The following discussion and analysis provides information that 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. 22
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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 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 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. 23 -------------------------------------------------------------------------------- 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$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 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 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 endedSeptember 30, 2021 , respectively, as compared to 20,696 and 67,404 certified loans during the three and nine months endedSeptember 30, 2020 , respectively. Total revenue was$58.9 million and$164.0 million during the three and nine months endedSeptember 30, 2021 , respectively, as compared to$29.8 million and$69.3 million during the three and nine months endedSeptember 30, 2020 , respectively. Operating income was$40.7 million and$115.1 million during the three and nine months endedSeptember 30, 2021 , respectively, as compared to$19.6 million and$32.4 million in the three and nine months endedSeptember 30, 2020 , respectively. Net income was$29.4 million and$118.2 million during the three and nine months endedSeptember 30, 2021 , respectively, as compared to net loss of$(71.1) million and$(112.8) million for the three and nine months endedSeptember 30, 2020 , respectively. Adjusted EBITDA was$42.1 million and$118.4 million for the three and nine months endedSeptember 30, 2021 , respectively, as compared to$19.8 million and$44.7 million during the three and nine months endedSeptember 30, 2020 , respectively. Information regarding use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income (loss), the most comparable GAAP measure, is included in "Non-GAAP Financial Measures." 24 -------------------------------------------------------------------------------- Table of Contents Highlights The table below summarizes the total dollar value of insured loans facilitated and the number of contracts signed with automotive lenders during the three and nine months endedSeptember 30, 2021 and 2020. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands, except number of contracts) Value of insured loans facilitated (1)$ 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 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$58.7 million and$158.9 million , respectively, for the three and nine months endedSeptember 30, 2021 and were$38.5 million and$108.0 million for the three and nine months endedSeptember 30, 2020 . Recent Developments Term Loan due 2027 OnMarch 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 inMarch 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) inMarch 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 endedSeptember 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 25 -------------------------------------------------------------------------------- Table of Contents 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 , we 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"). Our obligations under the Term Loan due 2026 and the Revolving Facility are guaranteed by all of ourU.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 ofSeptember 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. InJune 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 atSeptember 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 ofSeptember 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 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 ofSeptember 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 26 -------------------------------------------------------------------------------- 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 ofSeptember 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 OnJune 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 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 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. 27 -------------------------------------------------------------------------------- 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 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 endedSeptember 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 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. 28 -------------------------------------------------------------------------------- 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 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 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 endedSeptember 30, 2020 was driven by the change in estimated fair value fromJune 10, 2020 through the date immediately before each tranche of contingent consideration shares vested. 29 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth our results of operations for the three and nine months endedSeptember 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 endedSeptember 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 % 30
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Table of Contents Comparison of Three and Nine Months EndedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 , as compared to the same periods in 2020. During the three months endedSeptember 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 endedSeptember 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, 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 endedSeptember 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 endedSeptember 30, 2020 . In addition, during the three and nine months endedSeptember 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 endedSeptember 30, 2020 . The positive adjustment during the three and nine months endedSeptember 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$1.7 million , or 53%, for the three and nine months endedSeptember 30, 2021 as compared to the same periods in the prior year, driven by 52% and 47% increases in total earned premiums and 138% and 91% increases in new loan certifications, as compared to the same periods in the prior year. 31 -------------------------------------------------------------------------------- Table of Contents Cost of Services, Gross Profit and Gross Margin Nine Months Ended Three Months Ended September 30, September 30, 2021 2020 2021 2020 ($ 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$87.7 million , or 140%, during the three and nine months endedSeptember 30, 2021 , respectively, as compared to the same periods in 2020, driven by an increase in anticipated profit share, program fees and claims administration and other service fees revenues on new originations and change in estimated future revenues based on historical vintages as discussed above. Operating Expenses, Operating Income and Operating Margin Nine Months Ended Three Months Ended September 30, September 30, 2021 2020 2021 2020 ($ 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 endedSeptember 30, 2021 , respectively, as compared to the same periods last year. The increase during the three months endedSeptember 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 endedSeptember 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 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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$5.4 million during the three and nine months 32 -------------------------------------------------------------------------------- Table of Contents endedSeptember 30, 2020 , respectively. The effective tax rate for the three and nine months endedSeptember 30, 2021 was 26.1% and 24.4%, respectively, as compared to effective tax rate of (6.0)% and (5.0)% for the three and nine months endedSeptember 30, 2020 , respectively. The change in the effective tax rate is primarily due to the taxable entity structure adopted in conjunction with the Business Combination that was consummated onJune 10, 2020 . Liquidity and Capital Resources Cash Flow and Liquidity Analysis We assess liquidity primarily in terms of our ability to generate cash to fund operating and investing activities. A significant portion of our cash from operating activities is derived from our profit share arrangements with our insurance partners, which are subject to judgments and assumptions and is, therefore, subject to variability. We believe that our existing cash resources and revolving credit facility will provide sufficient liquidity to fund our near-term working capital needs. We regularly evaluate alternatives for managing our capital structure and liquidity profile in consideration of expected cash flows, growth and operating capital requirements and capital market conditions. The following table provides a summary of cash flow data: Nine Months Ended September 30, 2021 2020 (in thousands) Net cash provided by operating activities$ 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 endedSeptember 30, 2021 was$68.4 million . For the nine months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 and 2020, net cash used in investing activities was$1.8 million and$1.1 million , respectively. For the nine months endedSeptember 30, 2021 , the investments primarily related to computer software developed for internal use. For the nine months endedSeptember 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 endedSeptember 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 33 -------------------------------------------------------------------------------- Table of Contents 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 intoMarch 19, 2021 , which refinanced our existing debt, less$1.7 million in deferred financing costs associated with this facility. For the nine months endedSeptember 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 intoMarch 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 endedSeptember 30, 2020 . The cash used primarily consisted of a$135.4 million distribution toOpen 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 ofSeptember 30, 2021 , we had outstanding amounts of$123.4 million under the Term Loan due in 2026 and$25.0 million under the Revolving Facility under the New Credit Agreement that we entered into onMarch 19, 2021 , proceeds from which were used primarily to pay the Term Loan due 2027 in full and provide cash for general corporate purposes. Non-GAAP Financial Measures Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial measure used by management to evaluate its operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources. Accordingly, we believe these measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors. In addition, they provide useful measures for period-to-period comparisons of our business, as they remove the effect of certain non-cash items and certain variable charges. Adjusted EBITDA is defined as GAAP net income (loss) excluding interest expense, income taxes, depreciation and amortization expense, share-based compensation expense, gain on extinguishment of tax receivable agreement, loss on extinguishment of debt, transaction bonuses and change in fair value of contingent consideration. Adjusted EBITDA margin is defined as Adjusted EBITDA expressed as a percentage of total revenue. The following table presents a reconciliation of GAAP net income (loss) to Adjusted EBITDA for each of the periods indicated: Nine Months Ended Adjusted EBITDA Three Months Ended September 30, September 30, 2021 2020 2021 2020 ($ 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 endedSeptember 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 endedSeptember 30, 2020 . Adjusted EBITDA margin for the three and nine months endedSeptember 30, 2021 increased to 71% and 72% as compared to 66% and 65% in the three and nine months endedSeptember 30, 2020 . The increase in Adjusted EBITDA during the three and nine months endedSeptember 30, 2021 reflects an increase in certified loan volume and an increase in estimated future profit share as a result of the continued 34 -------------------------------------------------------------------------------- Table of Contents 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 endedSeptember 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 endedDecember 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 endedDecember 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 endedSeptember 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. 35
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