1% interest in Title365. The
revolving facility is currently available and undrawn.

There is no amortization of the principal amount outstanding under our credit facility; all principal amounts thereunder are payable on the maturity date (which is the fifth anniversary of the closing of the credit facility).


The obligations under our credit facility are guaranteed by all of our domestic
subsidiaries (other than Title365 and its direct and indirect subsidiaries, and
subject to certain thresholds and other exceptions), and secured by a lien on
substantially all of our and our subsidiaries' assets (other than the equity
issued by, and the assets of, Title365 and its direct and indirect subsidiaries
and subject to certain thresholds and other exceptions).

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Our credit facility subjects us to certain affirmative and negative covenants,
financial reporting obligations, and a minimum liquidity threshold that is
tested quarterly. It also requires mandatory prepayment of all or a portion of
the outstanding debt thereunder in certain circumstances.

Material cash needs


Our material cash requirements arising from known contractual and other
obligations primarily relate to our obligations under our Credit Agreement,
leases for our office locations, and purchase commitments. As of December 31,
2021, our principal contractual cash obligations consisted of the following:

                                 Total        Next 12 Months       Beyond 12 Months
                                                  (In thousands)
Term Loan - principal         $ 225,000                    -      $         225,000
Term Loan - interest             87,915               19,543                 68,372
Term Loan - exit fee              4,500                    -                  4,500
Operating lease obligations      21,739                4,780                 16,959
Purchase commitments             12,602                8,376                  4,226
Total                         $ 351,756      $        32,699      $         319,057



We believe that current cash, cash equivalents, marketable securities, and the
availability of credit under our revolving credit facility will be sufficient to
fund our operations for at least the next 12 months. Our future capital
requirements, however, will depend on continued growth in our customer base, the
timing and extent of spending to support our research and development efforts,
the expansion of sales and marketing activities, the introduction of new and
enhanced products and features, and the continuing market adoption of Blend's
software platform. We may in the future enter into arrangements to acquire or
invest in complementary businesses, services, and technologies, including
intellectual property rights. In the event that additional financing is required
from outside sources, we may seek to raise additional funds at any time through
equity, equity-linked arrangements, and debt. If we are unable to raise
additional capital when desired and at reasonable rates, our business, results
of operations, and financial condition would be adversely affected. See the
section titled "Risk Factors-Risks Related to Our Business-Our failure to raise
additional capital or generate cash flows necessary to expand our operations and
invest in new technologies in the future could reduce our ability to compete
successfully and harm our results of operations."

Cash flow

The following table summarizes our cash flows for the periods presented:

                                                                      Year Ended December 31,
                                                            2021                2020               2019
                                                                          (In thousands)
Net cash used in operating activities                   $ (127,504)         $ (65,013)         $ (58,939)
Net cash used in investing activities                     (633,908)            (7,917)           (65,513)
Net cash provided by financing activities                  933,573             90,756            132,666

Effect of exchange rates on cash, cash equivalents and restricted cash

                                                 (9)                 -                  -

Net increase in cash, cash equivalents and restricted cash

                                                    $  172,152          

$17,826 $8,214

Cash flows used in operating activities


Our largest source of operating cash is cash collections from our customers. Our
primary uses of cash from operating activities are for employee-related
expenditures, sales and marketing expenses, and third-party hosting costs.
Historically, we have generated negative cash flows from operating activities
and have supplemented working capital requirements through net proceeds from the
sale of equity securities.
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During the year ended December 31, 2021, we used $127.5 million in cash for
operating activities. The primary factors affecting our operating cash flows
during this period were our net loss of $169.1 million, impacted by $94.0
million of non-cash charges, offset by a $39.3 million change in deferred taxes
primarily driven by the release of historical valuation allowance, and $13.1
million cash used as a result of changes in our operating assets and
liabilities. The non-cash charges primarily consisted of $70.8 million in
stock-based compensation, $10.6 million of depreciation and amortization, $5.0
million in amortization of deferred contract costs, $3.2 million of amortization
of our operating lease right-of-use assets, and $1.4 million of amortization of
debt discount and issuance costs. The cash used as a result of changes in our
operating assets and liabilities was primarily due to a $13.9 million increase
in prepaid expenses and other assets, a $5.6 million decrease in deferred
revenue, a $3.2 million decrease in operating lease liabilities, and a $5.8
million increase in accounts receivable, partially offset by a $7.1 million
increase in other liabilities, a $1.6 million increase in accounts payable, a
$1.2 million decrease in deferred contract costs, non-current, and $5.6 million
increase in accrued compensation costs.

During the year ended December 31, 2020, we used $65.0 million in cash for
operating activities. The primary factors affecting our operating cash flows
during this period were our net loss of $74.6 million, impacted by $20.8 million
non-cash charges, and $11.2 million of cash used due to changes in our operating
assets and liabilities. The non-cash charges primarily consisted of $10.1
million in stock-based compensation, $4.0 million of depreciation and
amortization, $3.6 million in amortization of deferred contract costs, and $2.4
million of non-cash operating lease expense. The cash used due to changes in our
operating assets and liabilities was primarily due to a $12.2 million increase
in trade and other receivables, a $6.5 million increase in prepaid expenses and
other assets, a $2.6 million decrease in operating lease liabilities, and a $2.0
million increase in the non-current portion of deferred contract costs. These
amounts were partially offset by a $5.7 million increase in accrued
compensation, a $4.8 million increase in other liabilities, and a $1.2 million
increase in deferred revenue.

During the year ended December 31, 2019, we used $58.9 million in cash for
operating activities. The primary factors affecting our operating cash flows
during this period were our net loss of $81.5 million, impacted by $18.5 million
non-cash charges, and $4.0 million of cash provided by changes in our operating
assets and liabilities. The non-cash charges primarily consisted of $9.9 million
in stock-based compensation, $4.8 million of depreciation and amortization, $2.3
million in amortization of deferred contract costs, and $1.2 million in
amortization related to a discount on a convertible note. The cash provided by
changes in our operating assets and liabilities was primarily due to a $5.7
million increase in deferred revenue, a $2.6 million increase in accounts
payable, a $2.3 million increase in accrued compensation, and a $1.1 million
increase in other liabilities. These amounts were partially offset by a $7.1
million decrease in prepaid expenses and other current assets and a $0.8 million
decrease in deferred contract costs.

Cash used in investing activities


Net cash used in investing activities during the year ended December 31, 2021
was $633.9 million, which was primarily due to $400.0 million cash used in
connection with our acquisition of Title365, $351.6 million used in purchases of
marketable securities, partially offset by maturities of marketable securities
of $125.1 million, an investment via issuance of note receivable of $3.0
million, and an investment in non-marketable equity securities of $2.5 million.

Net cash used in investing activities during the year ended December 31, 2020
was $7.9 million, which was primarily the result of purchases of marketable
securities of $174.0 million and property and equipment purchases of $1.3
million, partially offset by sales and maturities of marketable securities of
$167.4 million.

Net cash used in investing activities during the year ended December 31, 2019
was $65.5 million, which was primarily the result of purchases of marketable
securities of $150.7 million and property and equipment purchases of $0.6
million, partially offset by sales and maturities of marketable securities of
$85.8 million.

Cash provided by financing activities


Net cash provided by financing activities for the year ended December 31, 2021
was $933.6 million, reflecting net proceeds from our initial public offering of
$366.8 million, net proceeds from debt financing of $218.8 million, net proceeds
from issuance of Series G convertible preferred stock of $309.7 million,
proceeds from the exercise of convertible preferred stock warrants of $10.2
million, proceeds from the exercises of stock options of $25.4 million, and
proceeds from the repayment of an employee promissory note of $2.9 million.

Net cash provided by financing activities for the year ended December 31, 2020
was $90.7 million, reflecting proceeds from issuance of Series F convertible
preferred stock of $76.2 million, proceeds from exercise of Class A common stock
warrants of $10.0 million and the exercise of stock options net of repurchases
of $4.5 million.
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Net cash provided by financing activities for the year ended December 31, 2019
was $132.7 million, reflecting proceeds from issuance of Series E convertible
preferred stock of $124.6 million, proceeds from a convertible note of $5.0
million, the exercise of stock options net of repurchases of $1.6 million, and
the exercise of convertible preferred stock warrants of $1.5 million.

Off-balance sheet arrangements


We administer escrow and trust deposits held at third-party financial
institutions representing funds received under real estate contracts, escrowed
funds received under escrow agreements, and/or undisbursed amounts received for
settlement of mortgage and home equity loans. Cash held for these purposes was
approximately $27.0 million net of outstanding checks in transit of $56.2
million as of December 31, 2021. These funds are not considered assets of ours
and, therefore, are not included in our consolidated balance sheet; however, we
are contingently liable for the disposition of these funds on behalf of
consumers. As of December 31, 2021, we did not have any other relationships with
unconsolidated entities or financial partnerships, such as structured finance or
special purpose entities that were established for the purpose of facilitating
off-balance sheet arrangements or other purposes.

Employee compensation


We face significant competition for talent from other technology and high-growth
companies. To attract and retain top talent, we have had to offer, and believe
we will need to continue to offer, highly competitive compensation packages and
provide a range of health, savings, retirement, time-off and wellness benefits
for our employees.

Additionally, we may consider adopting various employee compensation programs
from time to time, including one possible program that would allow employees the
opportunity to annually elect the proportion of their compensation that would be
provided in the form of cash or equity. The details of any such program, and the
extent to which we may implement any such program, have not been determined at
this time. If we do decide to adopt a program like this in the future, it could
result in us paying a greater percentage of our employees' compensation in the
form of cash or equity, depending on how our employees elect to receive their
compensation. This could result in us using a larger amount of our cash reserves
for the payment of compensation in future periods or could result in us granting
a greater number of our shares subject to equity awards, which could increase
our overall dilution, increase our stock-based compensation expense for
financial accounting purposes, and increase our tax withholding and remittance
obligations. How we determine any such tax withholding obligations would be
satisfied could further impact our cash position or increase dilution.

                           Indemnification Agreements

In the ordinary course of business, we enter into agreements of varying scope
and terms pursuant to which we agree to indemnify customers, vendors, lessors,
business partners, and other parties with respect to certain matters, including,
but not limited to, losses arising out of the breach of such agreements,
services to be provided by us, or from intellectual property infringement claims
made by third parties. In addition, we have entered into indemnification
agreements with our directors and certain officers and employees that require
us, among other things, to indemnify them against certain liabilities that may
arise by reason of their status or service as directors, officers, or employees.
No demands have been made upon us to provide indemnification under such
agreements, and there are no claims that we are aware of that could have a
material effect on our consolidated balance sheets, consolidated statements of
operations and comprehensive loss, or consolidated statements of cash flows.

                   Critical Accounting Policies and Estimates

Our consolidated financial statements and the related notes thereto included
elsewhere in this Annual Report on Form 10-K are prepared in accordance with the
U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of
our consolidated financial statements in accordance with GAAP requires us to
make estimates, judgments, and assumptions that affect the reported amounts of
assets, liabilities, revenue, costs, and expenses, and related disclosures. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. Our actual results may
differ from these estimates under different assumptions or conditions. To the
extent that there are differences between our estimates and actual results, our
future financial statement presentation, financial condition, results of
operations, and cash flows could be affected.

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We believe that of our significant accounting policies, which are described in
Note 2 of the notes to our consolidated financial statements, the following
accounting policies involve a greater degree of judgment and complexity.
Accordingly, these are the policies we believe are the most critical to aid in
fully understanding and evaluating our consolidated financial condition and
results of operations.

Revenue Recognition

Overview

We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which requires the application of the following five-step model:


•Identification of the contract, or contracts, with a customer - A contract with
a customer exists when (i) we enter into an enforceable contract with a customer
that defines each party's rights regarding the services to be transferred and
identifies the payment terms related to these services, (ii) the contract has
commercial substance, and (iii) it is determined that collection of
substantially all consideration for services that are transferred is probable
based on the customer's intent and ability to pay the promised consideration
when it is due.

•Identification of the performance obligations in the contract - Performance
obligations promised in a contract are identified based on the services that
will be transferred to the customer that are both capable of being distinct,
whereby the customer can benefit from the services either on their own or
together with other resources that are readily available from third parties or
from us, and are distinct within the context of the contract, whereby the
transfer of the services is separately identifiable from the other promises in
the contract. To the extent that a contract includes multiple promised services,
we apply judgment to determine whether promised services are capable of being
distinct.

•Determination of the transaction price - The transaction price is determined
based on the consideration to which we will be entitled in exchange for
transferring services to the customer. We estimate and include variable
consideration for our subscription arrangements in the transaction price at
contract inception to the extent it is probable that a significant reversal in
the amount of cumulative revenue recognized will not occur when the uncertainty
associated with the variable consideration is subsequently resolved. In
estimating overage fees in subscription arrangements, we consider our historical
experience and other external factors that may impact the expectation of future
completed transactions beyond a customer's contracted minimum number of
completed transactions. The estimated variable consideration is sensitive to the
inputs, judgements, and assumptions made by us. Although we believe that our
approach to developing estimates of variable consideration is reasonable, actual
results could differ, and we may be exposed to increases or decreases in revenue
that could be material. Our estimates of variable consideration may prove to be
inaccurate, in which case we may have understated or overstated the revenue
recognized in a reporting period. The amount of variable consideration
recognized to date that remains subject to estimation is included within the
prepaid expenses and other current assets and deferred revenue on the
consolidated balance sheet.

•Allocation of the transaction price to the performance obligations in the
contract - We allocate the transaction price to each performance obligation on a
relative standalone selling price basis, or SSP. The SSP is the price at which
we would sell a promised service separately to a customer. In instances where we
do not sell or price a service separately, we estimate the SSP by considering
available information such as market conditions, internally approved pricing
guidelines, and the underlying cost of delivering the performance obligation.
Judgment is required to determine the SSP for each distinct performance
obligation.

• Revenue recognition when or as we satisfy a performance obligation – For each performance obligation identified, we determine at the start of the contract whether it satisfies the performance obligation over time or at a point in time.



Blend Platform

We generate revenue from fees paid by our customers to access our platform, and,
to a lesser extent, from professional services related to the deployment of our
platform, support services, and consulting services.

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Our customers have the ability to access our platform under subscription
arrangements, in which customers commit to a minimum number of completed
transactions at specified prices over the contract term, or under usage-based
arrangements, in which customers pay a variable amount for completed
transactions at specified prices. Subscription arrangements are generally
non-cancelable during the contract term while usage-based arrangements generally
can be terminated at any time by the customer. Arrangements with customers do
not provide the contractual right to take possession of our software at any
point in time. We begin recognizing revenue when access to our platform is
provisioned to our customers for an amount that reflects the consideration we
expect to be entitled to in exchange for those services.

Access to our platform represents a series of distinct services as we
continually provide access to our platform, and fulfill our obligation to our
customer over the non-cancelable contractual term and the customer receives and
consumes the benefit of our platform throughout the contract period. The series
of distinct services represents a single performance obligation that is
satisfied over time.

Under our subscription arrangements, we typically bill our customers for any
committed amounts quarterly, semi-annually or annually in advance and for
overages beyond a customer's contracted minimum number of completed transactions
on a monthly or quarterly basis in arrears. We recognize fees for subscription
arrangements ratably over the non-cancelable contract term of the arrangement as
subscription services are provided, beginning on the commencement date of each
contract, which is the date services are made available to our customers.

For usage-based arrangements, we typically bill our customers for any completed
transactions on a monthly basis in arrears. We recognize fees for usage-based
arrangements as the completed transactions are processed using our platform.
Revenue from usage-based arrangements represented 29%, 12% and 12% of our Blend
Platform revenue for the years ended December 31, 2021, 2020 and 2019,
respectively.

Professional services revenue consists of fees for services related to helping
customers deploy, configure, and optimize the use of our technology. These
services include consulting, system integration, data migration, process
enhancement, and training. Our professional services contracts are typically on
a fixed price basis and billed in full at the beginning of the contract term.
Professional services revenue is recognized on a proportional performance basis,
which measures the service hours performed to date relative to the total
expected hours to completion.

Title365


Title365 is a title insurance agency that offers title, escrow and other trustee
services, including title search procedures for title insurance policies, escrow
and other closing and settlement services. Title365 also offers title services
in connection with a borrowers default and with the issuance of home equity
lines of credit and home equity loans.

For title insurance services, we earn a fee for placing and binding title
insurance policies with third-party underwriters that ultimately provide the
title insurance policy to consumers. We act as an agent to place and bind title
insurance policies and satisfy the performance obligation upon the closing of
the underlying real estate transaction. Revenue related to title insurance is
recognized net of the amount of consideration paid to the third-party insurance
underwriters.

Escrow fees and fees for other trustee services are primarily associated with
managing the closing of real estate transactions, including the processing of
funds on behalf of the transaction participants, gathering and recording the
required closing documents, and providing notary and other real estate or
title-related activities. The transfer of these services is satisfied and
revenue is recognized at the closing of the underlying real estate transaction.

Revenue from Default Title Services and Home Equity Services is recognized when the title report is delivered, as we have no material continuing obligations after delivery.

Business combinations


On June 30, 2021, we completed our acquisition of 90.1% ownership of Title365.
We account for acquisitions in accordance with ASC 805, Business Combinations.
Identifiable assets acquired, liabilities assumed and any noncontrolling
interest in the acquired business are recognized and measured as of the
acquisition date at fair value. Goodwill is recognized to the extent by which
the aggregate of the acquisition-date fair value of the consideration
transferred and any noncontrolling interest in the acquired business exceeds the
recognized basis of the identifiable assets acquired, net of assumed
liabilities. Transaction costs directly attributable to the acquisition are
expensed as incurred. Upon acquisition, the accounts and results of operations
of the acquired business are consolidated as of and subsequent to the
acquisition date.
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Good will and intangible assets


Goodwill represents the excess of the consideration transferred in a business
combination over the aggregate fair value of the identifiable assets acquired
and liabilities assumed. Goodwill is not amortized, but rather tested for
impairment annually, or more frequently, if events or changes in circumstances
indicate the carrying amount of goodwill may not be recoverable.

Acquired intangible assets are recorded at their estimated fair value at the
date of acquisition. Determination of the fair value of the acquired customer
relationships and licenses involves significant estimates and assumptions
related to revenue forecasts, discount rates, customer attrition rates, and
replacement costs. Determination of estimated useful lives of intangible assets
requires significant judgment, and the Company regularly evaluates whether
events and circumstances have occurred that indicate the useful lives of
finite-lived intangible assets may warrant revision. Finite-lived intangible
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.

Participation not giving refundable control


The Title365 stockholders' agreement includes a provision whereby we have a call
option to purchase the 9.9% noncontrolling interest at a purchase price equal to
the greater of (1) $49.5 million plus an amount of interest calculated using an
interest rate of 5.0% per annum compounding annually; or (2) 4.4 multiplied by
the trailing 12-month EBITDA multiplied by the noncontrolling interest ownership
percentage ("Title365 Call Option"). The Title365 Call Option is exercisable
beginning two years following the acquisition closing date. The noncontrolling
interest holder also holds an option to compel us to purchase the remaining 9.9%
noncontrolling interest at a price calculated in the same manner as the Title365
Call Option ("Title365 Put Option"). The Title365 Put Option is exercisable
beginning five years following the acquisition closing date. Neither the
Title365 Call Option nor the Title365 Put Option have an expiration date. As the
Title365 Put Option is not solely within our control, we classified this
interest as redeemable noncontrolling interest ("RNCI"), within the mezzanine
equity section of the consolidated balance sheets. The RNCI is accreted to the
redemption value under the interest method from the acquisition date through the
date the Title365 Put Option becomes exercisable. At each balance sheet date,
RNCI is reported at the greater of the initial carrying amount adjusted for the
redeemable noncontrolling interest's share of earnings or losses and other
comprehensive income or loss, or its accreted redemption value. The changes in
the redemption amount are recorded with corresponding adjustments against
retained earnings or, in the absence of retained earnings, additional
paid-in-capital. For each reporting period, the entire periodic change in the
redemption amount is reflected in the computation of net loss per share under
the two-class method as being akin to a dividend.

Stock-based compensation


We measure and recognize our stock-based compensation based on estimated fair
values for all stock awards, which include stock options and RSUs that vest
based upon the satisfaction of a service condition. We recognize stock-based
compensation expense for stock options and RSUs that vest only based upon the
satisfaction of a service condition on a straight-line basis over the requisite
service period, which is generally the vesting period. We account for
forfeitures as they occur.

For stock option awards, we use the Black-Scholes-Merton option pricing model to
determine the grant date fair value of the stock options granted. The
Black-Scholes option pricing model requires the input of highly subjective
assumptions, including the fair value of the underlying common stock (for
pre-IPO awards), the expected term of the option, the expected volatility of the
price of the common stock, risk-free interest rates, and the expected dividend
yield of the common stock. The assumptions used to determine the fair value of
the option awards represent our estimates, which involve inherent uncertainties
and the application of management's judgment. As we continue to accumulate
additional data related to our Class A common stock, we may have refinements to
our estimates, which could materially impact our future stock-based compensation
expense.

Prior to our IPO, the fair value of the common stock underlying our stock-based
awards has historically been determined by our board of directors, with input
from management and contemporaneous third-party valuations. We believe that our
board of directors has the relevant experience and expertise to determine the
fair value of our common stock. Given the absence of a public trading market of
our common stock, and in accordance with the American Institute of Certified
Public Accountants Practice Aid, Valuation of Privately-Held Company Equity
Securities Issued as Compensation, our board of directors exercised reasonable
judgment and considered numerous objective and subjective factors to determine
the best estimate of the fair value of our common stock at each grant date.
These factors include:

•the results of contemporaneous valuations carried out at periodic intervals by a third-party valuation firm;

•the prices, rights, preferences and privileges of our convertible preferred stock over those of our common stock;

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•the prices of our convertible preferred stock and common stock sold to investors in arm’s length transactions;

•our actual operating and financial performance and estimated trends and prospects for our future performance;

•our stage of development;

•the likelihood of a liquidity event occurring, such as an IPO, direct listing or sale of our company, given prevailing market conditions;

•the lack of negotiability of the securities of a private company;

•the stock market performance of comparable listed companies; and

•Financial market conditions in the United States and around the world.


In valuing our common stock, our board of directors determined the equity value
of our business generally using the income approach and the market approach
valuation methods. In allocating the equity value, we considered and have used a
combination of the option pricing method, or OPM, the Probability Weighted
Expected Return Method, or PWERM, and the Hybrid Method (which is a combination
of the OPM and PWERM). The Hybrid Method involves the estimation of multiple
future potential outcomes for us and estimation of the probability of each
respective potential outcome. The common stock per share value determined using
this approach is ultimately based upon probability-weighted per share values
resulting from the various future scenarios. Our scenarios included the use of
an initial public offering scenario and a scenario assuming continued operation
as a private entity (in which an OPM was applied). After the Equity Value is
determined and allocated to the various classes of shares, a discount for lack
of marketability, or DLOM, is applied to arrive at the fair value of the common
stock. A DLOM is applied based on the theory that as a private company, an owner
of the stock has limited opportunities to sell this stock as there is not a
readily available market to sell the stock.

In addition, we also considered any secondary transactions involving our capital
stock. In our evaluation of those transactions, we considered the facts and
circumstances of each transaction to determine the extent to which they
represented a fair value exchange. Factors considered include transaction
volume, timing, whether the transactions occurred among unrelated parties, and
whether the transactions involved investors with access to our financial
information.

Application of these approaches involves the use of estimates, judgment, and
assumptions that are highly complex and subjective, such as those regarding our
expected future revenue, expenses, and future cash flows, discount rates, market
multiples, the selection of comparable companies, and the probability of
possible future events. Changes in any or all of these estimates and assumptions
or the relationships between those assumptions impact our valuations as of each
valuation date and may have a material impact on the valuation of our common
stock.

For valuations after our IPO, the fair value of each underlying Class A common stock is based on the closing price of our Class A common stock as published on the grant date.


Certain stock options granted to our Co-Founder and Head of Blend vest upon the
satisfaction of a service condition, liquidity event-related performance
condition and performance-based market conditions. In July 2021, the first
tranche of the Co-Founder and Head of Blend stock option award vested upon
completion of the IPO. The remaining tranches of shares will vest dependent on
performance goals tied to the Company's stock price hurdles with specified
expiration dates for each tranche.

Segment information


Our operating segments are defined in a manner consistent with how we manage our
operations and how our chief operating decision maker evaluates the results and
allocates our resources. Prior to the acquisition of Title365 we operated as a
single reportable segment. Following the acquisition, Blend Platform, the legacy
banking platform business, and Title365 operate as two separate reportable
segments.

                        Recent Accounting Pronouncements

See Note 2, “Summary of Significant Accounting Policies,” in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

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