The following discussion and analysis provides information which management believes is relevant to an assessment and understanding ofOpen 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 endedDecember 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 ofOpen Lending Corporation , and its condensed consolidated subsidiaries. 21
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Table of Contents
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 withOpen Lending's growth as a result of demands on its operational, marketing, compliance and accounting infrastructure; •regulatory agreements betweenOpen 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. 22 -------------------------------------------------------------------------------- Table of Contents 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 throughoutthe 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 endedJune 30, 2021 , respectively, as compared to 18,684 and 46,708 certified loans during the three and six months endedJune 30, 2020 , respectively. Total revenue was$61.1 million and$105.1 million for three and six months endedJune 30, 2021 , respectively, as compared to$22.1 million and$39.5 million during the three and six months endedJune 30, 2020 , respectively. Operating income was$44.9 million and$74.3 million for three and six months endedJune 30, 2021 , respectively, as compared to$3.9 million and$12.9 million in the three and six months endedJune 30, 2020 , respectively. Net income was$76.0 million and$88.8 million for three and six months endedJune 30, 2021 , respectively, as compared to net loss of$(49.8) million and$(41.6) million for the three and six months endedJune 30, 2020 , respectively. Adjusted EBITDA was$46.1 million and$76.3 million for the three and six months endedJune 30, 2021 , respectively, as compared to$15.4 million and$25.0 million during the three and six months endedJune 30, 2020 , respectively. Information regarding use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income (loss), the most comparable GAAP measure, is included in "Non-GAAP Financial Measures." 23 -------------------------------------------------------------------------------- Table of Contents Highlights The table below summarizes the total dollar value of insured loans facilitated and the number of contracts signed with automotive lenders during the three and six months endedJune 30, 2021 and 2020. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (in thousands, except number of contracts) Value of insured loans facilitated (1)$ 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 asOpen 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 endedJune 30, 2021 and were$35.9 million and$69.5 million for the three and six months endedJune 30, 2020 . Recent Developments Term Loan due 2027 OnMarch 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 inMarch 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) inMarch 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 endedJune 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 24 -------------------------------------------------------------------------------- Table of Contents 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 OnMarch 19, 2021 , the Company entered into a credit agreement withWells 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 inMarch 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 inMarch 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'sU.S. subsidiaries and are secured by substantially all of the assets of the Company and itsU.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 ofJune 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. InJune 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 atJune 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 ofJune 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 endingJune 30, 2021 . The maximum total net leverage ratio is 3.5 to 1.0 for periods on or prior toDecember 31, 2022 , and then decreases to 3.0 to 1.0 afterDecember 31, 2022 . The minimum fixed charge coverage ratio is 1.25 to 1.0. As ofJune 30, 2021 , we were in compliance with all required covenants under the New Credit Agreement. Underwritten Public Offering OnApril 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, includingNebula 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 ofMarch 29, 2021 , betweenOpen Lending and the selling stockholders, we repurchased from the selling stockholders onApril 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 effectiveApril 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 25 -------------------------------------------------------------------------------- Table of Contents 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. OnApril 12, 2021 , an independent committee of disinterested members of the Board of Directors approved our decision to exercise the Early Termination Right. As ofJune 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 OnJune 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 addAmerican 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 theU.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. 26 -------------------------------------------------------------------------------- Table of Contents 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 endedJune 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 subsidiaryInsurance 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. 27 -------------------------------------------------------------------------------- Table of Contents 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 onMarch 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 onJune 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 fromJune 10, 2020 throughJune 30, 2020 . 28 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth our results of operations for the three and six months endedJune 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 endedJune 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 % 29
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Table of Contents Comparison of Three and Six Months EndedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2021 , as compared to the same periods in 2020. During the three months endedJune 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 endedJune 30, 2020 . InApril 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, inApril 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 endedJune 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 endedJune 30, 2020 . In addition, during the three and six months endedJune 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 endedJune 30, 2020 . The positive adjustment during the three and six months endedJune 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$1.0 million , or 49%, for the three and six months endedJune 30, 2021 as compared to the same periods in the prior year, driven by 47% and 43% increases in total earned premiums and 148% and 71% increases in new loan certifications, as compared to the same periods in the prior year. 30 -------------------------------------------------------------------------------- Table of Contents Cost of Services, Gross Profit and Gross Margin Three Months Ended June 30, Six Months Ended June 30, % % 2021 2020 Change 2021 2020 Change (S in thousands) Total revenue$ 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$62.5 million , or 178%, during the three and six months endedJune 30, 2021 , respectively, as compared to the same periods in 2020, driven by an increase in anticipated profit share, program fees and claims administrative revenues on new originations and change in estimated future revenues based on historical vintages as discussed above. Operating Expenses, Operating Income and Operating Margin Three Months Ended June 30, Six Months Ended June 30, % % 2021 2020 Change 2021 2020 Change ($ 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 endedJune 30, 2021 , respectively, as compared to the same periods last year. During the three and six months endedJune 30, 2020 , general and administrative expenses included a$9.1 million transaction bonus awarded to key employees and directors ofOpen 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2020 . 31
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Table of Contents For the three months endedJune 30, 2021 our effective tax rate was 23.4%, as compared to an effective tax rate of (2.8)% for the three months endedJune 30, 2020 . Our effective tax rate for the six months endedJune 30, 2021 was 23.8% as compared to an effective tax rate of (3.4)% for the six months endedJune 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 onJune 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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