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OFFON

NEBULA ACQUISITION CORPORATION

(LPRO)
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OPEN LENDING CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/12/2021 | 04:13pm EST
The following discussion and analysis provides information that 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 (the "Exchange
Act"), 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, as well as any supply chain disruptions and vehicle affordability for
near and non-prime borrowers;
•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 us 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 $12.4 billion in automotive
loans, accumulating over 20 years of proprietary data and developing over two
million unique risk profiles. We currently cater to 394 active automotive
lenders.
We specialize in risk-based pricing and modeling, and we 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 submit the proposed
rate 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 2% 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 49,332 and 129,058 certified loans during the three and nine
months ended September 30, 2021, respectively, as compared to 20,696 and 67,404
certified loans during the three and nine months ended September 30, 2020,
respectively.
Total revenue was $58.9 million and $164.0 million during the three and nine
months ended September 30, 2021, respectively, as compared to $29.8 million and
$69.3 million during the three and nine months ended September 30, 2020,
respectively.
Operating income was $40.7 million and $115.1 million during the three and nine
months ended September 30, 2021, respectively, as compared to $19.6 million and
$32.4 million in the three and nine months ended September 30, 2020,
respectively.
Net income was $29.4 million and $118.2 million during the three and nine months
ended September 30, 2021, respectively, as compared to net loss of $(71.1)
million and $(112.8) million for the three and nine months ended September 30,
2020, respectively.
Adjusted EBITDA was $42.1 million and $118.4 million for the three and nine
months ended September 30, 2021, respectively, as compared to $19.8 million and
$44.7 million during the three and nine months ended September 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
nine months ended September 30, 2021 and 2020.
                                            Three Months Ended September 30,             Nine Months Ended September 30,
                                                2021                 2020                   2021                    2020
                                                               (in thousands, except number of contracts)
Value of insured loans facilitated (1)     $  1,267,809          $ 463,377          $       3,218,657          $ 1,500,422
Number of contracts signed with automotive
lenders                                                 16                 11                         52                   39


(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 $58.7 million and $158.9
million, respectively, for the three and nine months ended September 30, 2021
and were $38.5 million and $108.0 million for the three and nine months ended
September 30, 2020.
Recent Developments
Term Loan due 2027
On March 11, 2020, we 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 paying off our 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, we recognized a non-cash debt extinguishment
loss of $8.8 million during the nine months ended September 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
extinguishment was calculated as the
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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, we 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"). Our obligations under the
Term Loan due 2026 and the Revolving Facility are guaranteed by all of our 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 September 30,
2021, both the Term Loan due 2026 and the Revolving Facility are subject to
LIBOR of 0.086% plus a spread of 1.75% per annum. In June 2021, we 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 September 30, 2021. Commitment fees were accrued at a weighted
average of 0.218% per annum on the unused commitment balance and is recorded
under the caption accrued expenses in the condensed consolidated balance sheets.
In connection with the issuance of the Term Loan due 2026 and the Revolving
Facility,we 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
September 30, 2021, the weighted average effective interest rate on our
outstanding borrowings was 2.13%.
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 September 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 September 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 our condensed consolidated
statements of operations and comprehensive income.
Third Insurance Carrier Partner
On June 24, 2021, we 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 we earn profit share revenue and claims administration fees.
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 depends 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; any impacts related to
the slowdown in the supply chain for automobiles; 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. We are 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. We
believe 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. We 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. We continue 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 customers 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 with 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, supply chain disruptions, consumer confidence, the impact of the
pandemic and, particularly, the unemployment rate also influence consumer
spending and borrowing patterns.
Concentration
Our largest insurance partner accounted for the majority of our profit share and
claims administration service fee revenue in the three and nine months ended
September 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 and other 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 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 our 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 in the nine months ended September 30, 2020 was driven
by the change in estimated fair value from June 10, 2020 through the date
immediately before each tranche of contingent consideration shares vested.
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Results of Operations
The following table sets forth our results of operations for the three and nine
months ended September 30, 2021 and 2020:
                                   Three Months Ended September 30,                    Nine Months Ended September 30,
                                     2021               2020                   % Change              2021               2020               % Change
                                                                         ($ in thousands)
Revenue
Program fees                     $  21,638          $  10,087                       115  %       $  57,146          $   31,592                    81  %
Profit share                        35,447             18,544                        91  %         102,019              34,482                   196  %
Claims administration and other
service fees                         1,807              1,131                        60  %           4,860               3,185                    53  %
Total revenue                       58,892             29,762                        98  %         164,025              69,259                   137  %
Cost of services                     6,380              2,496                       156  %          13,882               6,818                   104  %
Gross profit                        52,512             27,266                        93  %         150,143              62,441                   140  %
Operating expenses
General and administrative           7,197              5,015                        44  %          23,790              23,233                     2  %
Selling and marketing                3,308              2,118                        56  %           8,659               5,491                    58  %
Research and development             1,268                579                       119  %           2,632               1,286                   105  %
Operating income                    40,739             19,554                       108  %         115,062              32,431                   255  %
Interest expense                      (959)            (3,572)                      (73) %          (5,370)             (7,980)                  (33) %
Interest income                         35                 36                        (3) %             177                  97                    82  %
Gain on extinguishment of tax
receivable agreement                     -                  -                         -  %          55,422                   -                   100  %
Loss on extinguishment of debt           -                  -                         -  %          (8,778)                  -                  (100) %
Change in fair value of
contingent consideration                 -            (83,130)                     (100) %               -            (131,932)                 (100) %
Other income (expense)                   3                  -                       100  %            (130)                  3                (4,433) %
Income (loss) before income
taxes                               39,818            (67,112)                     (159) %         156,383            (107,381)                 (246) %
Provision for income taxes          10,404              4,021                       159  %          38,141               5,385                   608  %
Net income (loss) and
comprehensive income (loss)      $  29,414          $ (71,133)                     (141) %       $ 118,242          $ (112,766)                 (205) %


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

Certified loans                           49,332             20,696                 138  %               129,058             67,404                  91  %
Single-pay                                44,243             15,500                 185  %               114,341             53,416                 114  %
Monthly-pay                                5,089              5,196                  (2) %                14,717             13,988                   5  %
Average program fees             $           439          $     487                 (10) %       $           443          $     469                  (6) %
Single-pay                       $           410          $     442                  (7) %       $           414          $     430                  (4) %
Monthly-pay                      $           686          $     623                  10  %       $           669          $     616                   9  %


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Comparison of Three and Nine Months Ended September 30, 2021 and 2020
Revenue
                                                                                  Nine Months Ended
                                            Three Months Ended September 30,        September 30,
                                                2021                2020                     2021               2020
                                                                 (in thousands)
Program fees                                $   21,638          $  10,087                $  57,146          $  31,592

Profit share
New certified loan originations                 27,932             14,706                   77,605             43,621
Change in estimated future revenues              7,515              3,838                   24,414             (9,139)
Total profit share                              35,447             18,544                  102,019             34,482

Claims administration and other service
fees                                             1,807              1,131                    4,860              3,185
Total revenue                               $   58,892          $  29,762                $ 164,025          $  69,259


Total revenue increased by $29.1 million and $94.8 million, or 98% and 137%,
respectively, for the three and nine months ended September 30, 2021, as
compared to the same periods in 2020, driven by an increase in anticipated
profit share, program fees and claims administrative and other service fee
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 nine months ended September 30,
2021, our anticipated profit share on historic business increased.
Program fees revenue increased by $11.6 million and $25.6 million, or 115% and
81%, respectively, for the three and nine months ended September 30, 2021, as
compared to the same periods in 2020. The increases were driven by 138% and 91%
increases in certified loan volume during the three and nine months ended
September 30, 2021 as compared to the prior year periods, respectively.
Profit share revenue increased by $16.9 million and $67.5 million, or 91% and
196%, respectively, during the three and nine months ended September 30, 2021,
as compared to the same periods in 2020. During the three months ended
September 30, 2021, we recorded $27.9 million in anticipated profit share,
associated with 49,332 new certified loans, for an average of $566 per new
certified loan, as compared to $14.7 million recorded in anticipated profit
share, associated with 20,696 new certified loans, for an average of $711 per
new certified loan, during the three months ended September 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, our average profit share per certified loan decreased in
the second and third quarter of 2021 and is now 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. During the nine months ended
September 30, 2021, we recorded $77.6 million in anticipated profit share
associated with 129,058 new certified loans for an average of $601 per new
certified loan, as compared to $43.6 million in anticipated profit share
associated with 67,404 certified loans for an average of $647 per new certified
loan, during the nine months ended September 30, 2020.
In addition, during the three and nine months ended September 30, 2021, we
recorded $7.5 million and $24.4 million, respectively, in estimated future
profit share on business written in historic periods, as compared to an increase
of $3.8 million and a $9.1 million reduction, respectively, in estimated future
profit share on historic vintages, during the three and nine months ended
September 30, 2020. The positive adjustment during the three and nine months
ended September 30, 2021 resulted in a $3.7 million change quarter over quarter
and $33.6 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. The 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 and other service fees, primarily represents
3% of our insurance partners' annual earned premium, increased by $0.7 million,
or 60%, and $1.7 million, or 53%, for the three and nine months ended
September 30, 2021 as compared to the same periods in the prior year, driven by
52% and 47% increases in total earned premiums and 138% and 91% increases in new
loan certifications, as compared to the same periods in the prior year.
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Cost of Services, Gross Profit and Gross Margin
                                                                                      Nine Months Ended
                                           Three Months Ended September 30,             September 30,
                                              2021                    2020                       2021                 2020
                                                                ($ in thousands)
Total revenue                          $        58,892           $    29,762                $   164,025          $    69,259
Cost of services                                 6,380                 2,496                     13,882                6,818
Gross profit                           $        52,512           $    27,266                $   150,143          $    62,441
Gross margin                                        89  %                 92  %                      92  %                90  %


Gross profit increased by $25.2 million, or 93%, and $87.7 million, or 140%,
during the three and nine months ended September 30, 2021, respectively, as
compared to the same periods in 2020, driven by an increase in anticipated
profit share, program fees and claims administration and other service fees
revenues on new originations and change in estimated future revenues based on
historical vintages as discussed above.
Operating Expenses, Operating Income and Operating Margin
                                                                                              Nine Months Ended
                                                    Three Months Ended September 30,            September 30,
                                                        2021                   2020                      2021                2020
                                                                         ($ in thousands)
Total revenue                                    $        58,892           $   29,762                $  164,025          $   69,259
Gross profit                                              52,512               27,266                   150,143              62,441
Operating expenses
General and administrative                                 7,197                5,015                    23,790              23,233
Selling and marketing                                      3,308                2,118                     8,659               5,491
Research and development                                   1,268                  579                     2,632               1,286
Operating income                                 $        40,739           $   19,554                $  115,062          $   32,431
Operating margin                                              69  %                66  %                     70  %               47  %


General and administrative expenses increased by $2.2 million, or 44% and $0.6
million, or 2%, during the three and nine months ended September 30, 2021,
respectively, as compared to the same periods last year. The increase during the
three months ended September 30, 2021 as compared to the prior year period is
primarily attributable to $2.2 million increase in employee compensation and
benefits, including share-based compensation. During the nine months ended
September 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 year over year increase of $11.9
million in general and administrative expenses in 2021, which is primarily
attributable to $5.4 million in employee compensation and benefits, including
share-based compensation, $4.2 million in professional and consulting fees
associated with continuing efforts to enhance internal controls, financial
reporting and compliance functions, $1.5 million in insurance expense and $0.8
million in software and data expenses.
Selling and marketing expenses increased by $1.2 million, or 56%, and $3.2
million, or 58%, during the three and nine months ended September 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 $0.7 million and $1.3 million, or
119% and 105%, during the three and nine months ended September 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 nine months ended September 30, 2021
increased by $21.2 million and $82.6 million, or 108% and 255%, respectively, as
compared to the prior year periods, driven by increases in program fees and
anticipated profit share from new originations and estimated future underwriting
profits on historic business.
Income Taxes
During the three and nine months ended September 30, 2021, we recognized income
tax expense of $10.4 million and $38.1 million, respectively, as compared to
income tax expense of $4.0 million and $5.4 million during the three and nine
months
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ended September 30, 2020, respectively. The effective tax rate for the three and
nine months ended September 30, 2021 was 26.1% and 24.4%, respectively, as
compared to effective tax rate of (6.0)% and (5.0)% for the three and nine
months ended September 30, 2020, respectively. 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. We believe that our existing cash resources
and revolving credit facility will provide sufficient liquidity to fund our
near-term working capital needs. We regularly evaluate alternatives for managing
our capital structure and liquidity profile in consideration of expected cash
flows, growth and operating capital requirements and capital market conditions.
The following table provides a summary of cash flow data:
                                                                  Nine Months Ended September 30,
                                                                      2021                2020
                                                                           (in thousands)
Net cash provided by operating activities                         $   68,423          $  16,375
Net cash used in investing activities                                 (1,785)            (1,097)
Net cash (used in) provided by financing activities                  (77,026)            92,590


Cash Flows from Operating Activities
Our cash flows provided by operating activities primarily consists of operating
income and adjustments for net changes in operating assets and liabilities,
including changes in accounts receivable, prepaid expenses, contract assets,
accounts payable, income tax payable/receivable and accrued expenses.
Our net cash from operating activities for the nine months ended September 30,
2021 was $68.4 million. For the nine months ended September 30, 2021, net cash
provided by operating activities was primarily attributable to cash inflows from
program fees and higher profit share payments from our insurance carriers,
primarily as a result of an increased certified loan volume and our carriers
releasing reserves established due to uncertainty related to the COVID-19
pandemic last year and the continued improved performance of our portfolio. In
addition, net income was increased by an $8.8 million non-cash loss on
extinguishment of debt, which was offset by a $55.4 million gain on the
extinguishment of the TRA, a $24.9 million increase in contract assets and a
$2.5 million increase in accounts receivable.
Our net cash from operating activities for the nine months ended September 30,
2020 was $16.4 million. Operating cash flow was driven primarily by net income
excluding the impact of fair value adjustment of contingent considerations
recorded as well as increased payments collected from customers on account
receivables, partially offset by a $10.0 million increase in contract assets.
Cash Flows from Investing Activities
For the nine months ended September 30, 2021 and 2020, net cash used in
investing activities was $1.8 million and $1.1 million, respectively. For the
nine months ended September 30, 2021, the investments primarily related to
computer software developed for internal use. For the nine months ended
September 30, 2020, the investments primarily consisted of purchases of
furniture and equipment.
Cash Flows from Financing Activities
Our cash flows provided by and used in financing activities primarily consist of
proceeds from debt, payments of debt and deferred financing costs, member
distributions, proceeds from stock warrant exercises and equity recapitalization
transactions.
For the nine months ended September 30, 2021, net cash used in financing
activities was $77.0 million. The cash used primarily consisted of $36.9 million
in early termination and settlement of the TRA, $20.0 million related to our
repurchase of 612,745 shares of our common stock held in treasury stock and debt
principal payments of $168.4 million, primarily related to the
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payment in full of the Term Loan due 2027. In addition, we paid down our
revolving facility $25.0 million. The cash inflow includes $175.0 million in
proceeds associated with our New Credit Agreement entered into March 19, 2021,
which refinanced our existing debt, less $1.7 million in deferred financing
costs associated with this facility.
For the nine months ended September 30, 2020, net cash provided by financing
activities was $92.6 million. The cash inflow consisted of $170.0 million in
proceeds associated with the Credit Agreement entered into March 1, 2020 less
$9.8 million in deferred financing costs and $88.0 million in proceeds received
in connection with stock warrant exercise transactions during the three months
ended September 30, 2020. The cash used primarily consisted of a $135.4 million
distribution to Open Lending, LLC's unitholders, $14.9 million in connection
with our recapitalization, net of transaction costs and $5.4 million of debt
principal payments.
Debt
As of September 30, 2021, we had outstanding amounts of $123.4 million under the
Term Loan due in 2026 and $25.0 million under the Revolving Facility under the
New Credit Agreement that we entered into on March 19, 2021, proceeds from which
were used primarily to pay the Term Loan due 2027 in full and provide cash for
general corporate purposes.
Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure used by management to evaluate
its operating performance, generate future operating plans, and make strategic
decisions, including those relating to operating expenses and the allocation of
internal resources. Accordingly, we believe these measures provide useful
information to investors and others in understanding and evaluating our
operating results in the same manner as our management and Board of Directors.
In addition, they provide useful measures for period-to-period comparisons of
our business, as they remove the effect of certain non-cash items and certain
variable charges. Adjusted EBITDA is defined as GAAP net income (loss) excluding
interest expense, income taxes, depreciation and amortization expense,
share-based compensation expense, gain on extinguishment of tax receivable
agreement, loss on extinguishment of debt, transaction bonuses and change in
fair value of contingent consideration. Adjusted EBITDA margin is defined as
Adjusted EBITDA expressed as a percentage of total revenue.
The following table presents a reconciliation of GAAP net income (loss) to
Adjusted EBITDA for each of the periods indicated:
                                                                                    Nine Months Ended
Adjusted EBITDA                            Three Months Ended September 30,           September 30,
                                               2021                  2020                      2021                2020
                                                                ($ in thousands)
Net Income (loss)                       $       29,414           $  (71,133)               $  118,242          $ (112,766)
Non-GAAP adjustments:
Interest expense                                   959                3,572                     5,370               7,980
Provision for income taxes                      10,404                4,021                    38,141               5,385
Depreciation and amortization                      201                  167                       590                 406
Share-based compensation                         1,098                    -                     2,726               2,676
Gain on extinguishment of tax
receivable agreement                                 -                    -                   (55,422)                  -
Loss on extinguishment of debt                       -                    -                     8,778                   -
Transaction bonuses                                  -                    -                         -               9,112
Change in fair value of contingent
consideration                                        -               83,130                         -             131,932
Total adjustments                               12,662               90,890                       183             157,491
Adjusted EBITDA                                 42,076               19,757                   118,425              44,725
Total revenue                           $       58,892           $   29,762                $  164,025          $   69,259
Adjusted EBITDA margin                              71  %                66  %                     72  %               65  %


For the three and nine months ended September 30, 2021, Adjusted EBITDA
increased by $22.3 million, or 113% and $73.7 million, or 165%, as compared to
the three and nine months ended September 30, 2020. Adjusted EBITDA margin for
the three and nine months ended September 30, 2021 increased to 71% and 72% as
compared to 66% and 65% in the three and nine months ended September 30, 2020.
The increase in Adjusted EBITDA during the three and nine months ended
September 30, 2021 reflects an increase in certified loan volume and an increase
in estimated future profit share as a result of the continued
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positive portfolio performance due to lower than projected default frequency and
severity stress and overall fewer claims for loss associated with historical
vintages, partially offset by an increase in cost of services in the current
quarter.
Critical Accounting Policies and Estimates
There have not been any material changes during the nine months ended
September 30, 2021 to the methodology applied by management for critical
accounting policies previously disclosed in our Annual Report on Form 10-K for
the year ended December 31, 2020. Please read "Part II, Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies and Estimates" in our Annual Report on
Form 10-K for the year ended December 31, 2020 for further description of our
critical accounting policies.
Off Balance Sheet Arrangements
We have not engaged in off-balance sheet financing arrangements, as defined in
Item 303(a)(4)(ii) of Regulation S-K.
Contractual Obligations
We had no material changes, other than the refinancing of our Term Loan due 2027
on March 19, 2021 as discussed in   Note-4 Debt  , in our contractual
commitments and obligations during the nine months ended September 30, 2021 from
the amounts listed under "Part II, Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations-Contractual Obligations" in the
Annual Report on Form 10-K.
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