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OFFON

NEBULA ACQUISITION CORPORATION

(LPRO)
End-of-day quote. End-of-day quote Nasdaq - 10/05
34.48 USD   +1.65%
10/13INSIDER SELL : Open Lending
MT
10/06INSIDER SELL : Open Lending
MT
09/22INSIDER SELL : Open Lending
MT
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Nebula Acquisition : OPEN LENDING CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/12/2021 | 04:13pm EDT
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of Open Lending
Corporation's condensed consolidated results of operations and financial
condition. The discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto on Form 10-K for the year
ended December 31, 2020. This discussion contains forward-looking statements and
involves numerous risks and uncertainties, including, but not limited to, those
described under the heading "Risk Factors" set forth elsewhere in this Quarterly
Report on Form 10-Q and our Annual Report on Form 10-K. Actual results may
differ materially from those contained in any forward-looking statements. Unless
the context otherwise requires, references in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is intended to mean
the business and operations of Open Lending Corporation, and its condensed
consolidated subsidiaries.
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              CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that involve
substantial risks and uncertainties. Forward-looking statements generally relate
to future events or our future financial or operating performance. In some
cases, you can identify forward-looking statements because they contain words
such as "may," "will," "appears," "shall," "should," "expects," "plans,"
"anticipates," "could," "intends," "target," "projects," "contemplates,"
"believes," "estimates," "predicts," "potential," or "continue," or the negative
of these words or other similar terms or expressions that concern our
expectations, strategy, plans, or intentions. Forward-looking statements
contained in this Quarterly Report on Form 10-Q include, but are not limited to,
statements about:
•our financial performance;
•changes in our strategy, future operations, financial position, estimated
revenues and losses, projected costs, prospects and plans;
•expansion plans and opportunities;
•the impact of the relative strength of the overall economy, including its
effect on unemployment, consumer spending and consumer demand for automotive
products;
•the growth in loan volume from Original Equipment Manufacturers ("OEM
Captives") relative to that of other automotive lenders, and associated
concentration of risks;
•the costs of services in absolute dollars and as a percentage of our program
fee revenue;
•general and administrative expenses in absolute dollars and as a percentage of
revenue;
•selling and marketing expenses in absolute dollars and as a percentage of
program fee revenue;
•research and development expenses in absolute dollars and as a percentage of
revenue;
•the impact of projected operating cash flows and available cash on hand on our
business operations in the future;
•the turnover in automotive lenders, as well as varying activation rates and
volatility in usage of our Lenders Protection Platform ("LPP") by automotive
lenders;
•the outcome of any known and unknown litigation and regulatory proceedings,
including such legal proceedings that may be instituted in connection with the
Business Combination and transactions contemplated thereby;
•the ability to maintain the listing of our common stock on NASDAQ;
•our ability to recognize the anticipated benefits of the Business Combination,
which may be affected by, among other things, competition and our ability to
grow and manage growth profitably;
•expenses associated with Open Lending's growth as a result of demands on its
operational, marketing, compliance and accounting infrastructure;
•regulatory agreements between Open Lending and state agencies regarding issues
including automotive lender conduct and oversight and loan pricing;
•changes in applicable laws or regulations; and
•the effects of the COVID-19 pandemic on our business.
All forward-looking statements are based on information and estimates available
to the Company at the time of this Quarterly Report on Form 10-Q and are not
guarantees of future financial performance. We undertake no obligation to update
any forward-looking statements made in this Quarterly Report on Form 10-Q to
reflect events or circumstances after the date of this Quarterly Report on Form
10-Q or to reflect new information or the occurrence of unanticipated events,
except as required by law.
The outcome of the events described in these forward-looking statements is
subject to known and unknown risks, uncertainties, and other factors described
in the section titled "Risk Factors" and elsewhere in this Quarterly Report on
Form 10-Q and our Annual Report on Form 10-K. We caution you that the foregoing
list may not contain all of the forward-looking statements made in this
Quarterly Report on Form 10-Q. You should not rely upon forward-looking
statements as predictions of future events.
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Business Overview
We are a leading provider of lending enablement and risk analytics to credit
unions, regional banks and the captive finance companies of OEM Captives. Our
clients, collectively referred to herein as automotive lenders, make automotive
consumer loans to underserved near-prime and non-prime borrowers by harnessing
our risk-based pricing models, powered by our proprietary data and real-time
underwriting of automotive loan default insurance coverage from insurers. Since
our inception in 2000, we have facilitated over $11.1 billion in automotive
loans, accumulating over 20 years of proprietary data and developing over two
million unique risk profiles. We currently cater to 380 active automotive
lenders.
We specialize in risk-based pricing and modeling and provide automated
decisioning-technology for automotive lenders throughout the United States. We
believe that we address the financing needs of near-prime and non-prime
borrowers, or borrowers with a credit bureau score between 560 and 699, who are
underserved in the automotive finance industry. Traditional lenders focus on
prime borrowers, where an efficient market has developed with interest rate
competition that benefits borrowers. Independent finance companies focus on
sub-prime borrowers. Borrowers that utilize the near-prime and non-prime
automotive lending market have fewer lenders focused on loans with longer terms
or higher advance rates. As a result, many near-prime and non-prime borrowers
turn to sub-prime lenders, resulting in higher interest rate loan offerings than
such borrower's credit profile often merits or warrants. We seek to make this
market more competitive, resulting in more attractive loan terms.
Our flagship product, LPP, enables automotive lenders to make loans that are
largely insured against losses from defaults. We have been developing and
advancing the proprietary underwriting models used by LPP for approximately 20
years. We believe LPP provides significant benefits to our growing ecosystem of
automotive lenders, automobile dealers and insurers.
A key element of LPP is the ability to facilitate risk-based interest rates that
are appropriate for each loan and lender and electronically submitted to our
automotive lenders within approximately five seconds after we receive a loan
application. Our interest rate pricing is customized to each automotive lender,
reflecting the cost of capital, loan servicing costs, loan acquisition costs,
expected recovery rates and target return on assets of each automotive lender.
Using our risk models, we project monthly loan performance results, including
expected losses and prepayments for automotive lenders that use LPP. The product
of this process is a risk-based interest rate, inclusive of elements to recover
all projected costs, program fees and insurance premiums, given the risk of the
loan, to return a targeted return on asset goal.
We believe that our market opportunity is significant. The near-prime and
non-prime automotive loan market is $250 billion annually, resulting in an
approximately $14.4 billion annual revenue opportunity. We are currently serving
less than 1% of this market, providing a significant growth opportunity.
Executive Overview
We facilitate certified loans and have achieved financial success by increasing
our penetration of the near-prime and non-prime automotive loan market while
diversifying our customer base and refining our data analysis capabilities.
We facilitated 46,408 and 79,726 certified loans during the three and six months
ended June 30, 2021, respectively, as compared to 18,684 and 46,708 certified
loans during the three and six months ended June 30, 2020, respectively.
Total revenue was $61.1 million and $105.1 million for three and six months
ended June 30, 2021, respectively, as compared to $22.1 million and $39.5
million during the three and six months ended June 30, 2020, respectively.
Operating income was $44.9 million and $74.3 million for three and six months
ended June 30, 2021, respectively, as compared to $3.9 million and $12.9 million
in the three and six months ended June 30, 2020, respectively.
Net income was $76.0 million and $88.8 million for three and six months ended
June 30, 2021, respectively, as compared to net loss of $(49.8) million and
$(41.6) million for the three and six months ended June 30, 2020, respectively.
Adjusted EBITDA was $46.1 million and $76.3 million for the three and six months
ended June 30, 2021, respectively, as compared to $15.4 million and $25.0
million during the three and six months ended June 30, 2020, respectively.
Information regarding use of Adjusted EBITDA, a non-GAAP measure, and a
reconciliation of Adjusted EBITDA to net income (loss), the most comparable GAAP
measure, is included in "Non-GAAP Financial Measures."
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Highlights
The table below summarizes the total dollar value of insured loans facilitated
and the number of contracts signed with automotive lenders during the three and
six months ended June 30, 2021 and 2020.
                                             Three Months Ended June 30,                   Six Months Ended June 30,
                                              2021                   2020                  2021                   2020
                                                            (in thousands, except number of contracts)
Value of insured loans facilitated (1) $      1,170,461          $  409,934          $    1,950,822          $ 1,037,031
Number of contracts signed with
automotive lenders                                      22                  11                      36                   28


(1)Value of insured loans are calculated as the total original loan amount of
all loans certified for active institutions during each reporting period.
Key Performance Measures
We review several key performance measures, discussed below, to evaluate
business and results, measure performance, identify trends, formulate plans and
make strategic decisions. We believe that the presentation of such metrics is
useful to our investors and counterparties because they are used to measure and
model the performance of companies such as Open Lending, with recurring revenue
streams.
Certified Automotive Loans
We refer to "certified loans" as the number of loans facilitated through LPP
during a given period. Additionally, we refer to loans with a one-time upfront
payment as "single-pay" loans and those paid over twelve monthly installments as
"monthly-pay" loans.
Average Program Fee
We define "average program fee" as the total program fee revenue recognized for
a period divided by the number of certified loans in that period.
Insurers' Aggregate Underwriting Profit
We define "insurers' aggregate underwriting profit" as the total underwriting
profit expected to be received by insurers over the expected life of the insured
loans.
Insurers' Earned Premium
We define "insurers' earned premium" as the total insurance premium earned by
insurers in a given period. Earned premiums were $52.9 million and $99.3
million, respectively, for the three and six months ended June 30, 2021 and were
$35.9 million and $69.5 million for the three and six months ended June 30,
2020.
Recent Developments
Term Loan due 2027
On March 11, 2020, the Company entered into a credit agreement with UBS A.G. as
the administrative agent and the lenders from time to time party thereto (the
"Credit Agreement"). Pursuant to the credit agreement, the lenders thereto
funded a term loan (the "Term Loan due 2027") in a principal amount of $170.0
million bearing an interest rate per annum of LIBOR plus 6.5% (subject to a
LIBOR floor of 1%), with a maturity date in March 2027. The Term Loan due 2027
was retired by the Company paying off its outstanding principal and interest
with proceeds from issuance of the Term Loan due 2026 and the Revolving Facility
(both as defined below) in March 2021. The transaction was deemed as a debt
extinguishment under ASC Topic 405-20, "Liabilities-Extinguishments of
Liabilities," and accordingly, the Company recognized a non-cash debt
extinguishment loss of $8.8 million during the six months ended June 30, 2021,
and is recorded under the caption loss on extinguishment of debt in the
condensed consolidated statements of operations and comprehensive Income. The
loss on debt
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extinguishment was calculated as the difference between the carrying amount of
the debt and the price paid to retire the debt, which primarily consisted of the
write off of the unamortized deferred financing costs related to the Term Loan
due 2027.
New Credit Agreement-Term Loan due 2026 and Revolving Credit Facility
On March 19, 2021, the Company entered into a credit agreement with Wells Fargo
Bank, N.A. as the administrative agent (the "New Credit Agreement"), pursuant to
which the lenders thereto (i) funded a senior secured term loan in an aggregate
principal amount of $125.0 million maturing in March 2026 (the "Term Loan due
2026") and (ii) committed to provide a $50.0 million senior secured revolving
credit facility, including a $10.0 million letter of credit sub-facility,
maturing in March 2026 (the "Revolving Facility"). The obligations of the
Company under the Term Loan due 2026 and the Revolving Facility are guaranteed
by all of the Company's U.S. subsidiaries and are secured by substantially all
of the assets of the Company and its U.S. subsidiaries, subject to customary
exceptions.
Interest under the Term Loan due 2026 and the Revolving Facility are, at the
option of the Company, either at an Alternate Base rate ("ABR") plus a spread
ranging from 0.75% to 1.50%, or LIBOR plus a spread ranging from 1.75% to 2.50%.
With respect to the ABR loans, interest will be payable at the end of each
calendar quarter. With respect to LIBOR loans, interest will be payable at the
end of the selected interest period. Additionally, there is a commitment fee
payable at the end of each quarter at a rate per annum ranging from 0.200% to
0.275% based on the average daily unused portion of the Revolving Facility, and
other customary letter of credit fees. Pursuant to the New Credit Agreement, the
interest rate spreads and commitment fees increase or decrease in increments as
our Funded Secured Debt/EBITDA ratio increase or decreases. As of June 30, 2021,
both the Term Loan due 2026 and the Revolving Facility are subject to LIBOR of
0.098% plus a spread of 2.00% per annum, and we do not have an unused commitment
balance under the Revolving Facility. In June 2021, the Company made a payment
of $25.0 million to the outstanding balance of the Revolving Facility and has an
unused commitment balance of $25.0 million under the Revolving Facility at
June 30, 2021. Commitment fees will be accrued at 0.225% per annum on the unused
commitment balance.
In connection with the issuance of the Term Loan due 2026 and the Revolving
Facility, the Company incurred total deferred financing costs of $1.7 million,
of which $1.2 million was allocated to the Term Loan due 2026 and $0.5 million
was allocated to the Revolving Facility. The deferred financing costs were
capitalized as a contra-liability against the principal balance of the loans and
are amortized as interest expense using the effective interest method. As of
June 30, 2021, the weighted average effective interest rate on our outstanding
borrowings was 2.38%.
The New Credit Agreement contains a maximum total net leverage ratio financial
covenant and a minimum fixed charge coverage ratio financial covenant that are
tested quarterly starting with the quarter ending June 30, 2021. The maximum
total net leverage ratio is 3.5 to 1.0 for periods on or prior to December 31,
2022, and then decreases to 3.0 to 1.0 after December 31, 2022. The minimum
fixed charge coverage ratio is 1.25 to 1.0. As of June 30, 2021, we were in
compliance with all required covenants under the New Credit Agreement.
Underwritten Public Offering
On April 6, 2021, we completed an underwritten public offering of 9,000,000
shares of our common stock at a public offering price of $34.00 per share. All
shares were sold by existing stockholders, including Nebula Holdings, LLC and
its affiliates, Bregal Sagemount and certain executive officers of the Company.
The selling stockholders also granted the underwriters a 30-day option to
purchase up to 1,350,000 additional shares of common stock. We did not issue any
shares and did not receive any of the proceeds of the offering.
Share Repurchase
Pursuant to a Stock Repurchase Agreement, dated as of March 29, 2021, between
Open Lending and the selling stockholders, we repurchased from the selling
stockholders on April 6, 2021 an aggregate number of 612,745 shares of its
common stock totaling $20.0 million at the same per share price paid by the
underwriters to the selling stockholders in the offering. The $20.0 million
stock repurchase was recorded in treasury stock at cost in April of 2021.
Tax Receivable Agreement Amendment
We entered into Amendment No. 1 (the "Amendment") to the TRA effective April 9,
2021. The Amendment provides that in lieu of early termination payments, the TRA
Holders will instead be entitled to payments equal to 40% of all Tax Benefit
Payments (all definitions used here in and otherwise not defined here in shall
have the meanings set forth in the Amendment) other than any Actual Interest
Amounts that would be required to be paid by the us under the TRA, using certain
valuation. The Amendment provides us with the right to terminate and settle all
present and future obligations under the TRA with a single
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payment by us to the TRA Holders of $36.9 million (the "Early Termination
Right"). Absent the Amendment and the exercise of the Early Termination Right,
we anticipated making TRA payments totaling $92.4 million, undiscounted, over
the life of the TRA.
On April 12, 2021, an independent committee of disinterested members of the
Board of Directors approved our decision to exercise the Early Termination
Right. As of June 30, 2021, we paid $36.9 million to terminate and settle the
TRA liability and recognized a gain of $55.4 million, which is included in gain
on extinguishment of tax receivable agreement on the Company's condensed
consolidated statements of operations and comprehensive income.
Third Insurance Carrier Partner
On June 24, 2021, the Company signed a producer agreement with a third insurance
carrier partner, American National Lloyds Insurance Company and ANPAC Louisiana
Insurance Company, both affiliates of American National Group, Inc, enabling
both companies to be additional providers of credit default insurance policies
for LPP, from which the Company expects to earn profit share revenue and claims
administration fees in the future. The Producer Agreement was subsequently
amended to add American National Property and Casualty Company, an affiliate of
American National Group, Inc., as an additional party.
COVID-19
The COVID-19 pandemic continues to create uncertainty regarding the U.S. and
global economies and our operating results, financial condition and cash flows.
The extent of the impact of the COVID-19 pandemic on our operational and
financial performance will depend on certain developments, including the
duration and continued spread of variants of COVID-19; the impact on our
revenues, which are generated with automobile lenders and insurance company
partners and driven by consumer demand for automobiles and automotive loans;
extended closures of businesses, the effectiveness of the vaccine distribution
program and the vaccines themselves; unemployment levels and the overall impact
on our customer behavior, all of which are uncertain and cannot be predicted.
The Company is diligently working to ensure that we can continue to operate with
minimal disruption, mitigate the impact of the pandemic on our employees' health
and safety, and address potential business interruptions on ourselves and our
customers. The Company believes that the COVID-19 pandemic, the mitigation
efforts and the resulting economic impact have had, and may continue to have, an
overall adverse effect on our business, results of operations and financial
condition. The Company saw a reduction in loan applications and certified loans
throughout the majority of 2020. As consumers and lenders have adjusted to the
pandemic, application and certification levels have increased in 2021. Lenders'
forbearance programs, government stimulus packages, extended unemployment
benefits and other government assistance have resulted in a reduction in
expected defaults since the onset of the pandemic. As these programs end
defaults may increase. The potential increase in defaults may impact our
revenues and subsequent recovery as the automotive finance industry and overall
economy recover. The Company continues to closely monitor the current macro
environment, particularly monetary and fiscal policies.
Key Factors Affecting Operating Results
Our future operating results and cash flows are dependent upon a number of
opportunities, challenges and other factors, including the growth in the number
of financial institutions and transaction volume, competition, profit share
assumptions and industry trends and general economic conditions.
Key factors affecting our operating results include the following:
Growth in the Number of Financial Institutions
The growth trend in active automotive lenders using LPP is a critical variable
directly affecting revenue and financial results. It influences the number of
loans funded on LPP and, therefore, the fees that we earn and the cost of the
services that we provide. Growth in our active automotive lender relationships
will depend on our ability to retain existing automotive lenders, add new
automotive lenders, and expand to new industry verticals.
Competition
We face competition to acquire and maintain automotive lenders as well as
competition to fund near-prime and non-prime auto loans. For LPP, which combines
lending enablement, risk analytics, near-prime and non-prime auto loan
performance data, real-time loan decisioning, risk-based pricing and auto loan
default insurance, we do not believe there are any direct competitors. The
emergence of direct competitors, providing risk, analytics and loss mitigation,
which are core elements of our business, could materially impact our ability to
acquire and maintain automotive lenders customers.
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The near-prime and non-prime lending market is highly fragmented and
competitive. We face competition from a diverse landscape of consumer lenders,
including traditional banks and credit unions, as well as alternative
technology-enabled lenders. The emergence of other insurers, in competition with
our insurers, could materially impact our business. Increased competition for
loans, which reduce the ability of our automotive lenders to source loan
application flow and or capture loans, could also materially and adversely
impact our business.
Profit Share Assumptions
We rely on assumptions to calculate the value of profit share revenue, which is
our share of insurance partners' underwriting profit. To the extent these
assumptions change, our profit share revenue will be adjusted. For example,
positive change in estimates associated historical vintages generate an increase
in our contract asset, additional revenues and future expected cash flows, while
negative change in estimates generate a decrease in our contract asset, a
reduction in revenues and future expected cash flows.
Industry Trends and General Economic Conditions
Our results of operations have in the past been fairly resilient to economic
downturns but in the future may be impacted by the relative strength of the
overall economy and its effect on unemployment, consumer spending and consumer
demand for automotive products. As general economic conditions improve or
deteriorate, the amount of disposable income consumers have tends to fluctuate,
which in turn impacts consumer spending levels and the willingness of consumers
to take out loans to finance purchases. Specific economic factors such as
interest rate levels, changes in monetary and related policies, market
volatility, consumer confidence, the impact of the pandemic crisis and,
particularly, the unemployment rate also influence consumer spending and
borrowing patterns.
Concentration
Our largest insurance partner accounted for the vast majority of our profit
share and claims administration service fee revenue in the three and six months
ended June 30, 2021 and 2020, respectively. Termination or disruption of this
relationship could materially and adversely impact our revenue.
Basis of Presentation
We conduct business through one operating segment, and we operate in one
geographic region, the United States. See   Note 2-Summary of Significant
Accounting and Reporting Policies and Recent Developments   of the accompanying
condensed consolidated financial statements for more information.
Components of Results of Operations
Total Revenues
Our revenue is generated through three streams: (i) program fees paid to us by
lenders, (ii) profit share and (iii) claims administration service fees paid to
us by insurance partners.
Program fees. Program fees are paid by automotive lenders for use of our LPP and
analytics. These fees are based on a percentage of each certified loan's
original principal balance and are recognized as revenue upfront upon receipt of
the loan by the consumer. The fee percentage rate varies by type of loan. For
loans with a one-time upfront payment, there is a sliding scale of rates
representing volume discounts to the lender and with fees generally capped at
$600 per loan. This cap may vary for certain large volume lenders. For loans
with 12 equal, monthly installments, the fee paid by the lender is a flat 3% of
the total amount of the loan and is not capped.
Profit share. Profit share represents our participation in the underwriting
profit of third-party insurance partners who provide lenders with credit default
insurance on loans the lenders make using LPP. We receive a percentage of the
aggregate monthly insurance underwriting profit. Monthly insurance underwriting
profit is calculated as the monthly earned premium less expenses and losses
(including reserves for incurred but not reported losses), with losses accrued
and carried forward for future profit share calculations.
Claims administration service fees. Claims administration service fees are paid
to us by third-party insurers for credit default insurance claims adjudication
services performed by our subsidiary Insurance Administrative Services, LLC on
its insured servicing portfolio. The administration fee is equal to 3% of the
monthly insurance earned premium for as long as the loan remains outstanding.
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Cost of Services and Operating Expenses
Cost of services. Cost of services primarily consists of fees paid to third
party resellers for lead-generation efforts, compensation and benefits expenses
relating to employees engaged in lenders' services and claims administration
activities, fees paid for actuarial services related to the development of the
monthly premium program and fees for integration with loan origination systems
of automotive lenders. We generally expect cost of services to increase in
absolute dollars as the total number of certified loans continues to grow;
however, we expect the cost of services to remain relatively constant in the
near to immediate term as a percentage of our program fee revenue.
General and administrative expenses. General and administrative expenses are
comprised primarily of expenses relating to employee compensation and benefits,
non-cash share-based compensation, travel, meals and entertainment expenses, IT
expenses and professional and consulting fees. In the near term, we expect
general and administrative expenses to increase in absolute dollar terms and as
a percentage of revenue as we continue to implement the internal control,
compliance and reporting requirements of public companies. In the intermediate
term, we expect general and administrative expenses to continue to increase in
absolute dollars as the total number of certified loans continues to grow.
Selling and marketing expenses. Selling and marketing expenses consist primarily
of compensation and benefits of employees engaged in selling and marketing
activities. We generally expect selling and marketing expenses to increase in
absolute dollars as the total number of certified loans continues to grow in the
long term; however, we expect selling and marketing expenses to remain
relatively constant in the near to immediate term as a percentage of program fee
revenue.
Research and development expenses. Research and development expenses consist of
employee compensation and benefits expenses for employees engaged in ongoing
development of our software technology platform. We generally expect our
research and development expenses to increase in absolute dollars as our
business continues to grow.
Other Income (Expense)
Interest expense. Interest expense primarily includes interest payments and the
amortization of deferred financing costs in connection with the issuance of the
debt.
Gain on extinguishment of tax receivable agreement. Gain on extinguishment of
tax receivable agreement is related to the early termination and settlement of
the TRA to the TRA holders.
Loss on extinguishment of debt. Loss on extinguishment of debt primarily
reflects unamortized deferred financing costs which were written off in
connection with the refinancing of our Term Loan due 2027 on March 19, 2021.
Change in fair value of contingent consideration. Change in fair value of
contingent consideration reflects the non-cash impact of changes in the fair
value of Company common stock expected to be issued as contingent consideration
in connection with our Business Combination on June 10, 2020. The fair value of
contingent consideration is based on a Monte Carlo simulation of the Company's
common stock as compared to certain market share price milestones, and is
primarily based on our peer group due to our limited history, as well as our
future implied volatility, a significant unobservable input. The change in the
estimated fair value of contingent consideration was driven by the change in
estimated fair value from June 10, 2020 through June 30, 2020.
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Results of Operations
The following table sets forth our results of operations for the three and six
months ended June 30, 2021 and 2020:
                                          Three Months Ended June 30,                            Six Months Ended June 30,
                                         2021                  2020                    % Change              2021               2020              % Change
                                                                             ($ in thousands)
Revenue
Program fees                       $       20,597          $   8,793                         134  %       $ 35,508          $  21,505                    65  %
Profit share                               38,842             12,163                         219  %         66,572             15,938                   318  %
Claims administration service fees          1,686              1,111                          52  %          3,053              2,054                    49  %
Total revenue                              61,125             22,067                         177  %        105,133             39,497                   166  %
Cost of services                            4,140              1,827                         127  %          7,502              4,322                    74  %
Gross profit                               56,985             20,240                         182  %         97,631             35,175                   178  %
Operating expenses
General and administrative                  8,381             14,650                         (43) %         16,593             18,218                    (9) %
Selling and marketing                       2,954              1,295                         128  %          5,351              3,373                    59  %
Research and development                      773                349                         121  %          1,364                707                    93  %
Operating income                           44,877              3,946                        1037  %         74,323             12,877                   477  %
Interest expense                           (1,122)            (3,644)                        (69) %         (4,411)            (4,408)                    -  %
Interest income                                58                 44                          32  %            142                 61                   133  %
Gain on extinguishment of tax
receivable agreement                       55,422                  -                         100  %         55,422                  -                   100  %
Loss on extinguishment of debt                  -                  -                           -  %         (8,778)                 -                  (100) %
Change in fair value of contingent
consideration                                   -            (48,802)                       (100) %              -            (48,802)                 (100) %
Other (expense) income                         (2)                 3                        (167) %           (133)                 3                (4,533) %
Income (loss) before income taxes          99,233            (48,453)                       (305) %        116,565            (40,269)                 (389) %
Provision for income taxes                 23,267              1,352                       1,621  %         27,737              1,364                 1,934  %
Net income (loss) and
comprehensive income (loss)        $       75,966          $ (49,805)                       (253) %       $ 88,828          $ (41,633)                 (313) %


Key Performance Measures
The following table sets forth key performance measures for the three and six
months ended June 30, 2021 and 2020:
                                                       Three Months Ended June 30,                                   Six Months Ended June 30,
                                                                                         %                                                            %
                                                2021                2020              Change                 2021                2020              Change

Certified loans                                  46,408            18,684                 148  %              79,726            46,708                  71  %
Single-pay                                       41,156            14,480                 184  %              70,098            37,916                  85  %
Monthly-pay                                       5,252             4,204                  25  %               9,628             8,792                  10  %
Average program fees                      $         444          $    471                  (6) %       $         445          $    460                  (3) %
Single-pay                                $         415          $    434                  (4) %       $         416          $    430                  (3) %
Monthly-pay                               $         673          $    616                   9  %       $         660          $    613                   8  %


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Comparison of Three and Six Months Ended June 30, 2021 and 2020
Revenue
                                                Three Months Ended June 30,                                     Six Months Ended June 30,
                                                                                  %                                                              %
                                        2021                 2020               Change                 2021                 2020              Change
                                                                                     ($ in thousands)
Program fees                      $       20,597          $  8,793                  134  %       $       35,508          $ 21,505                  65  %

Profit share
New certified loan originations           27,017            13,105                  106  %               49,673            28,918                  72  %
Change in estimated future
revenues                                  11,825              (942)               1,355  %               16,899           (12,980)                230  %
Total profit share                        38,842            12,163                  219  %               66,572            15,938                 318  %

Claims administration service
fees                                       1,686             1,111                   52  %                3,053             2,054                  49  %
Total revenue                     $       61,125          $ 22,067                  177  %       $      105,133          $ 39,497                 166  %


Total revenue increased by $39.1 million and $65.6 million, or 177% and 166%,
respectively, for the three and six months ended June 30, 2021, as compared to
the same periods in 2020, driven by an increase in anticipated profit share,
program fees and claims administrative revenues on new originations and the
change in estimated future revenues on historical vintages. As the loan default
rate, default severity and prepayment rate continued to improve during the three
and six months ended June 30, 2021, our anticipated profit share on historic
business increased.
Program fees revenue increased by $11.8 million and $14.0 million, or 134% and
65%, respectively, for the three and six months ended June 30, 2021, as compared
to the same periods in 2020. The increases were driven by 148% and 71% increases
in certified loan volume during the three and six months ended June 30, 2021 as
compared to the prior year periods, respectively.
Profit share revenue increased by $26.7 million and $50.6 million, or 219% and
318%, respectively, during the three and six months ended June 30, 2021, as
compared to the same periods in 2020. During the three months ended June 30,
2021, we recorded $27.0 million in anticipated profit share, associated with
46,408 new certified loans, for an average of $582 per new certified loan, as
compared to $13.1 million recorded in anticipated profit share, associated with
18,684 new certified loans, for an average of $701 per new certified loan,
during the three months ended June 30, 2020. In April 2021, we removed the
vehicle value discount established as part of our underwriting changes
implemented at the onset of COVID-19, which had the effect of increasing credit
default insurance premiums and corresponding profit share during the pandemic by
approximately 15% per certified loan. As a result of this underwriting change,
in April 2021, our average profit share per certified loan decreased in the
second quarter 2021 and is comparable to pre-COVID-19 profit share unit
economics. In addition, this change had a positive impact by increasing our
closure rates on certified loans in second quarter 2021. During the six months
ended June 30, 2021, we recorded $49.7 million in anticipated profit share
associated with 79,726 new certified loans for an average of $623 per new
certified loan, as compared to $28.9 million in anticipated profit share
associated with 46,708 certified loans for an average of $619 per new certified
loan, during the six months ended June 30, 2020.
In addition, during the three and six months ended June 30, 2021, we recorded
$11.8 million and $16.9 million, respectively, in estimated future profit share
on business written in historic periods, as compared to a $0.9 million reduction
and a $13.0 million reduction, respectively, in estimated future profit share on
historic vintages, during the three and six months ended June 30, 2020. The
positive adjustment during the three and six months ended June 30, 2021 resulted
in a $12.8 million change quarter over quarter and $29.9 million change year
over year and represents the continued improvement of our portfolio performance
from a risk perspective related to defaults, severity of defaults and
prepayments over what we anticipated last year when the COVID-19 pandemic began.
This positive adjustments in anticipated future profit share is a change in
estimated variable consideration in accordance with ASC 606 and represents
additional revenue and expected cash flow from historical vintages as a result
of better than expected performance from a risk perspective.
Revenue from claims administration service fees, which represents 3% of our
insurance partners' annual earned premium, increased by $0.6 million, or 52%,
and $1.0 million, or 49%, for the three and six months ended June 30, 2021 as
compared to the same periods in the prior year, driven by 47% and 43% increases
in total earned premiums and 148% and 71% increases in new loan certifications,
as compared to the same periods in the prior year.
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Cost of Services, Gross Profit and Gross Margin
                                                 Three Months Ended June 30,                                     Six Months Ended June 30,
                                                                                   %                                                                %
                                          2021                2020              Change                 2021                    2020              Change
                                                                                       (S in thousands)
Total revenue                       $     61,125           $ 22,067                 177  %       $    105,133               $ 39,497                 166  %
Cost of services                           4,140              1,827                 127  %              7,502                  4,322                  74  %
Gross profit                        $     56,985           $ 20,240                 182  %       $     97,631               $ 35,175                 178  %
Gross margin                                  93  %              92  %                1  %                 93  %                  89  %                4  %


Gross profit increased by $36.7 million, or 182%, and $62.5 million, or 178%,
during the three and six months ended June 30, 2021, respectively, as compared
to the same periods in 2020, driven by an increase in anticipated profit share,
program fees and claims administrative revenues on new originations and change
in estimated future revenues based on historical vintages as discussed above.
Operating Expenses, Operating Income and Operating Margin
                                                        Three Months Ended June 30,                                     Six Months Ended June 30,
                                                                                          %                                                                %
                                                 2021                2020              Change                 2021                    2020              Change
                                                                                              ($ in thousands)
Total revenue                              $     61,125           $ 22,067                 177  %       $    105,133               $ 39,497                 166  %
Gross profit                                     56,985             20,240                 182  %             97,631                 35,175                 178  %
Operating expenses
General and administrative                        8,381             14,650                 (43) %             16,593                 18,218                  (9) %
Selling and marketing                             2,954              1,295                 128  %              5,351                  3,373                  59  %
Research and development                            773                349                 121  %              1,364                    707                  93  %
Operating income                           $     44,877           $  3,946                1037  %       $     74,323               $ 12,877                 477  %
Operating margin                                     73  %              18  %               55  %                 71  %                  33  %               38  %


General and administrative expenses decreased by $6.3 million, or 43% and $1.6
million, or 9%, during the three and six months ended June 30, 2021,
respectively, as compared to the same periods last year. During the three and
six months ended June 30, 2020, general and administrative expenses included a
$9.1 million transaction bonus awarded to key employees and directors of Open
Lending, LLC and $2.2 million of non-cash charges incurred in connection with
the accelerated vesting of share-based awards, as a result of the Business
Combination. Excluding the impact of these one-time charges associated with the
Business Combination in the prior year, we experienced a quarter over quarter
increase of $5.0 million in general and administrative expenses in 2021, which
is primarily attributable to $1.6 million in professional and consulting fees
associated with continuing efforts to enhance internal controls, financial
reporting and compliance functions, $1.1 million in employee compensation and
benefits and $0.8 million in share-based compensation as we continue to expand
our business and $0.6 million increase in Directors and Officers insurance.
Selling and marketing expenses increased by $1.7 million, or 128%, and $2.0
million, or 59%, during the three and six months ended June 30, 2021,
respectively, as compared to the prior year periods, primarily due to an
increase in employee compensation and commissions costs driven by both increased
headcounts in sales and account management and increased sales.
Research and development expenses increased by $0.4 million and $0.7 million, or
121% and 93%, during the three and six months ended June 30, 2021, respectively,
as compared to the same periods in prior year, due to an increase in headcount
costs associated with the software development personnel.
Operating income for the three and six months ended June 30, 2021 increased by
$40.9 million and $61.4 million, or 1037% and 477%, respectively, as compared to
the prior year periods, driven by an increase in anticipated profit share from
new originations and estimated future underwriting profits on historic business.
Income Taxes
During the three and six months ended June 30, 2021, we recognized income tax
expense of $23.3 million and $27.7 million, respectively, as compared to income
tax expense of $1.4 million during each of the three and six months ended
June 30, 2020.
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For the three months ended June 30, 2021 our effective tax rate was 23.4%, as
compared to an effective tax rate of (2.8)% for the three months ended June 30,
2020. Our effective tax rate for the six months ended June 30, 2021 was 23.8% as
compared to an effective tax rate of (3.4)% for the six months ended June 30,
2020. The change in the effective tax rate is primarily due to the taxable
entity structure adopted in conjunction with the Business Combination that was
consummated on June 10, 2020.
Liquidity and Capital Resources
Cash Flow and Liquidity Analysis
We assess liquidity primarily in terms of our ability to generate cash to fund
operating and investing activities. A significant portion of our cash from
operating activities is derived from our profit share arrangements with our
insurance partners, which are subject to judgments and assumptions and is,
therefore, subject to variability.

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