MEDIAALPHA, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Cautionary Statement Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements. Management overview Our mission is to help insurance carriers and distributors target and acquire customers more efficiently and at greater scale through technology and data science. Our technology platform brings leading insurance carriers and high-intent consumers together through a real-time, transparent, and results-driven ecosystem. We believe we are the largest online customer acquisition channel in our core verticals of property & casualty ("P&C") insurance, health insurance, and life insurance, supporting over$1.6 billion in Transaction Value across our platform over the last two years. We have multi-faceted relationships with top-tier insurance carriers and distributors. A buyer or a demand partner within our ecosystem is generally an insurance carrier or distributor seeking to reach high-intent insurance consumers. A seller or a supply partner is typically an insurance carrier looking to maximize the value of non-converting or low LTV consumers, or an insurance-focused research destination or other financial websites looking to monetize high-intent users on their websites. For the twelve-month period endedSeptember 30, 2021 , an average of 33.7 million consumers each month shopped for insurance products through the websites of our diversified group of supply partners and our proprietary websites, driving an average of over 8.0 million Consumer Referrals per month on our platform. We generate revenue by earning a fee for each Consumer Referral sold on our platform. A transaction becomes payable upon a qualifying consumer action, such as a click, call or lead, and is not contingent on the sale of a product to the consumer. We believe in the disruptive power of transparency. Traditionally, insurance customer acquisition platforms operated in a black box. We recognized that a consumer may be valued differently by one insurer versus another; therefore, insurers should be able to determine pricing granularly based on the value that a particular customer segment is expected to bring to their business. As a result, we developed a technology platform that powers an ecosystem where buyers and sellers can transact with full transparency, control, and confidence, aligning the interests of the parties participating on our platform. We believe our technology is a key differentiator and a powerful driver of our performance. We maintain deep, custom integrations with partners representing the majority of our Transaction Value, which enable automated, data-driven processes that optimize our partners' customer acquisition spend and revenue. Through our platform, our insurance carrier partners can target and price across over 35 separate consumer attributes to manage customized acquisition strategies. Key factors affecting our business Revenue We believe that our future performance will depend on many factors, including those described below and in Part I, Item 1A "Risk Factors" in the 2020 Annual Report on Form 10-K. Secular trends in the insurance industry Our technology platform was created to serve and grow with our core insurance end markets. We believe secular trends in the insurance industry are critical drivers of our revenue and will continue to provide strong tailwinds for our business. More insurance consumers are shopping online and direct-to-consumer marketing, which fuels our revenue, is the fastest growing insurance distribution channel. In addition, insurance customer acquisition spending is growing. As mass-market customer acquisition spend is becoming more costly, insurance carriers and distributors are increasingly focusing on optimizing customer acquisition spend, which is at the core of the service we deliver on our platform. As long as these secular trends persist, we expect digital insurance customer acquisition spending to continue to grow over time, and we believe we are well-positioned to benefit from this growth. 22 -------------------------------------------------------------------------------- Table of Contents Transaction Value Transaction Value from Open marketplace transactions is a direct driver of our revenue, while Transaction Value from Private marketplace transactions is an indirect driver of our revenue (see "Key business and operating metrics" below). Transaction Value on our platform grew to$255.1 million and$774.1 million for the three and nine months endedSeptember 30, 2021 , respectively, from$217.6 million and$558.8 million for the three and nine months endedSeptember 30, 2020 , respectively. We have developed multi-faceted, deeply integrated partnerships with insurance carriers and distributors, who are often both buyers and sellers on our platform. We believe the versatility and breadth of our offerings, coupled with our focus on high-quality products, provide significant value to insurance carriers and distributors, resulting in strong retention rates. As a result, many insurance carriers and distributors use our platform as their central hub for broadly managing digital customer acquisition and monetization. For the three and nine months endedSeptember 30, 2021 , 96.6% and 98.3% of total Transaction Value executed on our platform, respectively, came from demand partner relationships in place during 2020. Our demand and supply partners Our success depends on our ability to retain and grow the number of demand and supply partners on our platform. The aggregate number of demand and supply partners active on our platform increased to 1,279 during the three months endedSeptember 30, 2021 from 935 during the three months endedSeptember 30, 2020 , driven by increased engagement in our P&C and Health verticals, offset in part by decreased engagement in our Travel vertical as advertising spend in this vertical decreased sharply during the three months endedMarch 31, 2021 , compared with the prior year period, due to reduced travel resulting from the COVID-19 pandemic. We retain and attract demand partners by finding high-quality sources of Consumer Referrals to make available to our demand partners. We seek to develop, acquire and retain relationships with high-quality supply partners by developing flexible platforms to enable our supply partners to maximize their revenue, manage their demand side relationships in scalable and flexible ways and focus on long-term sustainable economics with respect to revenue share. Our relationships with our partners are deep and long standing and involve the top-tier insurance carriers in the industry. In terms of buyers, 15 of the top 20 largest auto insurance carriers by customer acquisition spend are on our platform. Consumer Referrals Our results depend in large part on the number of Consumer Referrals purchased on our platform. The aggregate number of consumer clicks, calls and leads purchased by insurance buyers on our platform grew to 25.3 million and 72.7 million for the three and nine months endedSeptember 30, 2021 , respectively, from 19.9 million and 56.6 million for the three and nine months endedSeptember 30, 2020 , respectively. We seek to increase the number and scale of our supply relationships and drive consumers to our proprietary properties through a variety of paid traffic acquisition sources. We are investing in diversifying our paid media sources to extend beyond search engine marketing, which historically represented the bulk of our paid media spend, into other online media sources, including native, social, and display advertising. Seasonality Our results are subject to fluctuations as a result of seasonality. In particular, our property & casualty insurance vertical is typically characterized by seasonal strength in our quarters endingMarch 31 andSeptember 30 due to a greater supply of Consumer Referrals and higher customer acquisition budgets during those quarters, and to seasonal weakness in our quarters endingDecember 31 due to a lower supply of Consumer Referrals available on a cost-effective basis and lower customer acquisition budgets from some buyers during those quarters. Our health insurance vertical is typically characterized by seasonal strength in our quarters endingMarch 31 andDecember 31 due to open enrollment periods for health insurance and annual enrollment for Medicare during those quarters, with a material increase in consumer search volume for health products and a related increase in buyer customer acquisition budgets. Other factors affecting our partners' businesses include macro factors such as credit availability in the market, the strength of the economy and employment levels. 23 -------------------------------------------------------------------------------- Table of Contents Cyclicality Our results are also subject to fluctuations as a result of business cycles experienced by companies in the insurance industry. These cycles, most notably in the auto insurance industry, are characterized by periods of "soft" market conditions, when carriers are focused on lowering rates, increasing capacity, and building market share, and "hard" market conditions, when carriers tend to raise prices and prioritize profitability over growth. As our demand partners in these industries go through these market cycles, they often increase their customer acquisition spending during soft markets and reduce it during hard markets, causing their relative demand for Consumer Referrals from our platform to increase and decrease accordingly. We believe that the auto insurance industry is currently in a "hard" market due to higher than expected underwriting losses, and that many P&C insurance carriers are reducing their customer acquisition spending until they can increase their premium rates, the timing of which is difficult to predict. Regulations Our revenue and earnings may fluctuate from time to time as a result of federal, state, international and industry-based laws, directives and regulations and developing standards with respect to the enforcement of those regulations. Our business is affected directly because we operate websites, conduct telemarketing and email marketing and collect, process, store, share, disclose, transfer and use consumer information and other data. Our business is affected indirectly as our clients adjust their operations as a result of regulatory changes and enforcement activity within their industries. For example, theCalifornia Consumer Privacy Act ("CCPA"), became effective onJanuary 1, 2020 , and number of other states, includingColorado andVirginia , have enacted or are considering similar laws, all of which may affect our business. While it is unclear how this new legislation may be modified or how certain provisions will be interpreted, the effects of this legislation are potentially significant, and may require us to modify our data processing practices and policies and incur substantial compliance-related costs and expenses. For a description of laws and regulations to which we are generally subject, see "Business-Regulation" and "Risk factors-Risks related to laws and regulation" in our 2020 Annual Report on Form 10-K. COVID-19 Our Travel vertical is largely driven by consumer and business spending on airfare, hotels, rentals and other travel products. However, as a result of COVID-19, we have experienced a dramatic decline in revenue from the Travel vertical and expect this trend to continue for the foreseeable future. For the three and nine months endedSeptember 30, 2021 , revenue from the Travel vertical comprised approximately 2.1% and 2.0% of our total revenue, respectively, compared with 11.1% and 12.3% for the three and nine months endedSeptember 30, 2019 , prior to the start of the pandemic. While we have sought to maintain our commercial relationships in the Travel vertical and remain positioned to capitalize on transactions in the Travel vertical when travel activity resumes, we do not expect that revenue from the Travel vertical will match our historical results or have any material impact on our overall revenue or profitability for the foreseeable future. In addition, during the three months endedSeptember 30, 2021 supply chain disruptions and cost increases caused by the pandemic contributed to higher-than-expected property and casualty insurance claims costs, which has led many carriers to reduce their customer acquisition spending to preserve their profitability. These reductions continue to impact revenue from the Company's P&C vertical, and the duration and extent of this impact are difficult to estimate beyond the current year. Recent developments OnJuly 29, 2021 , we entered into an amendment to the 2020 Credit Agreement for a new senior secured term loan facility in an aggregate principal amount of$190.0 million , the proceeds of which were used to refinance all$186.4 million of the existing term loans outstanding and the unpaid interest thereof as of the date of the amendment, fees related to these transactions, and to provide cash for general corporate purposes, and a new senior secured revolving credit facility with commitments in an aggregate amount of$50.0 million , which replaced the existing revolving credit facility under the 2020 Credit Agreement. See "Liquidity and Capital Resources" below for additional information regarding these transactions. Key components of our results of operations Revenue We operate primarily in the P&C insurance, health insurance and life insurance verticals and generate revenue through the purchase and sale of Consumer Referrals. 24 -------------------------------------------------------------------------------- Table of Contents The price and amount of Consumer Referrals purchased and sold on our platform vary based on a number of market conditions and consumer attributes, including (i) geographic location of consumers, (ii) demographic attributes of consumers, (iii) the source of Consumer Referrals and quality of conversion by source, (iv) buyer bids and (v) buyer demand and budget. In our Open marketplace transactions, we have control over the Consumer Referrals that are sold to our demand partners. In these arrangements, we have separate agreements with demand partners and suppliers. Suppliers are not a party to the contractual arrangements with our demand partners, nor are the suppliers the beneficiaries of our demand partner agreements. We earn fees from our demand partners and separately pay (i) a revenue share to suppliers and (ii) a fee to internet search companies to drive consumers to our proprietary websites. We are the principal in the Open marketplace transactions. As a result, the fees paid by demand partners are recognized as revenue and the fees paid to suppliers are included in cost of revenue. With respect to our Private marketplace transactions, buyers and suppliers contract with one another directly and leverage our platform to facilitate transparent, real-time transactions utilizing the reporting and analytical tools available to them from use of our platform. We charge a platform fee on the Consumer Referrals transacted. We act as an agent in the Private marketplace transactions and recognize revenue for the platform fee received. There are no separate payments made by us to suppliers in our Private marketplace. Cost and operating expenses Cost and operating expenses consist primarily of cost of revenue, sales and marketing expenses, product expenses and general and administrative expenses. Cost of revenue Our cost of revenue is comprised primarily of revenue share payments to suppliers and traffic acquisition costs paid to top tier search engines, as well as telephony infrastructure costs, internet and hosting, merchant fees, salaries and related expenses, amortization expense and other expenses. Sales and marketing Sales and marketing expenses consist primarily of an allocation of personnel expenses for employees engaged in demand side and supply side business development, marketing and media acquisition activities, and include salaries, wages and benefits, including non-cash equity-based compensation. Sales and marketing expenses also include costs related to attracting partners to our platform, including marketing and promotions, tradeshows and related travel and entertainment expenses. Sales and marketing expenses also include an allocated portion of rent and facilities expenses and depreciation and amortization expense. Product development Product development expenses consist primarily of an allocation of personnel expenses for employees engaged in technology, engineering and product development and include salaries, wages and benefits, including non-cash equity-based compensation. Product development expenses also include an allocated portion of rent and facilities expenses and depreciation and amortization expense. General and administrative General and administrative expenses consist primarily of an allocation of personnel expenses for executive, finance, legal, human resources, and business analytics employees, and include salaries, wages and benefits, including non-cash equity-based compensation. General and administrative expenses also include professional services and an allocated portion of rent and facilities expenses and depreciation expense. Interest expense Interest expense consists primarily of interest expense associated with outstanding borrowings under our loan and security agreements and the amortization of deferred financing costs and debt discounts associated with these arrangements. 25 -------------------------------------------------------------------------------- Table of Contents Provision for income taxes We are the sole managing member of QLH, which is treated as a partnership forU.S. federal and most applicable state and local income tax purposes. As a partnership, QLH is not subject toU.S. federal and certain state and local income taxes. Any taxable income or loss generated by QLH is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject toU.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss generated by QLH. As our ownership interest in QLH increases, our share of the taxable income (loss) of QLH also increases. As ofSeptember 30, 2021 , our ownership interest in QLH was 65.8%. Net income (loss) attributable to QLH prior to Reorganization Transactions Net income incurred prior to the completion of the Reorganization Transactions is attributed to QLH. Net income (loss) attributable to Non-controlling interest Net income (loss) is attributed to non-controlling interests in accordance with QLH's limited liability company agreement. We allocate the share of net income (loss) to the non-controlling interest holders pro-rata to their holdings. The non-controlling interests balance represents the holders of Class B-1 units. Operating results for the three months endedSeptember 30, 2021 and 2020 The following table sets forth our operating results in absolute dollars and as a percentage of revenue for the three months endedSeptember 30, 2021 and 2020: Three months ended September 30, (in thousands) 2021 2020 Revenue$ 152,749 100.0 %$ 151,548 100.0 % Cost and operating expenses Cost of revenue 128,080 83.8 % 130,830 86.3 % Sales and marketing 5,620 3.7 % 2,916 1.9 % Product development 3,754 2.5 % 1,766 1.2 % General and administrative 15,349 10.0 % 7,605 5.0 % Total cost and operating expenses 152,803 100.0 % 143,117 94.4 % (Loss) income from operations (54) 0.0 % 8,431 5.6 % Other expenses, net 316 0.2 % 1,998 1.3 % Interest expense 1,765 1.2 % 1,594 1.1 % Total other expense 2,081 1.4 % 3,592 2.4 % (Loss) income before income taxes (2,135) (1.4) % 4,839 3.2 % Income tax expense 2,125 1.4 % 20 0.0 % Net (loss) income$ (4,260) (2.8) %$ 4,819 3.2 % Net income attributable to QLH prior to Reorganization Transactions - 0.0 % 4,819 3.2 % Net (loss) attributable to non-controlling interest (733) (0.5) % - 0.0 % Net (loss) attributable to MediaAlpha, Inc.$ (3,527) (2.3) % $ - 0.0 % Net (loss) per share of Class A common stock -Basic$ (0.09) $ - -Diluted$ (0.10) $ - Weighted average shares of Class A common stock outstanding -Basic 38,416,723 - -Diluted 61,190,185 - Revenue The following table presents our revenue, disaggregated by vertical, for the three months endedSeptember 30, 2021 and 2020, and the dollar and percentage changes between the two periods: 26
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Three Months Three Months
Ended Ended
September 30, September 30,
(dollars in thousands) 2021 $ % 2020
Property & Casualty insurance $ 105,104 $ (9,028) (7.9) % $ 114,132
Percentage of total revenue 68.8 % 75.3 %
Health insurance 34,053 6,710 24.5 % $ 27,343
Percentage of total revenue 22.3 % 18.0 %
Life insurance 7,489 97 1.3 % $ 7,392
Percentage of total revenue 4.9 % 4.9 %
Other 6,103 3,422 127.6 % $ 2,681
Percentage of total revenue 4.0 % 1.8 %
Revenue $ 152,749 1,201 0.8 % $ 151,548
The decrease in P&C insurance revenue for the three months ended September 30,
2021 , compared with the three months ended September 30, 2020 , was due to a
decrease in customer acquisition spending by certain insurance carriers to
address profitability concerns caused by higher-than-expected automobile repair
and replacement costs and claims from hurricanes and other major storms. We
believe that, due to these profitability issues, during the quarter ended
September 30, 2021 the auto insurance industry began to experience a cyclical
downturn that has led us to reduce our revenue forecasts for the fourth quarter
of 2021. We are currently unable to predict the duration of this cyclical
downturn in the auto insurance industry or its impact on our P&C insurance
vertical revenue or profitability beyond the current year.
The increase in health insurance revenue for the three months ended September
30, 2021 , compared with the three months ended September 30, 2020 , was driven by
increased customer acquisition spending in our marketplaces by from health
insurance carriers and brokers, as well as by an increased supply of customer
referrals to our marketplaces by our supply partners and our proprietary
websites due to the increased demand.
The increase in life insurance revenue for the three months ended September 30,
2021 , compared with the three months ended September 30, 2020 , was driven by an
increase in customer acquisition spending in our marketplaces by life insurance
carriers, as well as by an increased supply of customer referrals to our
marketplaces by our supply partners due to the increased demand.
The increase in other revenue for the three months ended September 30, 2021 ,
compared with the three months ended September 30, 2020 , was driven primarily by
an increase in travel comparison shopping, due to the easing of concerns related
to COVID-19, as well as higher activity levels from our consumer finance supply
and demand partners due to the continued strength in the mortgage and refinance
market.
Cost of revenue
The following table presents our cost of revenue for the three months ended
September 30, 2021 and 2020, and the dollar and percentage changes between the
two periods:
Three Months Ended Three Months Ended
(dollars in thousands) September 30, 2021 $ % September 30, 2020
Cost of revenue $ 128,080 $ (2,750) (2.1) % $ 130,830
Percentage of revenue 83.8 % 86.3 %
The decrease in cost of revenue for the three months ended September 30, 2021 ,
compared with the three months ended September 30, 2020 , was driven by the
higher mix of Transaction Value from our Private marketplace, where we recognize
revenue on a net basis and have no associated cost of revenue.
27
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Sales and marketing
The following table presents our sales and marketing expenses for the three
months ended September 30, 2021 and 2020, and the dollar and percentage changes
between the two periods:
Three Months Ended Three Months Ended
(dollars in thousands) September 30, 2021 $ % September 30, 2020
Sales and marketing $ 5,620 $ 2,704 92.7 % $ 2,916
Percentage of revenue 3.7 % 1.9 %
The increase in sales and marketing expenses for the three months ended
September 30, 2021 , compared with the three months ended September 30, 2020 , was
due primarily to higher equity-based compensation expense of $1.8 million and an
increase in personnel-related costs of $0.9 million resulting from planned
headcount additions.
Product development
The following table presents our product development expenses for the three
months ended September 30, 2021 and 2020, and the dollar and percentage changes
between the two periods:
Three Months Ended Three Months Ended
(dollars in thousands) September 30, 2021 $ % September 30, 2020
Product development $ 3,754 $ 1,988 112.6 % $ 1,766
Percentage of revenue 2.5 % 1.2 %
The increase in product development expenses for the three months ended
September 30, 2021 , compared with the three months ended September 30, 2020 , was
due primarily to higher equity-based compensation expense of $1.5 million and an
increase in personnel-related costs of $0.4 million resulting from planned
headcount additions to continue the enhancement and development of new
functionality on our platform.
General and administrative
The following table presents our general and administrative expenses for the
three months ended September 30, 2021 and 2020, and the dollar and percentage
changes between the two periods:
Three Months Ended Three Months Ended
(dollars in thousands) September 30, 2021 $ % September 30, 2020
General and administrative $ 15,349 $ 7,744 101.8 % $ 7,605
Percentage of revenue 10.0 % 5.0 %
The increase in general and administrative expenses for the three months ended
September 30, 2021 , compared with the three months ended September 30, 2020 , was
due primarily to higher equity-based compensation expense of $6.9 million , and
higher costs in the current year period related to our operation as a
publicly-reporting company, including directors and officers insurance premiums
of $1.5 million and higher professional and other fees, offset in part by
professional and legal fees incurred during the prior year period related to our
Reorganization Transaction and IPO that did not recur in the current year
period.
Equity-based compensation
The following table presents our equity-based compensation expense that was
included in cost and operating expenses for the three months ended September 30,
2021 and 2020, and the dollar and percentage changes between the two periods:
28--------------------------------------------------------------------------------
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Three Months Three Months
Ended Ended
September 30, September 30,
(dollars in thousands) 2021 $ % 2020
Cost of revenue $ 447 $ 429 2,383.3 % $ 18
Sales and marketing 1,956 1,798 1,138.0 % 158
Product development 1,602 1,508 1,604.3 % 94
General and administrative 7,193 6,857 2,040.8 % 336
Total $ 11,198 $ 10,592 1,747.9 % $ 606
The increase in equity-based compensation expense for the three months ended
September 30, 2021 , compared with the three months ended September 30, 2020 , was
driven primarily by grants of equity-based awards to Senior Executives and
Legacy Profit Interest Holders at the time of our IPO and grants of restricted
stock units under the 2020 Omnibus Incentive Plan.
Depreciation
The following table presents our depreciation expense that was included in cost
and operating expenses for the three months ended September 30, 2021 and 2020,
and the dollar and percentage changes between the two periods:
Three Months Ended Three Months Ended
(dollars in thousands) September 30, 2021 $ % September 30, 2020
Cost of revenue $ 7 $ 1 16.7 % $ 6
Sales and marketing 37 11 42.3 % 26
Product development 29 6 26.1 % 23
General and administrative 26 8 44.4 % 18
Total $ 99 $ 26 35.6 % $ 73
The increase in depreciation expense for the three months ended September 30,
2021 compared with the three months ended September 30, 2020 was not material.
Amortization
The following table presents our amortization of intangible asset expense that
was included in cost and operating expenses for the three months ended September
30, 2021 and 2020, and the dollar and percentage changes between the two
periods:
Three Months Ended Three Months Ended
(dollars in thousands) September 30, 2021 $ % September 30, 2020
Sales and Marketing $ 746 $ (53) (6.6) % $ 799
The decrease in amortization expense for the three months ended September 30,
2021 compared with the three months ended September 30, 2020 was not material.
Interest expense
The following table presents our interest expense for the three months ended
September 30, 2021 and 2020, and the dollar and percentage changes between the
two periods:
Three Months Ended Three Months Ended
(dollars in thousands) September 30, 2021 $ % September 30, 2020
Interest expense $ 1,765 $ 171 10.7 % $ 1,594
Percentage of revenue 1.2 % 1.1 %
29-------------------------------------------------------------------------------- Table of Contents The increase in interest expense for the three months endedSeptember 30, 2021 , compared with the three months endedSeptember 30, 2020 , was driven by a higher principal balance on the 2021 Credit Facility resulting from the refinancing of our 2020 Credit Facilities onJuly 29, 2021 . Income tax expense The following table presents our income tax expense for the three months endedSeptember 30, 2021 and 2020, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) September 30, 2021 $ % September 30, 2020 Income tax expense $ 2,125$ 2,105 10,525.0 % $ 20 Percentage of revenue 1.4 % 0.0 % For the three months endedSeptember 30, 2021 , we recorded an income tax expense of$2.1 million resulting from our effective tax rate of (99.5)%, which differed from theU.S. federal statutory rate of 21%, due primarily to nondeductible equity-based compensation, state taxes, income not taxable to us associated with the non-controlling interest, and the impact of tax benefits associated with equity-based awards. The results for the three months endedSeptember 30, 2020 consisted solely of the activities of its wholly owned Taiwanese subsidiary,Skytiger Studio Ltd. , which is a taxpaying entity inTaiwan , and prior to the Reorganization Transactions, the consolidated QLH pass through entity was not subject to corporate income tax. Operating results for the nine months endedSeptember 30, 2021 and 2020 The following table sets forth our operating results in absolute dollars and as a percentage of revenue for the nine months endedSeptember 30, 2021 and 2020: Nine Months Ended September 30, (in thousands) 2021 2020 Revenue$ 483,690 100.0 %$ 394,609 100.0 % Cost and operating expenses Cost of revenue 407,563 84.3 % 335,692 85.1 % Sales and marketing 16,721 3.5 % 8,866 2.2 % Product development 10,904 2.3 % 5,482 1.4 % General and administrative 44,677 9.2 % 13,907 3.5 % Total cost and operating expenses 479,865 99.2 % 363,947 92.2 % Income from operations 3,825 0.8 % 30,662 7.8 % Other expenses, net 337 0.1 % 1,998 0.5 % Interest expense 6,303 1.3 % 4,844 1.2 % Total other expense 6,640 1.4 % 6,842 1.7 % (Loss) income before income taxes (2,815) (0.6) % 23,820 6.0 % Income tax expense 1,636 0.3 % 20 0.0 % Net (loss) income$ (4,451) (0.9) %$ 23,800 6.0 % Net income attributable to QLH prior to Reorganization Transactions - 0.0 % 23,800 6.0 % Net (loss) attributable to non-controlling interest (1,021) (0.2) % - 0.0 % Net (loss) attributable to MediaAlpha, Inc.$ (3,430) (0.7) % $ - 0.0 % Net (loss) per share of Class A common stock -Basic$ (0.09) $ - -Diluted$ (0.09) $ - Weighted average shares of Class A common stock outstanding -Basic 36,426,270 - -Diluted 36,426,270 - 30
-------------------------------------------------------------------------------- Table of Contents Revenue The following table presents our revenue, disaggregated by vertical, for the nine months endedSeptember 30, 2021 and 2020, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended (dollars in thousands) September 30, 2021 $ % September 30, 2020 Property & Casualty insurance$ 339,981 $ 65,159 23.7 %$ 274,822 Percentage of total revenue 70.3 % 69.6 % Health insurance 103,637 22,217 27.3 %$ 81,420 Percentage of total revenue 21.4 % 20.6 % Life insurance 22,921 (1,344) (5.5) %$ 24,265 Percentage of total revenue 4.7 % 6.1 % Other 17,151 3,049 21.6 %$ 14,102 Percentage of total revenue 3.5 % 3.6 % Revenue$ 483,690 89,081 22.6 %$ 394,609 The increase in P&C insurance revenue for the nine months endedSeptember 30, 2021 , compared with the nine months endedSeptember 30, 2020 , was due to increased customer acquisition spending in our marketplaces by insurance carriers, driven by improving carrier profitability in the first half of the year and the growing trend of P&C insurance carriers allocating customer acquisition budgets to the DTC channel, resulting in our supply partners driving more consumers through their websites. We believe that, due to these profitability issues, during the three months endedSeptember 30, 2021 the auto insurance industry began to experience a cyclical downturn that has led us to reduce our revenue forecasts for the three months endedDecember 31, 2021 . We are currently unable to predict the duration of this cyclical downturn in the auto insurance industry, or its impact on our P&C insurance vertical revenue or profitability beyond the current year. The increase in health insurance revenue for the nine months endedSeptember 30, 2021 , compared with the nine months endedSeptember 30, 2020 , was driven by increased customer acquisition spending in our marketplaces by health insurance carriers and brokers, as well as by an increased supply of customer referrals to our marketplaces by our supply partners and our proprietary websites due to the increased demand. The decrease in life insurance revenue for the nine months endedSeptember 30, 2021 , compared with the nine months endedSeptember 30, 2020 , was driven by a higher mix of transactions occurring on our Private marketplace as certain of our larger supply partners migrated more of their consumer referral transactions with certain demand partners from our Open marketplace to our Private marketplace. The increase in other revenue for the nine months endedSeptember 30, 2021 , compared with the nine months endedSeptember 30, 2020 , was driven primarily by an increase in travel comparison shopping, due to the easing of concerns related to COVID-19, higher activity levels from our consumer finance supply and demand partners due to the continued strength in the mortgage and refinance market. Cost of revenue The following table presents our cost of revenue for the nine months endedSeptember 30, 2021 and 2020, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended (dollars in thousands) September 30, 2021 $ % September 30, 2020 Cost of revenue$ 407,563 $ 71,871 21.4 %$ 335,692 Percentage of revenue 84.3 % 85.1 % The increase in cost of revenue for the nine months endedSeptember 30, 2021 , compared with the nine months endedSeptember 30, 2020 , was driven by the overall increase in revenue volume and the corresponding increase in revenue share payments to suppliers. Cost of revenue as a percentage of revenue decreased due to a higher mix of Transaction Value from our Private marketplace, where we recognize revenue on a net basis and do not have associated cost of revenue. 31 -------------------------------------------------------------------------------- Table of Contents Sales and marketing The following table presents our sales and marketing expenses for the nine months endedSeptember 30, 2021 and 2020, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended (dollars in thousands) September 30, 2021 $ % September 30, 2020 Sales and marketing$ 16,721 $ 7,855 88.6 %$ 8,866 Percentage of revenue 3.5 % 2.2 % The increase in sales and marketing expenses for the nine months endedSeptember 30, 2021 , compared with the nine months endedSeptember 30, 2020 , was due primarily to higher equity-based compensation expense of$5.3 million and an increase in personnel-related costs of$2.3 million resulting from planned headcount additions. Product development The following table presents our product development expenses for the nine months endedSeptember 30, 2021 and 2020, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended (dollars in thousands) September 30, 2021 $ % September 30, 2020 Product development$ 10,904 $ 5,422 98.9 %$ 5,482 Percentage of revenue 2.3 % 1.4 % The increase in product development expenses for the nine months endedSeptember 30, 2021 , compared with the nine months endedSeptember 30, 2020 , was due primarily to higher equity-based compensation expense of$3.9 million and an increase in personnel-related costs of$1.4 million resulting from planned headcount additions to continue the enhancement and development of new functionality on our platform.. General and administrative The following table presents our general and administrative expenses for the nine months endedSeptember 30, 2021 and 2020, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended (dollars in thousands) September 30, 2021 $ % September 30, 2020 General and administrative$ 44,677 $ 30,770 221.3 %$ 13,907 Percentage of revenue 9.2 % 3.5 % The increase in general and administrative expenses for the nine months endedSeptember 30, 2021 , compared with the nine months endedSeptember 30, 2020 , was due primarily to higher equity-based compensation expense of$20.3 million , and higher costs in the current year period related to our operation as a publicly-reporting company, including directors and officers insurance premiums of$4.4 million , higher professional and legal fees incurred in connection with the Secondary Offering, and other professional fees, offset in part by professional and legal fees incurred during the prior year period related to our Reorganization Transaction and IPO that did not recur in the current year period. 32 -------------------------------------------------------------------------------- Table of Contents Equity-based compensation The following table presents our equity-based compensation expense that was included in cost and operating expenses for the nine months endedSeptember 30, 2021 and 2020, and the dollar and percentage changes between the two periods: Nine months Nine months ended ended September September 30, (dollars in thousands) 30, 2021 $ % 2020 Cost of revenue$ 1,289 $ 1,231 2,122.4 % $ 58 Sales and marketing 5,639 5,326 1,701.6 % 313 Product development 4,599 3,876 536.1 % 723 General and administrative 21,794 20,335 1,393.8 % 1,459 Total$ 33,321 $ 30,768 1,205.2 %$ 2,553 The increase in equity-based compensation expense for the nine months endedSeptember 30, 2021 , compared with the nine months endedSeptember 30, 2020 , was driven primarily by grants of equity-based awards to Senior Executives and Legacy Profit Interest Holders at IPO and grants of restricted stock units under the 2020 Omnibus Incentive Plan. Depreciation The following table presents our depreciation expense that was included in cost and operating expenses for the nine months endedSeptember 30, 2021 and 2020, and the dollar and percentage changes between the two periods: Nine months Nine months ended ended September 30, September 30, (dollars in thousands) 2021 $ % 2020 Cost of revenue$ 22 $ 5 29.4 %$ 17 Sales and marketing 109 34 45.3 % 75 Product development 80 13 19.4 % 67 General and administrative 61 10 19.6 % 51 Total$ 272 $ 62 29.5 %$ 210 The increase in depreciation expense for the nine months endedSeptember 30, 2021 compared with the nine months endedSeptember 30, 2020 was not material. Amortization The following table presents our amortization of intangible asset expense that was included in cost and operating expenses for the nine months endedSeptember 30, 2021 and 2020, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended September 30, September 30, (dollars in thousands) 2021 $ % 2020 Sales and Marketing$ 2,238 $ (164) (6.8) %$ 2,402 The decrease in amortization expense for the nine months endedSeptember 30, 2021 , compared with the nine months endedSeptember 30, 2020 , was driven by lower amortization based on the economic life of our customer relationships. Interest expense The following table presents our interest expense for the nine months endedSeptember 30, 2021 and 2020, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended (dollars in thousands) September 30, 2021 $ % September 30, 2020 Interest expense$ 6,303 $ 1,459 30.1 %$ 4,844 Percentage of revenue 1.3 % 1.2 % 33
-------------------------------------------------------------------------------- Table of Contents The increase in interest expense for the nine months endedSeptember 30, 2021 , compared with the nine months endedSeptember 30, 2020 , was driven by a higher principal balance on the 2020 and 2021 Credit Facility in connection with the refinancing of our 2019 Credit Facilities in 2020 and 2020 Credit Facilities in 2021. Income tax expense The following table presents our income tax expense for the nine months endedSeptember 30, 2021 and 2020, and the dollar and percentage changes between the two periods: Nine months ended Nine months ended September 30, (dollars in thousands) September 30, 2021 $ % 2020 Income tax expense$ 1,636 $ 1,616 8,080.0 %$ 20 Percentage of revenue 0.3 % 0.0 % For the nine months endedSeptember 30, 2021 , we recorded an income tax expense of$1.6 million . Our effective tax rate of (58.1)% differed from theU.S. federal statutory rate of 21%, due primarily to nondeductible equity-based compensation, state taxes, income not taxable to us associated with the non-controlling interest, nondeductible transaction costs associated with the Secondary Offering and the impact of tax benefits associated with equity-based awards. The results for the nine months endedSeptember 30, 2020 consisted solely of the activities of its wholly owned Taiwanese subsidiary,Skytiger Studio Ltd. , which is a taxpaying entity inTaiwan , and prior to the Reorganization Transactions, the consolidated QLH pass through entity was not subject to corporate income tax. Key business and operating metrics In addition to traditional financial metrics, we rely upon certain business and operating metrics that are not presented in accordance with GAAP to estimate the volume of spending on our platform, estimate and recognize revenue, evaluate our business performance and facilitate our operations. Such business and operating metrics should not be considered in isolation from, or as an alternative to, measures presented in accordance with GAAP and should be considered together with other operating and financial performance measures presented in accordance with GAAP. Also, such business and operating metrics may not necessarily be comparable to similarly titled measures presented by other companies. Adjusted EBITDA We define "Adjusted EBITDA" as net income excluding interest expense, income tax benefit (expense), depreciation expense on property and equipment, and amortization of intangible assets, as well as equity-based compensation expense and certain other adjustments as listed in the table below. Adjusted EBITDA is a non-GAAP financial measure that we present to supplement the financial information we present on a GAAP basis. We monitor and present Adjusted EBITDA because it is a key measure used by our management to understand and evaluate our operating performance, to establish budgets and to develop operational goals for managing our business. We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in the calculations of Adjusted EBITDA. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects. In addition, presenting Adjusted EBITDA provides investors with a metric to evaluate the capital efficiency of our business. Adjusted EBITDA is not presented in accordance with GAAP and should not be considered in isolation of, or as an alternative to, measures presented in accordance with GAAP. There are a number of limitations related to the use of Adjusted EBITDA rather than net income, which is the most directly comparable financial measure calculated and presented in accordance with GAAP. These limitations include the fact that Adjusted EBITDA excludes interest expense on debt, income tax benefit (expense), equity-based compensation expense, depreciation and amortization, and certain other adjustments that we consider useful information to investors and others in understanding and evaluating our operating results. In addition, other companies may use other measures to evaluate their performance, including different definitions of "Adjusted EBITDA," which could reduce the usefulness of our Adjusted EBITDA as a tool for comparison. 34 -------------------------------------------------------------------------------- Table of Contents The following table reconciles Adjusted EBITDA with net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, for the three and nine months endedSeptember 30, 2021 and 2020. Three months ended Nine months ended September 30, September 30, (in thousands) 2021 2020 2021 2020 Net (loss) income$ (4,260) $ 4,819 $ (4,451) $ 23,800 Equity-based compensation expense 11,198 606 33,321 2,553 Interest expense 1,765 1,594 6,303 4,844 Income tax expense 2,125 20 1,636 20 Depreciation expense on property and equipment 99 73 272 210 Amortization of intangible assets 746 799 2,238 2,402 Transaction expenses(1) 1,152 6,049 3,883 6,049 Employee-related costs(2) 270 - 619 - SOX implementation costs(3) 348 - 797 - Settlement costs(4) 800 - 800 - Changes in TRA related liability(5) (448) - (604) - Reduction in Tax Indemnification Receivable(6) - - 147 - Adjusted EBITDA$ 13,795 $ 13,960 $ 44,961 $ 39,878 (1)Transaction expenses include$1.2 million and$3.9 million of expenses incurred by us for the three and nine months endedSeptember 30, 2021 , respectively, for legal and accounting fees and other costs in connection with the Secondary Offering, and other registration statements, and refinancing of our 2020 Credit Facilities. Transaction expenses of$6.0 million for the three and nine months endedSeptember 30, 2020 , include$4.0 million in legal, accounting, and professional fees in connection with the Reorganization Transaction and IPO and$2.0 million in loss on extinguishment of debt related to the termination of the 2019 Credit Facilities. (2)Employee-related costs include$0.3 million and$0.5 million of expenses incurred by us for the three and nine months endedSeptember 30, 2021 , respectively, for amounts payable to recruiting firms in connection with the hiring of certain executive officers to support our operation as a publicly-reporting company. (3)SOX implementation costs include$0.3 million and$0.8 million of expenses incurred by us for the three and nine months endedSeptember 30, 2021 , respectively, for third-party consultants to assist us with the development, implementation, and documentation of new and enhanced internal controls and processes for compliance with SOX Section 404(b). During the three months endedJune 30, 2021 , we updated our Adjusted EBITDA definition to exclude these costs and accordingly determined that it was appropriate to recast our Adjusted EBITDA calculation for the three months endedMarch 31, 2021 to exclude these costs of$0.2 million . (4)Settlement costs include$0.8 million of expenses incurred by us for the three and nine months endedSeptember 30, 2021 , to settle certain claims made by theAttorney General's Office of the State of Washington . (5)Changes in TRA related liability includes$0.4 million and$0.6 million of income for the three and nine months endedSeptember 30, 2021 , respectively, due to a change in the estimated future state tax benefits and other changes in the estimate resulting in reduction of the TRA liability created in connection with the Reorganization Transactions. (6)Reduction in Tax Indemnification Receivable includes$0.1 million of expenses incurred by us for the nine months endedSeptember 30, 2021 related to a reduction in the tax indemnification receivable recorded in connection with the Reorganization Transactions. Contribution and Contribution Margin We define "Contribution" as revenue less revenue share payments and online advertising costs, or, as reported in our consolidated statements of operations, revenue less cost of revenue (i.e., gross profit), as adjusted to exclude the following items from cost of revenue: equity-based compensation; salaries, wages, and related; internet and hosting; amortization; depreciation; other services; and merchant-related fees. We define "Contribution Margin" as Contribution expressed as a 35 -------------------------------------------------------------------------------- Table of Contents percentage of revenue for the same period. Contribution and Contribution Margin are non-GAAP financial measures that we present to supplement the financial information we present on a GAAP basis. We use Contribution and Contribution Margin to measure the return on our relationships with our supply partners (excluding certain fixed costs), the financial return on and efficacy of our online advertising costs to drive consumers to our proprietary websites, and our operating leverage. We do not use Contribution and Contribution Margin as measures of overall profitability. We present Contribution and Contribution Margin because they are used by our management and board of directors to manage our operating performance, including evaluating our operational performance against budget and assessing our overall operating efficiency and operating leverage. For example, if Contribution increases and our headcount costs remain steady, our Adjusted EBITDA and operating leverage increase. If Contribution Margin decreases, we may choose to re-evaluate and re-negotiate our revenue share agreements with our supply partners, to make optimization and pricing changes with respect to our bids for keywords from primary traffic acquisition sources, or to change our overall cost structure with respect to headcount, fixed costs and other costs. Other companies may calculate Contribution and Contribution Margin differently than we do. Contribution and Contribution Margin have their limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results presented in accordance with GAAP. The following table reconciles Contribution with gross profit, the most directly comparable financial measure calculated and presented in accordance with GAAP, for the three and nine months endedSeptember 30, 2021 and 2020: Three months ended Nine months ended September 30, September 30, (in thousands) 2021 2020 2021 2020 Revenue$ 152,749 $ 151,548 $ 483,690 $ 394,609 Less cost of revenue (128,080) (130,830) (407,563) (335,692) Gross profit 24,669 20,718 76,127 58,917 Adjusted to exclude the following (as related to cost of revenue): Equity-based compensation 447 18 1,289 58 Salaries, wages, and related 501 434 1,523 1,175 Internet and hosting 105 107 315 328 Other expenses 103 69 320 205 Depreciation 7 6 22 17 Other services 300 189 847 616 Merchant-related fees 56 130 286 447 Contribution 26,188 21,671 80,729 61,763 Gross margin 16.2 % 13.7 % 15.7 % 14.9 % Contribution Margin 17.1 % 14.3 % 16.7 % 15.7 % Transaction Value We define "Transaction Value" as the total gross dollars transacted by our partners on our platform. Transaction Value is a driver of revenue, with differing revenue recognition based on the economic relationships we have with our partners. Our partners use our platform to transact via Open and Private marketplace transactions. In our Open marketplace model, Transaction Value is equal to the revenue recognized and revenue share payments to our supply partners represent costs of revenue. In our Private marketplace model, revenue recognized represents a platform fee billed to the demand partner or supply partner based on an agreed-upon percentage of the Transaction Value for the Consumer Referrals transacted, and accordingly there are no associated costs of revenue. We utilize Transaction Value to assess revenue and to assess the overall level of transaction activity through our platform. We believe it is useful to investors to assess the overall level of activity on our platform and to better understand the sources of our revenue across our different transaction models and verticals. 36 -------------------------------------------------------------------------------- Table of Contents The following table presents Transaction Value by platform model for the three and nine months endedSeptember 30, 2021 and 2020: Three months ended Nine months ended September 30, September 30, (dollars in thousands) 2021 2020 2021 2020 Open Marketplace transactions$ 147,800 $ 148,240 $ 469,670 $ 386,224 Percentage of total Transaction Value 57.9 % 68.1 % 60.7 % 69.1 % Private Marketplace transactions 107,290 69,320 304,410 172,590 Percentage of total Transaction Value 42.1 % 31.9 % 39.3 % 30.9 % Total Transaction Value$ 255,090 $ 217,560 $ 774,080 $ 558,814
The following table presents Transaction Value by vertical for the three and
nine months ended
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands) 2021 2020 2021 2020
Property & Casualty insurance $ 175,375 $ 161,323 $ 535,448 $ 390,955
Percentage of total Transaction Value 68.8 % 74.2 % 69.2 % 70.0 %
Health insurance 48,692 33,650 146,275 98,739
Percentage of total Transaction Value 19.1 % 15.5 % 18.9 % 17.7 %
Life insurance 13,361 11,628 41,736 31,717
Percentage of total Transaction Value 5.2 % 5.3 % 5.4 % 5.7 %
Other (1) 17,662 10,959 50,621 37,403
Percentage of total Transaction Value 6.9 % 5.0 % 6.5 % 6.7 %
Total Transaction Value $ 255,090 $ 217,560 $ 774,080 $ 558,814
(1)Our other verticals include Travel, Education and Consumer Finance.
Consumer Referrals
We define "Consumer Referral" as any consumer click, call or lead purchased by a
buyer on our platform. Click revenue is recognized on a pay-per-click basis and
revenue is earned and recognized when a consumer clicks on a listed buyer's
advertisement that is presented subsequent to the consumer's search (e.g., auto
insurance quote search or health insurance quote search). Call revenue is earned
and recognized when a consumer transfers to a buyer and remains engaged for a
requisite duration of time, as specified by each buyer. Lead revenue is
recognized when we deliver data leads to buyers. Data leads are generated either
through insurance carriers, insurance-focused research destination websites or
other financial websites that make the data leads available for purchase through
our platform, or when consumers complete a full quote request on our proprietary
websites. Delivery occurs at the time of lead transfer. The data we generate
from each Consumer Referral feeds into our analytics model to generate
conversion probabilities for each unique consumer, enabling discovery of
predicted return and cost per sale across the platform and helping us to improve
our platform technology. We monitor the number of Consumer Referrals on our
platform in order to measure Transaction Value, revenue and overall business
performance across our verticals and platform models. For the three and nine
months ended September 30, 2021 , Transaction Value generated from clicks, calls
and leads was 80.1%, 8.4% and 11.6% and 81.4%, 7.7% and 10.9%, respectively.
Number of demand and supply partners
The aggregate number of demand and supply partners on our platform determines in
part the level of Consumer Referral demand and supply on our platform. We use
the number of demand and supply partners on our platform to evaluate our current
business performance and future business prospects.
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Segment information
We operate in the United States and in a single operating segment. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. Our chief operating decision maker is
our chief executive officer, who reviews financial information presented on a
consolidated basis for purposes of allocating resources and evaluating financial
performance. No expense or operating income is evaluated at a segment level.
Since we operate in one operating segment and reportable segment, all required
financial segment information can be found in the consolidated financial
statements.
Liquidity and capital resources
Overview
Our primary sources of liquidity are our cash flows generated from operations.
Our principal uses of cash include to fund operations, interest payments and
mandatory principal payments on our long-term debt, if any. On October 30, 2020 ,
we completed our IPO selling 7,027,606 shares of Class A common stock at a
public offering price of $19.00 per share, which includes 769,104 shares issued
pursuant to the underwriters' over-allotment option. We received $124.2 million ,
net of underwriting discounts and commissions.
The Secondary Offering did not generate any proceeds for the Company.
As of September 30, 2021 and December 31, 2020 , our cash and cash equivalents
totaled $29.3 million and $23.6 million , respectively.
We believe that our current sources of liquidity, which include cash flow
generated from operations, cash and funds available under the 2021 Revolving
Credit Facilities under the Amended Credit Agreement entered into on July 29,
2021 , as discussed in more detail below, will be sufficient to meet our
projected operating and debt service requirements for at least the next 12
months. As of September 30, 2021 we had all of the $50.0 million available under
our 2021 Revolving Credit Facility. To the extent that our current liquidity is
insufficient to fund future activities, we may need to raise additional funds.
In the future, we may attempt to raise additional capital through the sale of
equity securities or through debt financing arrangements. If we raise additional
funds by issuing equity securities, the ownership of our existing stockholders
will be diluted. The incurrence of additional debt financing would result in
debt service obligations, and any future instruments governing such debt could
provide for operating and financing covenants that could restrict our
operations.
Cash Flows
The following table presents a summary of our cash flows for the nine months
ended September 30, 2021 and 2020, and the dollar and percentage changes between
the periods:
Nine months ended Nine months
September 30, ended September
(dollars in thousands) 2021 $ % 30, 2020
Net cash provided by operating activities
(83.0) % $ 39,300
Net cash used in investing activities (568) 9,588 (94.4) % (10,156)
Net cash used in financing activities (361) 26,806 (98.7) % (27,167)
Operating activities
Cash flows provided by operating activities were $6.7 million for the nine
months ended September 30, 2021 , compared with $39.3 million for the nine months
ended September 30, 2020 . The decrease resulted from higher working capital
usage due primarily to the timing of our payables, offset in part by improved
collection of our accounts receivable.
Investing activities
Cash flows used in investing activities were $0.6 million for the nine months
ended September 30, 2021 , compared with $10.2 million for the nine months ended
September 30, 2020 . During the nine months ended September 30, 2020 , we entered
into a cost method investment of $10.0 million for which there was no comparable
investment in the nine months ended September 30, 2021 .
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Financing activities
Cash flows used in financing activities were $0.4 million for the nine months
ended September 30, 2021 , compared with $27.2 million for the nine months ended
September 30, 2020 . The decrease in net cash used was due primarily to higher
distributions of $130.9 million to the members of QLH during the nine months
ended September 30, 2020 , including dividend distributions made in connection
with the refinancing of our 2019 Credit Facilities during the nine months ended
September 30, 2020 and our 2020 Credit Facilities during the nine months ended
September 30, 2021 .
Senior secured credit facilities
2021 Credit Facilities
As of September 30, 2021 , we had $186.6 million of outstanding borrowings, net
of deferred debt issuance costs of $3.4 million , under the 2021 Credit
Facilities, which consist of (i) a $190.0 million term loan (the "2021 Term Loan
Facility") and (ii) a $50.0 million revolving credit facility (the "2021
Revolving Credit Facility" and, together with the 2021 Term Loan Facility, the
"2021 Credit Facilities").
On July 29, 2021 , we entered into an amendment (the "First Amendment") to the
2020 Credit Agreement (as amended by the First Amendment, "Amended Credit
Agreement"). The Amendment Credit Agreement provides for a new senior secured
term loan facility in an aggregate principal amount of $190.0 million , the
proceeds of which were used to refinance all of the $186.4 million of the
existing 2020 Term Loan Facility outstanding and the unpaid interest thereof as
of the date of the First Amendment, to pay fees related to these transactions,
and to provide cash for general corporate purposes, and a new senior secured
revolving credit facility with commitments in an aggregate amount of
$50.0 million , which replaced the 2020 Revolving Credit Facility. Our
obligations under the term loan facility and the revolving credit facility are
guaranteed by QLH and secured by substantially all assets of QLH and QL.
Borrowings under the Amended Credit Agreement bear interest at a rate equal to,
at our option, the London interbank offered rate plus an applicable margin, with
a floor of 0.00%, or base rate plus an applicable margin. The applicable margins
will be based on our consolidated total net leverage ratio as calculated under
the terms of the Amended Credit Agreement (the "Leverage Ratio") for the prior
fiscal quarter and range from 2.00% to 2.75% with respect to the London
interbank offered rate and from 1.00% to 1.75% with respect to the base rate.
The Amended Credit Agreement contains certain customary financial and
non-financial covenants and default provisions. The financial covenants include
a minimum Fixed Charge Coverage Ratio and a maximum Total Net Leverage Ratio (in
each case, as defined in the 2021 Credit Facilities). The non-financial
covenants include restrictions on investments, dividends, asset sales, and the
incurrence of additional debt and liens.
Loans under the term loan facility and the revolving credit facility will mature
on July 29, 2026 . Loans under the term loan facility will amortize quarterly,
beginning with the first business day after December 31, 2021 and ending with
June 30, 2026 , by an amount equal to 1.25% of the aggregate outstanding
principal amount of the term loans initially made.
Tax receivable agreements
Our purchase (through Intermediate Holdco) of Class B-1 units from certain
unitholders (including the Selling Class B-1 Unit Holders) in connection with
the IPO as well as any exchanges of Class B-1 units subsequent to the IPO,
together with an equal number of shares of our Class B common stock, for shares
of our Class A common stock (or, at our election, cash of an equivalent value),
and the Pre-IPO Leveraged Distribution and other actual or deemed distributions
by QLH to its members pursuant to the Exchange Agreement, are expected to result
in increases in our allocable tax basis in the assets of QLH. These increases in
tax basis are expected to increase (for tax purposes) depreciation and
amortization deductions allocable to us and, therefore, reduce the amount of tax
that we otherwise would be required to pay in the future. This increase in tax
basis may also decrease gain (or increase loss) on future dispositions of
certain assets to the extent tax basis is allocated to those assets.
In connection with the IPO, we entered into the Tax Receivables Agreement
("TRA") with Insignia, the Senior Executives, and White Mountains related to the
tax basis step-up of the assets of QLH and certain net operating losses of
Intermediate Holdco. The agreement requires us to pay Insignia and the Senior
Executives 85% of the cash savings, if any, in U.S. federal, state and local
income tax we realize (or are deemed to realize) as a result of (i) any
increases in tax basis of assets of QLH resulting from any exchange of Class B-1
units of QLH, as discussed above, and (3) certain other tax benefits related to
making our payments under the TRA. The TRA also requires us to pay White
Mountains 85% of the amount of the cash savings, if any, in U.S. federal, state
and local income tax that we realize (or are deemed to realize) as a result of
the utilization
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of the net operating losses of Intermediate Holdco attributable to periods prior
to the IPO and the deduction of any imputed interest attributable to our payment
obligations under the TRA.
In addition to tax expenses, we will also make payments under the TRA, which we
expect to be significant. We will account for the income tax effects and
corresponding TRA effects resulting from future exchanges of Class B-1 units by
recognizing an increase in our deferred tax assets, based on enacted tax rates
at the date of the exchange. Further, we will evaluate the likelihood that we
will realize the benefit represented by the deferred tax asset and, to the
extent that we estimate that it is more likely than not that we will not realize
the benefit, we will reduce the carrying amount of the deferred tax asset with a
valuation allowance. The amounts to be recorded for both the deferred tax assets
and the liability for our obligations under the TRA will be estimated at the
time of any purchase or redemption as a reduction to shareholders' equity, and
the effects of changes in any of our estimates after this date will be included
in net income (loss). Similarly, the effect of subsequent changes in the enacted
tax rates will be included in net income (loss). Judgement is required in
assessing the future tax consequences of events that have been recognized in our
consolidated financial statements. A change in our assessment of such
consequences, such as realization of deferred tax assets, changes in tax laws or
interpretations thereof could materially impact our results.
Recent accounting pronouncements
For a discussion of new accounting pronouncements recently adopted and not yet
adopted, see Note 2 to consolidated financial statements appearing in Part I,
Item 1 of this Quarterly Report on Form 10-Q.
Critical accounting policies and estimates
Our critical accounting policies and estimates are included in the 2020 Annual
Report on Form 10-K and did not materially change during the nine months ended
September 30, 2021 .
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, we are subject to market risks. Market risk
represents the risk of loss that may impact our financial position due to
adverse changes in financial market prices and rates.
Interest rate risk
The 2021 Credit Facilities bear interest at a variable rate. As a result, we may
be exposed to fluctuations in interest rates to the extent of our outstanding
borrowings under the 2021 Credit Facilities. A hypothetical 1.0% increase or
decrease in the interest rate associated with the 2021 Credit Facilities would
have resulted in a $1.4 million change in our interest expense for the nine
months ended September 30, 2021 .
Concentrations of credit risk and of significant demand and supply partners
We maintain cash balances that can, at times, exceed amounts insured by the
Federal Deposit Insurance Corporation . We have not experienced any losses in
these accounts and believe we are not exposed to any unusual credit risk in this
area based on the financial strength of the institutions with which we maintain
our deposits.
Our accounts receivable, which are unsecured, may expose us to credit risks
based on their collectability. We control credit risk by investigating the
creditworthiness of all customers prior to establishing relationships with them,
performing periodic reviews of the credit activities of those customers during
the course of the business relationship, and regularly analyzing the
collectability of accounts receivable.
Customer concentrations consisted of two customers that accounted for
approximately $46 million , or 30%, and $141 million , or 29%, of revenue for the
three and nine months ended September 30, 2021 , respectively, and one customer
that accounted for approximately $46 million , or 30%, and $102 million , or 26%,
of revenue for the three and nine months ended September 30, 2020 , respectively.
Our two largest customers accounted for approximately $20 million , or 28%, and
$33 million , or 35%, of our accounts receivable as of September 30, 2021 and
December 31, 2020 , respectively.
Our supplier concentration can expose us to business risks. For the three months
ended September 30, 2021 , we had one supplier that accounted for approximately
$13 million , or 10%, of total purchases, and for the nine months ended September
30, 2021 , we had no supplier that accounted for more than 10% of total
purchases. For the three and nine months ended September 30, 2020 , two suppliers
that collectively accounted for approximately $34 million , or 25%, and $71
million ,
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Table of Contents or 20%, of total purchases, respectively. We had one large supplier that accounted for approximately$7 million , or 16%, of total accounts payable as ofSeptember 30, 2021 and two large suppliers that collectively accounted for approximately$25 million , or 25%, of total accounts payable as ofDecember 31, 2020 . Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures As ofSeptember 30, 2021 , we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("the Exchange Act")) to determine whether such disclosure controls and procedures provide reasonable assurance that information to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of theSEC and such information is accumulated and communicated to management, including our principal executive and principal financial officers or persons performing similar functions, as appropriate to allow timely decisions regarding disclosure. Based on that evaluation, our principal executive officer and our principal financial officer have concluded that as ofSeptember 30, 2021 , our disclosure controls and procedures were not effective to provide reasonable assurance because of the previously reported material weakness in our internal control over financial reporting that we describe in Part II, Item 9A "Controls and Procedures" of the 2020 Annual Report on Form 10-K. Management's Remediation Plan for the Previously Identified Material Weakness and status of remediation efforts We previously described our remediation plan in Part II, Item 9A "Controls and Procedures" of the 2020 Annual Report on Form 10-K. We have made significant progress on our previously reported remediation plan. During the three months endedSeptember 30, 2021 , we have completed the implementation of our third-party equity-based compensation software system which automates the tracking of expense calculation of our equity-based compensation awards and enhanced related internal controls over financial reporting. The material weakness cannot be considered remediated until the applicable remedial controls have operated for a sufficient period of time and we have concluded, through testing, that these controls are designed and operating effectively. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting during the three months endedSeptember 30, 2021 , except as discussed in the above section - Management's Remediation Plan for the Previously Identified Material Weakness and status of remediation efforts, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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