An S-4 filing from Aurora Acquisition Corp., the SPAC that digital mortgage provider Better.com intended to merge with, provides stark details about the latter company’s financial performance.
The filing — dated April 24, 2022 — reveals that Better.com swung to a loss of more than $300 million last year, a sharp turnaround from its profitable 2020. The rapid-fire decline in Better.com’s business, brought on by several factors, is notable, as the company is hardly the only concern working in the consumer mortgage space; other companies are taking similar fire.
Aurora’s filing says that Better’s financial performance “deteriorated” as a result of numerous factors, including fluctuating and increasing interest rates, the continued impact of the reorganization of its sales and operations teams in the third quarter of 2021, continued investments in its business (including investments to expand its product offerings) and the effects of “negative media coverage” following, and severance costs associated with, a series of mass layoffs that began on December 1, 2021.
The first round of layoffs — which affected about 900 people — as well as subsequent workforce reductions, have led to a host of issues for the company, Aurora notes in the filing. Aurora attributes the malaise to widespread employee dissatisfaction, which it says has “detrimentally affected” the company’s productivity, financial results and third-party relationships. It also noted that the layoffs and subsequent media attention resulted in “increased attrition” throughout the company, including on its senior leadership team.
TechCrunch in February reported that Sarah Pierce, who served as executive vice president of customer experience, sales and operations, and Emanuel Santa-Donato, who was senior vice president of capital markets and growth, were no longer with the digital mortgage company. Pierce had been with Better.com since August 2016, when she started as a “growth associate.” Santa-Donato joined the company in January 2016 as a “capital markets associate.”
Their departures followed those of three other executives who left the company in December in the wake of the layoffs: Patrick Lenihan, the company’s VP of communications; Tanya Gillogley, head of public relations; and Melanie Hahn, head of marketing.
The company’s CTO, Diane Yu, in April transitioned from her leadership role to an advisory position.
Meanwhile, that same week, Better.com conducted its second mass layoff, which resulted in more than 3,000 workers losing their jobs. Then just a couple of weeks later, the company conducted a third round of layoffs. The company is believed to have effectively reduced its headcount from about 10,000 in December to less than 5,000 in less than five months.
A change of seasons
It’s not hard to see why Better.com pursued going public, looking at its 2020 results. The company’s $875.6 million in revenue — up nearly 10x on the year prior — led to net income of $172.1 million, meaning that Better.com during the boom times was just that — booming.
Then the year changed and the season turned from summer to winter as the market for mortgages worsened. Last year Better.com’s revenue grew to some $1.23 billion, or 41%. That pace of growth, while slower, is still more than respectable for a company on its way to going public.
And it’s not dramatically lower than the $1.38 billion the company expected to bring in for 2021 based on projections it shared in its investor presentation last May. At that time, though, the company also rather ambitiously projected that it would nearly double its revenue in 2022 and again in 2023.
So what’s the bad news? A simply massive swing in profitability, in the negative direction.
Last year Better.com had a net loss of $303.8 million, meaning that it suffered a nearly half-billion profit variance in a single calendar year. That mismatch between gross profit and operating expenses — net income, essentially — that the company endured last year is why it had to cut expenses not just once, but repeatedly.
Suddenly Better.com’s cost structure was too large, and as the company’s market has further fallen apart — interest rates are rising — its cost basis had to be reduced again and again. We all know what happened next: The company’s CEO bungled one set of cuts. His team bungled the next, and the rest is, as they say, history.
In its investor presentation from last May, the company described one of its key competitive advantages as stemming from its technology platform, Tinman, which it said provided a “massive labor cost advantage.” While the company did continue to invest in its tech, it also continued to rack up operational and personnel-related costs, more than doubling its mortgage platform expenses and nearly doubling its compensation and benefits payments from 2020 to 2021, the latest filing shows.
“The increases in headcount and professional services were necessary to support our overall growth and expanding compliance requirements necessary to operate as a public company,” the filing reads. The filing also clarifies that the projections provided last May “do not represent Better management’s current expectations regarding 2022 and subsequent years.”
In a leaked video obtained by TechCrunch in which Garg addressed employees that remained after the December mass layoff, the executive admitted to also screwing up by hiring too many people to begin with. Specifically, he said:
Today we acknowledge that we overhired, and hired the wrong people. And in doing that we failed. I failed. I was not disciplined over the past 18 months. We made $250 million last year, and you know what, we probably pissed away $200 million. We probably could have made more money last year and been leaner, meaner and hungrier.
History of controversy
Well before Better.com garnered negative media coverage due to the manner in which CEO and founder Vishal Garg callously laid off 900 employees, the controversial executive had made headlines for being the target of multiple lawsuits. In fact, the ongoing litigation is considered to be a risk factor for the company, according to the filing, in that it could divert Garg’s attention from its business “regardless of the outcome,” as well as inflict damage to, “or negatively affect,” its reputation. For example, Garg is involved in ongoing litigation that involves accusations that Garg “breached his fiduciary duties to another company he co-founded, misappropriated intellectual property and trade secrets, converted corporate funds and failed to file corporate tax returns.”
In another action the filing goes on to detail, plaintiff investors in a prior business venture claim they did not receive required accounting documentation and that Garg misappropriated funds that should have been distributed to them.
In the filing, Aurora said:
Although we are not currently a party to either litigation, at least one plaintiff has sought permission to add us as a defendant in one of those litigations on claims of misappropriation of trade secrets and unfair competition, alleging that we have used unspecified, misappropriated trade secrets allegedly belonging to another company owned in part by the Better Founder and CEO.
It went on to express concern that its licenses, which it admitted are necessary to conduct its business, could be “materially and adversely affected” by the outcome of the aforementioned litigations.
Garg has also long been dogged by reports that he led by fear and has contributed to a toxic work culture.
Notably, the litigations against Garg are reportedly behind the company’s decision to shift from going public via a traditional IPO to a SPAC to begin with. The Daily Beast last year reported that “Morgan Stanley informed the company that, due to the lawsuits, it would no longer work with Better on a possible IPO, according to a source with direct knowledge of the situation.”
Whether or not Better.com will go public remains in doubt, and either party can still elect to call off the deal until the deadline of September 30th this year, per the filing. It’s difficult to believe that with all the challenges the company is facing that it will manage to keep its doors open, much less venture out into a shaky public market via a SPAC.