OPEN LENDING CORPORATION The following discussion and analysis provides information which management believes is relevant to an assessment and understanding ofOpen Lending Corporation's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto for the year endedDecember 31, 2019 set forth in the Registration Statement on Form S-4 filed onMay 20, 2020 (Reg. No. 333-237264). 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. 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 consolidated subsidiaries. Business Overview We are a leading provider of lending enablement and risk analytics to credit unions, regional banks and OEM Captives. Our clients, collectively referred to herein as automotive lenders, make automotive consumer loans to underserved near-prime and non-prime borrowers by harnessingOpen Lending's risk-based pricing models, powered by our proprietary data and real-time underwriting of automotive loan default insurance coverage from insurers. SinceOpen Lending's inception in 2000, we have facilitated over$8.0 billion in automotive loans, accumulating over 20 years of proprietary data and developing over two million unique risk profiles. We currently cater to approximately 340 active automotive lenders. We specialize in risk-based pricing and modeling and provide automated decision-technology for automotive lenders throughoutthe United States . We believe thatOpen Lending addresses 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.Open Lending seeks to make this market more competitive, resulting in more attractive loan terms. Our flagship product, Lenders Protection Program, 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. LPP provides significant benefits to our growing ecosystem of automotive lenders, automobile dealers and insurers. A key element of LPP is the ability to facilitate risk-based interest rates that are appropriate for each loan and lender and electronically submitted to our automotive lenders within approximately five seconds after we receive a loan application. Our interest rate pricing is customized to each automotive lender, reflecting the cost of capital, loan servicing costs, loan acquisition costs, expected recovery rates and target return on assets of each automotive lender. UsingOpen Lending's 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 approximate$14.6 billion annual revenue opportunity.Open Lending is currently serving less than 1% of this market, providing a significant growth opportunity. Executive OverviewOpen Lending believes that it facilitates certified loans and significant total revenue and as a result operating margins and Adjusted EBITDA as a result of executing onOpen Lending's strategy of increasing penetration of the near-prime and non-prime automotive loan market, diversifying its customer base and refining its data analysis capabilities.Open Lending facilitated 20,696 and 67,404 certified loans during the three and nine months endedSeptember 30, 2020 , respectively, as compared to 19,087 and 55,875 certified loans during the three and nine months endedSeptember 30, 2019 , respectively. 25 -------------------------------------------------------------------------------- Table of Contents Total revenue was$29.8 million and$69.3 million for the three and nine months endedSeptember 30, 2020 , respectively, as compared to$22.1 million and$66.8 million during the three and nine months endedSeptember 30, 2019 , respectively. Operating income was$19.6 million and$32.4 million for the three and nine months endedSeptember 30, 2020 , respectively, as compared to$14.8 million and$45.3 million in the three and nine months endedSeptember 30, 2019 , respectively. Net loss was$(71.1) million and$(112.8) million for the three and nine months endedSeptember 30, 2020 , respectively, as compared to net income of$14.7 million and$45.1 million the three and nine months endedSeptember 30, 2019 , respectively. Adjusted EBITDA was$19.8 million and$44.7 million for the three and nine months endedSeptember 30, 2020 , respectively, as compared to$15.3 million and$46.9 million during the three and nine months endedSeptember 30, 2019 , respectively. Information regarding use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, is included in "Non-GAAP Financial Measures". Highlights The table below summarizes the total dollar value of insured loans facilitated and the number of contracts signed with automotive lenders for the three and nine months endedSeptember 30, 2020 and 2019. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (in thousands, except number of contracts) Value of Insured Loans facilitated(1)$ 463,377 $ 424,806 $ 1,500,422 $ 1,246,260 Number of contracts signed with automotive lenders 11 21 39 53 (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 they are used to measure and model the performance of companies such asOpen Lending , with recurring revenue streams. Automotive Loans We refer to "automotive 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 billed 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' Annual Earned Premium We define "insurers' annual earned premium" as the total insurance premium earned by insurers in a given period. 26 -------------------------------------------------------------------------------- Table of Contents Insurers' Average Earned Premium Per Loan We define "insurers' average earned premium per loan" as the total single premium equivalent insurance premium written in a period by insurers divided by the number of certified loans in that period.
Recent Developments
Appointment and Departure of Officers and Directors OnAugust 28, 2020 , the Board of Directors (the "Board") appointedRoss M. Jessup as President of the Company, effective immediately.Mr. Jessup will also continue to serve as the Company's Chief Operating Officer.John J. Flynn will remain as Chairman of the Board and Chief Executive Officer of the Company. Also, onAugust 28, 2020 , the Board appointedCharles D. Jehl as Executive Vice President, Chief Financial Officer and Treasurer of the Company, effective immediately. OnAugust 20, 2020 ,Ryan J. Collins resigned his positions as Chief Technology Officer and Chief Information Officer of the Company. OnAugust 28,2020 , the Board appointedSarah Lackey as Chief Technology Officer of the Company, effective immediately. OnAugust 28, 2020 , the Board electedEric A. Feldstein to serve as a Director of the Company effective immediately.Mr. Feldstein was appointed to serve on the Audit Committee and the Risk Committee. OnAugust 5, 2020 , the Board electedJessica Snyder andShubhi Rao to serve as Directors of the Company, effective immediately.Ms. Snyder was appointed to serve on theNominating and Corporate Governance Committee and as the Chair of the Audit Committee.Ms. Rao was appointed to serve on the Audit Committee. Business Combination Nebula, our predecessor, was originally incorporated inDelaware onOctober 2, 2017 as a special purpose acquisition company for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. Nebula consummated the Business Combination onJune 10, 2020 . Immediately upon the Closing,Open Lending, LLC became a direct wholly owned subsidiary of ParentCo, and ParentCo changed its name toOpen Lending Corporation . The Company is now listed on NASDAQ under the symbol "LPRO". The aggregate consideration for the Business Combination was$1.0 billion , consisting of$463.8 million in cash and 51,909,655 shares of our common stock valued at$10.00 per share totaling$519.1 million . The terms of the Business Combination Agreement contain customary representations and warranties, covenants, closing conditions, termination fee provisions and other terms relating to the Business Combination and the other transactions contemplated. New Credit Agreement OnMarch 11, 2020 , we entered into the Credit Agreement. The Term Loan in a principal amount of$170.0 million was funded onMarch 12, 2020 . The proceeds of the Term Loan were used to, among other things, finance a distribution toOpen Lending's equity investors prior to the consummation of the Business Combination. The Term Loan bears interest at LIBOR plus 6.50% (subject to a 1% LIBOR floor) or the base rate plus 5.50%. Our obligations under the Credit Agreement are guaranteed by all of its subsidiaries and secured by substantially all of the assets ofOpen Lending and its subsidiaries, in each case, subject to certain customary exceptions. The Term Loan has a maturity date ofMarch 11, 2027 . Subject to the terms and conditions set forth in the Credit Agreement, we may be required to make certain mandatory prepayments prior to maturity. Voluntary prepayments and certain mandatory prepayments may be subject to certain prepayment premiums in the first two years after the date thereof. The Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including, among other things, customary limitations on the incurrence of indebtedness and liens, certain intercompany transactions and other investments, dispositions of assets, issuance of certain units, repayment of other indebtedness, redemptions of units and payment of dividends. The Credit Agreement also contains a maximum total net leverage ratio financial covenant that is tested quarterly and calculated based on the ratio of our Adjusted EBITDA (as defined in the Credit Agreement) to funded indebtedness. The maximum total net leverage ratio begins at 4.75 to 1.0 and then gradually decreases from year-to-year down to 2.5 to 1.0 on or afterJune 30, 2026 . The Credit Agreement also 27 -------------------------------------------------------------------------------- Table of Contents contains customary events of default, at times subject to thresholds and grace periods (among others), including payment default, covenant default, cross default to other material indebtedness, and judgment defaults. Non-Liquidating Cash Distribution OnMarch 24, 2020 ,Open Lending, LLC's Board of Managers approved a non-liquidating cash distribution to its unitholders' in the amount of$135.0 million . See "-Liquidity and Capital Resources-Unitholders' Distribution." Coronavirus Outbreak The recent outbreak of the novel coronavirus COVID-19, which was declared a pandemic by theWorld Health Organization onMarch 11, 2020 and declared a National Emergency by the President ofthe United States onMarch 13, 2020 , has led to adverse impacts on theU.S. and global economies and created uncertainty regarding potential impacts on our operating results, financial condition and cash flows. The extent of the impact of COVID 19 on our operational and financial performance will depend on certain developments, including the duration and continued spread of the disease, the impact on our revenues which are generated with automobile lenders and insurance company partners and driven by consumer demand for automobiles and automotive loans, extended closures of businesses, continued high unemployment and the overall impact on our customer behavior, all of which are uncertain and cannot be predicted. We expect to have a short-term reduction in loan applications and certified loans and increased defaults, which will 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 the impact of the recent COVID-19 pandemic on monetary and fiscal policies.
Redemption of Public Warrants
As ofOctober 19, 2020 ,Open Lending redeemed all of its outstanding public warrants that had not been exercised as ofOctober 13, 2020 , which resulted in the exercise of 9,160,776 warrants for proceeds to us of$105.3 million and the redemption of 5,883 public warrants at a redemption price of$0.01 per warrant. Key Factors Affecting Operating Results Our future operating results and cash flows are dependent upon a number of opportunities, challenges and other factors, including the growth in the number of financial institutions and transaction volume, competition, profit share assumptions and industry trends and general economic conditions. Key factors affecting our operating results include the following: Growth in the Number of Financial Institutions The growth trend in active automotive lenders using LPP is a critical variable directly affecting revenue and financial results. It influences the number of loans funded on LPP and, therefore, the fees that we earn and the cost of the services that we provide. Growth in our active automotive lender relationships will depend on our ability to retain existing automotive lenders, add new automotive lenders, and expand to new industry verticals. Competition We face competition to acquire and maintain automotive lenders as well as competition to fund near-prime and non-prime auto loans. For LPP, which combines lending enablement, risk analytics, near-prime and non-prime auto loan performance data, real-time loan decisioning, risk-based pricing and auto loan default insurance, we do not believe there are any direct competitors. The emergence of direct competitors, providing risk, analytics and loss mitigation, which are core elements of our business, could materially impact our ability to acquire and maintain automotive lenders customers. 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 adversely impact our business. 28 -------------------------------------------------------------------------------- Table of Contents 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. 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 tend to fluctuate, which in turn impacts consumer spending levels and the willingness of consumers to take out loans to finance purchases. Specific economic factors such as interest rate levels, changes in monetary and related policies, market volatility, consumer confidence and, particularly, the unemployment rate, also influence consumer spending and borrowing patterns. At the end of first quarter 2020, changes in facts and circumstances and general market conditions from the COVID-19 pandemic resulted in lower expectations of future operating results, and in response, we lowered our initial anticipated revenue and profit share on historic business. During the most recent quarter, we have adopted a more favorable near-term outlook as a result of better than anticipated performance during the three months endedSeptember 30, 2020 . Concentration We have not historically had significant concentration risk in our client base, given that our lending clients are distributed across the country with our top ten clients accounting for approximately 31% of total program fees over the last three years. Going forward, however, we expect significant growth in loan volume from OEM Captives relative to that of other automotive lenders. Therefore, we anticipate concentrated risk for some period of time. Additionally, our largest insurance partner accounted for the vast majority of our profit share and claims administration service fee revenue in the three and nine months endedSeptember 30, 2020 . Termination or disruption of this relationship could materially 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 andRecent Development , of the accompanying consolidated financial statements for more information. Components of Results of Operations Total Revenues Revenue. 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 ofOpen Lending's LPP and analytics. These fees are based on a percentage of each certified loan's original principal balance and are recognized as revenue by us 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 monthly equal 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 partnerswho provide lenders with credit default insurance on loans the lenders make using LPP. We receive a percentage of the aggregate monthly insurance underwriting profit. Monthly insurance underwriting profit is calculated as the monthly earned premium less expenses and losses (including reserves for incurred but not reported losses), with losses accrued and carried forward for future profit share calculations. Claims administration service fees. Claims administration service fees are paid to us by third- party insurers for credit default insurance claims adjudication services performed by our subsidiaryInsurance Administrative Services, LLC on its insured servicing portfolio. The administration fee is equal to 3% of the monthly insurance premium for as long as the loan remains outstanding. 29 -------------------------------------------------------------------------------- Table of Contents Costs of Services and Operating Expenses Cost of services. Cost of services primarily consists of fees paid to third party resellers for lead-generation efforts, costs of third-party data and information used in underwriting, 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 costs of the 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 and compliance procedures required 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 continue to grow. General and administrative expenses for the nine months endedSeptember 30, 2020 include$9.1 million and$2.2 million , respectively, related to transaction bonuses and non-cash share-based compensation expense as a result of the Business Combination. 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 its selling and marketing expenses to increase in absolute dollars as the total number of certified loans continue to grow in the long term; however, we expect selling and marketing expenses to remain constant in the near to immediate term as a percentage of its 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) Change in fair value of contingent consideration: Change in fair value of contingent consideration reflects the non-cash impact of changes in the fair value of Company common stock expected to be issued as contingent consideration in connection with our Business Combination onJune 10, 2020 . The fair value of contingent consideration is based on a Monte Carlo simulation of the Company's common stock as compared to certain market share price milestones, and is primarily based on our peer group due to our limited history, as well as our future implied volatility, a significant unobservable input. The change in the estimated fair value of contingent consideration 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. Interest expense. Interest expense includes interest payments and the amortization of debt issuance costs in connection with the Credit Agreement. Results of Operations The following table sets forth our results of operations for the three and nine months endedSeptember 30, 2020 and 2019: 30
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Table of Contents
Three Months Ended September
30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
Revenue
Program fees $ 10,087 $ 8,950 $ 31,592 $ 26,407
Profit share 18,544 12,310 34,482 38,089
Claims administration service fees 1,131 844 3,185 2,275
Total revenue 29,762 22,104 69,259 66,771
Cost of services 2,496 1,923 6,818 5,517
Gross profit 27,266 20,181 62,441 61,254
Operating expenses
General and administrative 5,015 3,263 23,233 9,670
Selling and marketing 2,118 1,810 5,491 5,455
Research and development 579 291 1,286 869
Operating income 19,554 14,817 32,431 45,260
Change in fair value of contingent
consideration (83,130) - (131,932) -
Interest expense (3,572) (70) (7,980) (238)
Interest income 36 7 97 15
Other income - 3 3 9
Income/(loss) before income taxes (67,112) 14,757 (107,381) 45,046
Provision (benefit) for income taxes 4,021 41 5,385 (58)
Net income (loss) and comprehensive income
(loss) $ (71,133) $ 14,716 $ (112,766) $ 45,104
Key Performance Measures
The following table sets forth key performance measures for the three and nine
months ended September 30, 2020 , and 2019:
Three Months Ended September 30, Nine Months Ended September 30,
% %
2020 2019 Change 2020 2019 Change
(earned premium in thousands)
Certified loans 20,696 19,087 8.4 % 67,404 55,875 20.6 %
Single-pay 15,500 14,625 6.0 % 53,416 42,593 25.4 %
Monthly-pay 5,196 4,462 16.5 % 13,988 13,282 5.3 %
Average program fees
Single-pay $ 442 $ 424 4.2 % $ 430 $ 429 0.2 %
Monthly-pay $ 623 $ 616 1.1 % $ 616 $ 612 0.7 %
Insurance partners' total earned
premium $ 34,165 $ 27,374 24.8 % $ 99,430 $ 76,021 30.8 %
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Table of Contents Comparison of Three and nine months EndedSeptember 30, 2020 and 2019 Revenue Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (in thousands) Program fees$ 10,087 $ 8,950 $ 31,592 $ 26,407 Profit share New certified loan originations 14,706 11,482 43,621 32,709 Change in estimated future revenues 3,838 828 (9,139) 5,380 Total profit share 18,544 12,310 34,482 38,089 Claims administration service fees 1,131 844 3,185 2,275 Total revenue$ 29,762 $ 22,104 $ 69,259 $ 66,771 Total revenue increased by$7.7 million and$2.5 million , or 35% and 4%, for the three and nine months endedSeptember 30, 2020 , respectively, as compared to the same periods in 2019, driven by an increase in anticipated profit share, programs fees and claims administrative revenues on new originations. As the expected loan default rate, default severity and prepayment rate improved during the three months endedSeptember 30, 2020 , our estimated profit share on historic business increased by$3.8 million . Despite an increase in new business, as well as average earned premiums, our results for the nine months endedSeptember 30, 2020 were negatively impacted by a$9.1 million reduction in estimated future underwriting profit share on historical vintages. Program fee revenue increased by$1.1 million , or 13%, and$5.2 million , or 20%, for the three and nine months endedSeptember 30, 2020 , respectively, as compared to the same periods in 2019. Despite the impact of the COVID-19 pandemic, certified loan volume was up by 8.4% and 20% for the three and nine months endedSeptember 30, 2020 , respectively, as compared to the prior year. Profit share revenue increased by$6.2 million , or 51%, and decreased$3.6 million , or 9%, respectively, during the three and nine months endedSeptember 30, 2020 , as compared to the same periods in 2019. This increase in profit share revenue was driven primarily by$14.7 million and$43.6 million in anticipated profit share from new originations during the three months and nine months endedSeptember 30, 2020 , respectively, as compared to 2019. Despite this increase in new business, our year to date results were negatively impacted by a$9.1 million reduction in estimated future underwriting profit share for claims and premiums associated with business written in historic periods, primarily as a result of the economic slowdown attributable to the COVID-19. This reduction in future profit share is a change in estimated variable consideration in accordance with ASC 606. Revenue from claims administration service fees, which represents 3% of our insurance partners' annual earned premium, increased by$0.3 million , or 34%, and$0.9 , or 40%, respectively, for the three and nine months endedSeptember 30, 2020 as compared to the previous year, driven by a 31% increase in total earned premium and a 21% increase in new loan certifications on a year to date basis, as compared to the prior year. Cost of Services, Gross Profit and Gross Margin: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (in thousands) Revenue$ 29,762 $ 22,104 $ 69,259 $ 66,771 Cost of services 2,496 1,923 6,818 5,517 Gross profit$ 27,266 $ 20,181 $ 62,441 $ 61,254 Gross Margin 92 % 91 % 90 % 92 % Costs of services increased by$0.6 million , or 30%, and$1.3 million , or 24%,, for the three and nine months endedSeptember 30, 2020 , as compared to the same period in 2019, driven by an increase in fees paid to resellers. 32 -------------------------------------------------------------------------------- Table of Contents Gross profit increased by$7.1 million , or 35% , and$1.2 million , or 2%, respectively, during the three and nine months endedSeptember 30, 2020 , as compared to the same periods in 2019, driven by an increase in anticipated profit share, programs fees and claims administrative revenues on new originations. As the estimated future underwriting profit share on historic placements improved during the three months endedSeptember 30, 2020 , our gross margins increased to 92% as compared to 91% during the prior year period. Operating Expenses, Operating Income and Operating Margin: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (in thousands) Revenue$ 29,762 $ 22,104 $ 69,259 $ 66,771 Gross profit 27,266 20,181 62,441 61,254 Operating expenses: General and administrative 5,015 3,263 23,233 9,670 Selling and marketing 2,118 1,810 5,491 5,455 Research and development 579 291 1,286 869 Operating income$ 19,554 $ 14,817 $ 32,431 $ 45,260 Operating Margin 66 % 67 % 47 % 68 % General and administrative expenses increased by$1.8 million , or 54%, and$13.6 million , or 140%, respectively, during the three and nine months endedSeptember 30, 2020 , as compared to the same periods last year. In the first nine months of 2020, General and administrative expenses includes a$9.1 million in transaction bonuses 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, which were incurred during the second quarter, as a result of the Business Combination. General and administrative expenses also reflects an increase in employee compensation and benefits, as we build out our organization, in addition to professional and consulting fees, as we continue to implement the internal control and compliance procedures required of public companies. Selling and marketing expenses increased by$0.3 million , or 17%, during the three months endedSeptember 30, 2020 as compared to the prior year period, primarily due to an increase in employee compensation and benefits expense as a result of an increase in commissions, both by sales staff and account managers, driven by increased sales. Research and development expenses increased by$0.3 million , or 99%, and$0.4 , or 48%, during the three and nine months endedSeptember 30, 2020 , respectively, as compared to the same periods in prior year, due to an increase in headcount costs driven by an increase in engineering personnel. Operating income for the three months endedSeptember 30, 2020 , increased by$4.7 million , or 32%, as compared to the prior year period, driven by an increase in on gross profit from new originations. During the nine months endedSeptember 30, 2020 , operating income declined by$12.8 million , or 28%, as compared to the prior year, due to a reduction in estimated future underwriting profits, as a result of the economic impact of the COVID-19 pandemic, and an increase in operating expenses, which include a$9.1 million in transaction bonuses to key employees and directors as a result of the Business Combination and$2.2 million of non-cash charges incurred in connection with the accelerated vesting of employee share-based awards. During the three and nine months endedSeptember 30, 2020 , we recorded$83.1 million and$131.9 in non-cash charges, respectively, for the change in the estimated fair value of contingent consideration fromJune 10, 2020 through the vesting of the contingent consideration. Interest expense during the three and nine months endedSeptember 30, 2020 , increased by$3.5 million and$7.7 million , respectively, as compared the three and nine months endedSeptember 30, 2019 , as a result of entering into a new term loan agreement in first quarter 2020. Income Taxes Our effective tax rate for the three months endedSeptember 30, 2020 was (6.0)%, as compared to an effective tax rate of 0.3% for the three months endedSeptember 30, 2019 . Our effective tax rate for the nine months endedSeptember 30, 2020 was (5.0)% as compared to an effective tax rate of (0.1)% for the nine months endedSeptember 30, 2019 . The change in the effective tax rate for both comparative periods is due primarily to the taxable entity structure adopted in 33
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Table of Contents conjunction with the Business Combination that was consummated onJune 10, 2020 . Also, in relation to the Business Combination, the Company incurred significant non-deductible expenses including, but not limited to, the change in estimated fair value of contingent consideration. Net Income (Loss) For the reasons discussed above, we recorded a net loss of$(71.1) million and$(112.8) million , respectively, during the three and nine months endedSeptember 30, 2020 , as compared to a net income of$14.7 million and$45.1 million , respectively, during the three and nine months endedSeptember 30, 2019 , respectively. 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 are derived from our profit share arrangements with our insurance partners, which are subject to judgements and assumptions and are, therefore, subject to variability.
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