NEBULA ACQUISITION CORPORATION The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing in "Item 8. Financial Statements and Supplementary Data." This section of our Annual Report generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Annual Report can be found in "Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those factors discussed below and elsewhere in this Annual Report, particularly in "Item 1A. Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements," all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
Business Overview
We are a leading provider of lending enablement and risk analytics to credit unions, regional banks, non-bank auto finance companies and OEM Captives. Our clients, collectively referred to herein as automotive lenders or 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$13.5 billion in automotive loans, accumulating over 20 years of proprietary data and developed over two million unique risk profiles. We currently cater to 396 active automotive lenders. We specialize in risk-based pricing and modeling and provide automated decision-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 over 20 years. We believe LPP provides significant benefits to our growing ecosystem of automotive lenders, automobile dealers, borrowers and insurers. A key element of LPP is the ability to facilitate risk-based interest rates that are appropriate for each loan and lender and electronically submitted to our automotive lenders within approximately five seconds after we receive a loan application. Our interest rate pricing is customized to each automotive lender, reflecting the cost of capital, loan servicing costs, loan acquisition costs, expected recovery rates and target return on assets of each automotive lender. Using our risk models, we project monthly loan performance results, including expected losses and prepayments for automotive lenders that use LPP. The product of this process is a risk-based interest rate, inclusive of elements to recover all projected costs, program fees and insurance premiums, given the risk of the loan, to return a targeted return on asset goal.
We believe that our market opportunity is significant. The near-prime and
non-prime automotive loan market is
Executive Overview
We facilitate certified loans, as described below, and have achieved financial success by increasing our penetration of the near-prime and non-prime automotive loan market and refining our data analysis capabilities.
We facilitated 171,697 and 94,226 certified loans during the years ended
Total revenue was
Operating income was
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Net income (loss) was
Adjusted EBITDA was$155.0 million and$69.5 million for the years endedDecember 31, 2021 and 2020, respectively. Information regarding use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, is included in "Non-GAAP Financial Measures." Highlights
The table below summarizes the total dollar-value of insured loans we
facilitated, the number of new contracts we signed with automotive lenders for
the years ended
Years ended December 31,
2021 2020
(in thousands, except number of
contracts)
Value of insured loans facilitated (1) $ 4,331,508 $ 2,126,327
Number of contracts signed with automotive lenders 71 55
(1) Value of insured loans are calculated as the total original loan amount with active institutions as of the end of 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 such metrics are used to measure and model the performance of companies such as us, 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 program fee payment as "single-pay" loans. For certain loans, the program fee is paid to us over 12 monthly installments and we refer to these loans 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
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- 36 -------------------------------------------------------------------------------- Extinguishments of Liabilities," and, accordingly, we recognized a non-cash debt extinguishment loss of$8.8 million during the year endedDecember 31, 2021 , and is recorded under the caption loss on extinguishment of debt in the consolidated statements of operations and comprehensive income (loss). The loss on debt extinguishment was calculated as the difference between the carrying amount of the debt and the price paid to retire the debt, which primarily consisted of the write off of the unamortized deferred financing costs related to the Term Loan due 2027.
New Credit Agreement-Term Loan due 2026 and Revolving Credit Facility
OnMarch 19, 2021 , 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 ourU.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 ofDecember 31, 2021 , both the Term Loan due 2026 and the Revolving Facility are subject to LIBOR of 0.099% 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 have an unused commitment balance of$25.0 million under the Revolving Facility atDecember 31, 2021 . Commitment fees were accrued at a weighted average of 0.200% on the unused commitment balance and is recorded under the caption accrued expenses in the 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 ofDecember 31, 2021 , we had outstanding amounts of$122.7 million under the Term Loan due 2026 and$25.0 million under the Revolving Facility with an average weighted average effective interest rate of outstanding borrowings was 2.15%. 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. 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 ofDecember 31, 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 of our executive officers. 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 , between us and the selling stockholders, we repurchased from the selling stockholders onApril 6, 2021 an aggregate number of 612,745 shares of our 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. 37 --------------------------------------------------------------------------------
Tax Receivable Agreement
In connection with the Business Combination, we entered into the Tax Receivable
Agreement ("TRA"). The TRA generally provides for the payment by us to the Open
Lending LLC unitholders and Blocker's sole shareholder (the "TRA holders"), as
applicable, of 85% of the net cash savings, if any, in U.S. federal, state and
local income tax that we actually realize (or are deemed to realize in certain
circumstances) in periods after the Closing as a result of: (i) certain tax
attributes of Blocker and/or Open Lending, LLC that existed prior to the
Business Combination and were attributable to the Blocker; (ii) certain
increases in the tax basis of Open Lending, LLC's assets resulting from the
Transactions; (iii) imputed interest deemed to be paid by us as a result of
payments we make under the TRA; and (iv) certain increases in tax basis
resulting from payments we make under the TRA. We retain the benefit of the
remaining 15% of these cash savings.
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 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. During the year ended December 31, 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
consolidated statements of operations and comprehensive income (loss).
Third Insurance Carrier Partner
OnJune 24, 2021 , we signed a producer agreement withAmerican National Lloyds Insurance Company and ANPAC Louisiana Insurance Company , collectively referred to as American National. American National is an additional provider of credit default insurance policies for LPP, from which we earn profit share revenue and claims administration fees. 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.
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--------------------------------------------------------------------------------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 goods and services specific to our industry
("verticals").
Competition
We face competition to acquire and maintain automotive lenders as customers, as
well as competition to facilitate the funding of 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. 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.
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. Please refer to "Critical Accounting Policies and Estimates" for more information on these assumptions.
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 two largest insurance partners accounted for 41% and 22% and 40% and 19% of our total revenue during the years endedDecember 31, 2021 and 2020, respectively. Termination or disruption of these relationships could materially and adversely impact our revenue.
Basis of Presentation
We conduct business through one operating segment and we operate in one
geographic region,
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 solutions and automated issuance of credit default insurance with
third-party insurance providers. These fees are based on a percentage of each
certified loan's
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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 with fees generally capped at $600
per loan. This cap may vary for certain large volume lenders. For monthly pay
loans, the fee paid by the lender is a flat 3% of the total amount of the loan
and is not capped.
Profit share. Profit share represents our participation in the underwriting
profit of third-party insurance partners who provide lenders with credit default
insurance on loans the lenders make using LPP. We receive a percentage of the
aggregate monthly insurance underwriting profit. Monthly insurance underwriting
profit is calculated as the monthly earned premium less expenses and losses
(including reserves for incurred but not reported losses), with losses accrued
and carried forward for future profit share calculations.
Claims administration service fees. Claims administration service fees are paid
to us by third-party insurers for credit default insurance claims adjudication
services performed by our subsidiary IAS 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.
Cost of Services and Operating Expenses
Cost of services. Cost of services primarily consists of fees paid to third party partners 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, data and software expenses and professional and consulting fees. In the near to intermediate term, we expect general and administrative expenses to remain relatively constant. 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 intermediate term as a percentage of program fee revenue. Research and development expenses. Research and development expenses primarily consist of employee compensation and benefits expenses for employees engaged in ongoing research and 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
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--------------------------------------------------------------------------------Results of Operations
The following table sets forth our results of operations for the years ended
Year Ended December 31,
2021 2020 % Change
($ in thousands)Revenue Profit share$ 133,215 $ 60,392 121% Program fees 75,630 43,995 72% Claims administration and other service fees 6,810 4,505 51% Total revenue 215,655 108,892 98% Cost of services 18,621 9,786 90% Gross profit 197,034 99,106 99% Operating expenses General and administrative 30,393 32,584 (7)% Selling and marketing 12,000 7,841 53% Research and development 4,352 1,964 122% Operating income 150,289 56,717 165% Interest expense (5,859) (11,601) 49% Interest income 213 202 5% 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 - (131,932) 100% Other expense (119) (4,377) 97% Income (loss) before income taxes 191,168 (90,991) (310)% Income tax expense 45,086 6,573 586% Net income (loss) and comprehensive income (loss)$ 146,082 $ (97,564) 250%
Key Performance Measures
The following table sets forth key performance measures for the years endedDecember 31, 2021 and 2020: Year Ended December 31, 2021 2020 % Change Certified loans 171,697 94,226 82 % Single-pay 152,629 76,031 101 % Monthly-pay 19,068 18,195 5 % Average program fees$ 440 $ 467 (6) % Single-pay$ 412 $ 430 (4) % Monthly-pay$ 670 $ 623 7 % 41
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Comparison of Year Ended
Revenue
Year Ended December 31,
2021 2020
($ in thousands)
Profit share
New certified loan originations $ 102,324 $ 62,032
Change in estimated future revenues 30,891 (1,640) Total profit share 133,215 60,392 Program fees 75,630 43,995 Claims administration and other service fees 6,810 4,505 Total revenue$ 215,655 $ 108,892 Total revenue increased by$106.8 million , or 98%, for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 , driven by an increase in anticipated profit share, program fees and claims administration 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 year endedDecember 31, 2021 , our anticipated profit share on historical business increased. Profit share revenue increased by$72.8 million , or 121%, for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 . During 2021, we recorded$102.3 million in anticipated profit share, associated with 171,697 new certified loans, for an average of$596 per new certified loan, as compared to$62.0 million in anticipated profit share, associated with 94,226 new certified loans, for an average of$658 per new certified loan during the year endedDecember 31, 2020 . In addition, during 2021, we recorded$30.9 million in estimated future profit share on business written in historic periods, as compared to a decrease of$1.6 million in estimated future profit share on historical vintages, during 2020. Program fees revenue increased by$31.6 million , or 72%, for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 . The increase was driven by an 82% increase in certified loan volumes as compared to the prior year. Revenue from claims administration and other service fees which primarily represents 3% of our insurance partners' annual earned premium, increased by$2.3 million , or 51%, for the year endedDecember 31, 2021 as compared to 2020 due to a 50% increase in total earned premiums and a 82% increase in new loan certifications.
Cost of Services, Gross Profit and Gross Margin
Year Ended December 31,
2021 2020
(in thousands)
Revenue $ 215,655 $ 108,892
Cost of services 18,621 9,786
Gross profit $ 197,034 $ 99,106
Gross margin 91 % 91 %
Gross profit increased by $97.9 million , or 99%, for the year ended December 31,
2021 as compared to the year ended December 31, 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.
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--------------------------------------------------------------------------------Operating Expenses, Operating Income and Operating Margin
Year Ended December 31,
2021 2020
(in thousands)
Revenue $ 215,655 $ 108,892
Gross profit 197,034 99,106
Operating expenses
General and administrative 30,393 32,584
Selling and marketing 12,000 7,841
Research and development 4,352 1,964
Operating income $ 150,289 $ 56,717
Operating margin 70 % 52 %
General and administrative expenses decreased by $2.2 million , or 7%, for the
year ended December 31, 2021 when compared to the year ended December 31, 2020 .
The year ended December 31, 2020 includes $9.1 million in transaction bonuses
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, which were incurred during 2020, 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 $9.1 million in general and administrative expenses in 2021, which is
primarily attributable to $3.1 million in employee compensation and benefits,
including share-based compensation, $3.0 million in professional and consulting
fees associated with continuing efforts to enhance internal controls, financial
reporting and compliance functions, $1.6 million in insurance expense and $0.7
million in software and data expenses.
Selling and marketing expenses increased by $4.2 million , or 53%, for the year
ended December 31, 2021 as compared to the year ended December 31, 2020 ,
primarily due to an increase in employee compensation and commissions costs,
driven by both increased headcounts in sales and account management as well as
increased sales.
Research and development expenses increased by $2.4 million , or 122%, for the
year ended December 31, 2021 as compared to the year ended December 31, 2020 due
to an increase in headcount costs.
Operating income for the year ended December 31, 2021 , increased by $93.6
million , or 165%, as compared to the year ended December 31, 2020 , driven by
increases in program fees and anticipated profit share from new originations and
estimated future underwriting profits on historic business.
Contingent Consideration
During the year endedDecember 31, 2020 , we recorded$131.9 million in non-cash charges for the change in the fair value of contingent consideration fromJune 10, 2020 through the settling of the contingent consideration.
Interest Expense
Interest expense decreased
Other Expense
Other expense decreased by$4.3 million or 97% for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 . During the year endedDecember 31, 2020 , we recognized a non-cash charge related to the change in the measurement of our TRA liability as a result of changes in our blended state tax rate. Income Taxes During the years endedDecember 31, 2021 and 2020, we recognized income tax expense of$45.1 million and$6.6 million , respectively. The effective tax rate for the year endedDecember 31, 2021 was 23.6%, as compared to an effective tax rate of (7.2)% for the year endedDecember 31, 2020 . The effective tax rate forDecember 31, 2020 was primarily impacted by the 43 --------------------------------------------------------------------------------
change in fair value of contingent consideration that resulted from the Business
Combination that was consummated on
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. Refer to "Critical Accounting Policies and Estimates" and "Risk Factors" for a full description of the related estimates, assumptions, and judgments. Based on our assessment of the underlying provisions and circumstances of our contractual obligations, other than the risks that we and other similarly situated companies face with respect to the condition of the capital markets (as described in "Risk Factors"), there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur that would have a material adverse effect on our consolidated results of operations, financial condition, or liquidity.
The following table provides a summary of cash flow data:
Year Ended December 31,
2021 2020
(in thousands)
Net cash provided by operating activities $ 95,156 $ 24,640
Net cash used in investing activities $ (1,987) $ (1,196)
Net cash (used in) provided by financing activities $ (77,808) Cash Flows from Operating Activities
Our cash flows provided by operating activities reflect net income adjusted for certain non-cash items and changes in operating assets and liabilities.
The following table summarizes the non-cash adjustments in the operating activities in the statement of cash flows:
Year Ended December 31,
2021 2020
(in thousands)
Net income (loss) $ 146,082 $ (97,564)
Deferred income taxes and other non-cash expenses 25,536 9,330
Non-cash (gains) losses and changes in fair value of contingent consideration
(46,644) 131,932
Change in contract assets (23,763) (26,391)
Change in other assets and liabilities (6,055) 7,333
Net cash provided by operating activities $ 95,156 $ 24,640
Net cash from operating activities increased by $70.5 million for the year ended
December 31, 2021 as compared to the year ended December 31, 2020 . The increase
was primarily attributable to increased cash inflows from program fees and
higher profit share payments from our insurance carriers, primarily as a result
of 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.
For the year ended December 31, 2020 , net cash provided by operating activities
was primarily attributable to income excluding the impact of fair value
adjustment of contingent consideration as well as increased payments collected
from customers on account receivables.
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--------------------------------------------------------------------------------Cash Flows from Investing Activities
For the years ended
Cash Flows from Financing Activities.
Our cash flows used in and provided by financing activities primarily consist of payments of debt and deferred financing costs, member distributions, early termination and settlement of the TRA, share repurchases, proceeds from debt, proceeds from stock warrant exercise transactions and equity recapitalization transactions. For the year endedDecember 31, 2021 , net cash used in financing activities was$77.8 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$169.2 million , primarily related to the payment in full of the Term Loan due 2027. In addition, we paid down our revolving facility by$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 year endedDecember 31, 2020 , net cash provided by financing activities was$70.8 million . The cash inflow consisted of$170.0 million in proceeds associated with the Credit Agreement entered intoMarch 1, 2020 less$10.1 million in deferred financing costs and$105.3 million in proceeds received in connection with stock warrant exercise transactions. The cash used primarily consisted of a$135.6 million distribution toOpen Lending, LLC's unitholders,$37.5 million related to our repurchase of 1,395,089 shares of our common stock held in treasury stock onDecember 14, 2020 ,$14.9 million in connection with our recapitalization, net of transaction costs, and$6.5 million of debt principal repayments.
Debt
As ofDecember 31, 2021 , we had outstanding amounts of$122.7 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, change in fair value of contingent consideration, change in measurement - tax receivable agreement and transaction bonuses. Adjusted EBITDA margin is defined as Adjusted EBITDA expressed as a percentage of total revenue. 45 --------------------------------------------------------------------------------
The following table presents a reconciliation of GAAP net income (loss) to Adjusted EBITDA for each of the periods indicated:
Year Ended December 31,
2021 2020
(in thousands)
Net income (loss) $ 146,082 $ (97,564)
Non-GAAP adjustments:
Interest expense 5,859 11,601
Income tax expense 45,086 6,573
Depreciation and amortization expense 792 752
Share-based compensation 3,815
2,828
Gain on extinguishment of tax receivable agreement (55,422)
-
Loss on extinguishment of debt 8,778
-
Change in fair value of contingent consideration -
131,932
Change in measurement - tax receivable agreement - 4,292 Transaction bonuses - 9,112 Total adjustments 8,908 167,090 Adjusted EBITDA 154,990 69,526 Total revenue$ 215,655 $ 108,892 Adjusted EBITDA margin 72 % 64 % For the year endedDecember 31, 2021 , Adjusted EBITDA increased by$85.5 million , or 123%, as compared to year endedDecember 31, 2020 . The increase in Adjusted EBITDA during the year endedDecember 31, 2021 reflects our revenue growth, partially offset by an increase in the cost of sales and operating expenses during the current year. Our current year margin was also affected by an increase in general and administrative expenses as we implement the internal control and compliance procedures required of public companies.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, income (loss) from operations and net income (loss), as well as on the value of certain assets and liabilities on our consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. The consolidated financial statements have been prepared in accordance with GAAP. To prepare these financial statements, we make estimates, assumption, and judgments that affect what we report as our assets and liabilities, what we disclose as contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the periods presented. In accordance with our policies, we regularly evaluate our estimates, assumptions, and judgments, including, but not limited to, those concerning revenue recognition, depreciation and amortization, contingencies, share-based compensation, and income taxes, and base our estimates, assumptions, and judgments on historical experience and on factors we believe reasonable under the circumstances. The results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. If our assumptions or conditions change, the actual results we report may differ from these estimates. We believe the following critical accounting policies affect the more significant estimates, assumptions, and judgments we use to prepare these consolidated financial statements. See Note 2 - Summary of Significant Accounting and Reporting Policies in the notes accompanying our consolidated financial statements for a summary of our significant accounting policies, and discussion of recent accounting pronouncements.
Profit Share Revenue Recognition
We recognize revenue in accordance withFinancial Accounting Standards Board , Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. Application of ASC 606 requires us to make judgments and estimates related to the classification, measurement and recognition of revenue. Our revenue primarily consists of profit share, program fees 46 --------------------------------------------------------------------------------
derived from contracts with lending institutions and claims administration service fees from contracts with insurance carriers, and is recognized when the contractual performance obligation is satisfied.
The primary judgment relating to the recognition of revenue is the estimation of our profit share with our insurance partners, which relies on market rate assumptions and our proprietary database, which has been accumulated over the last 20 years. To determine the profit share revenue, we use forecasts of loan-level earned premium and insurance claim payments. These forecasts are driven by the projection of loan defaults, prepayments and severity rates. These assumptions are based on our observations of the historical behavior for loans with similar risk characteristics. The assumptions also take consideration of forecast adjustments under various macroeconomic conditions and the current mix of the underlying portfolio of our insurance partners. To the extent these assumptions change, our profit share revenue will be adjusted. For profit share revenue recognition purposes, particularly to measure the profit share variable consideration, we update our forecast of loan default and prepayment assumptions on a quarterly basis. The loan default rate also incorporates multiple macro-economic scenarios with conservatism embedded in a stressed scenario to ensure a representation of an economic recession. We back-test the major estimate assumptions to ensure the accuracy of the revenue recognition model. We also benchmark back-testing results of our forecasted default rates against those reported by auto lenders. We update our profit-share forecasting model on an annual basis, resulting in a forecasted prepayment rate consistent with actual prepayment rates.
The impact on profit share revenue for the year ended
Assumptions Defaults Prepayments Severity Stress size 10 % (10) % 10 % (10) % 10 % (10) % Impact on revenue (5) % 6 % (3) % 3 % (5) % 5 % Income Taxes Prior to closing of the Business Combination,Open Lending, LLC , the sole owner ofLenders Protection, LLC andOpen Lending Services, Inc. , was treated as a partnership for income tax purposes. Therefore, no provision had historically been made for income tax purposes prior to the closing.
Subsequent to closing,
Our effective tax rate is based on income at statutory tax rates, adjusted for non-taxable and non-deductible items and tax credits. Management's best estimate of future events and their impact is included in our effective tax rate. Certain changes or future events, such as changes in tax legislation, could have an impact on our estimates and effective tax rate. Audit periods remain open for review until the statute of limitations has passed. The calculation of income taxes involves estimating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, we are required to develop estimates of the anticipated timing of the reversal of existing deferred tax liabilities, as well as estimates of future taxable income in some instances. Judgment is inherent in this process and differences between the estimated and actual amounts could result in a material impact on our consolidated financial statements. We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine whether the weight of available evidence indicates that the tax position has met the threshold for recognition. Therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period. Although we believe we have no material uncertain tax positions as ofDecember 31, 2021 , 2020 or 2019, no assurance can be given that the final outcome of these matters will align with the positions reflected within these financial statements. 47 --------------------------------------------------------------------------------
Share-Based Compensation Awards
We measure and recognize compensation expense for all share-based awards made to
employees and non-employee directors based on estimated fair values on the date
of grant. The compensation expense is recognized on a straight-line basis over
the requisite service or performance period. Performance-based restricted units
("PSUs") are evaluated on a quarterly basis for probability of meeting
performance metrics and any adjustments to share-based compensation expense are
then made in the quarter of evaluation. Forfeitures are recognized as occurred.
To determine the fair value of the share-based awards, we use the closing price
of our common stock publicly traded on Nasdaq on the date of grant for
time-based and performance-based restricted stock awards, and we utilize the
Black-Scholes option pricing model to value stock options, which involves inputs
for the share value of Open Lending , expected share volatility, expected term of
the awards, risk-free interest rate and expected dividend. The expected
volatility was based on the average of implied and observed historical
volatility of comparable companies as we do not have enough history as a public
company
This determination of fair value is affected by assumptions regarding a number
of highly complex and subjective variables. Changes in the subjective
assumptions can materially affect the estimate of their fair value. See Note
8-Share-Based Compensation of the accompanying consolidated financial
statements for more information.
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting and Reporting Policies to the accompanying consolidated financial statements for our discussion about new accounting pronouncements adopted and those pending.
Contractual Obligations
As ofDecember 31, 2021 , our estimated future obligations include both current and long term obligations. For our debt as noted in Note 5-Debt , we have a current obligation of$3.1 million and a long-term obligation of$144.6 million . Under our operating lease as noted in Note 11-Commitments and Contingencies , we have a current obligation of$0.9 million and a long-term obligation of$5.8 million .
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