OPEN LENDING CORPORATION The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements can be identified by the use of predictive, future-tense or forward-looking terminology, such as "believes," "anticipates," "expects," "estimates," "plans," "may," "intends," "will," or similar terms. Investors are cautioned that any forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. The following discussion should be read together with the consolidated financial statements and notes to those financial statements included elsewhere in this report. 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 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$9.2 billion in automotive loans, accumulating over 20 years of proprietary data and developing over two million unique risk profiles. We currently cater to approximately 355 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 approximately 20 years. We believe LPP provides significant benefits to our growing ecosystem of automotive lenders, automobile dealers and insurers. A key element of LPP is the ability to facilitate risk-based interest rates that are appropriate for each loan and lender and electronically submitted to our automotive lenders within approximately five seconds after we receive a loan application. Our interest rate pricing is customized to each automotive lender, reflecting the cost of capital, loan servicing costs, loan acquisition costs, expected recovery rates and target return on assets of each automotive lender. Using our risk models, we project monthly loan performance results, including expected losses and prepayments for automotive lenders that use LPP. The product of this process is a risk-based interest rate, inclusive of elements to recover all projected costs, program fees and insurance premiums, given the risk of the loan, to return a targeted return on asset goal. We believe that our market opportunity is significant. The near-prime and non-prime automotive loan market is$250 billion annually, resulting in an approximately$14.4 billion annual revenue opportunity. We are currently serving less than 1% of this market, providing a significant growth opportunity. Executive Overview We facilitate certified loans and have achieved financial success by increasing our penetration of the near-prime and non-prime automotive loan market while diversifying our customer base and refining our data analysis capabilities. During the year endedDecember 31, 2020 , we facilitated 94,226 certified loans, representing an increase of 20.1% from 78,434 in the year endedDecember 31, 2019 , which in turn increased by 38.3% from 56,705 in the year endedDecember 31, 2018 . Total revenue was$108.9 million for the year endedDecember 31, 2020 , representing an increase of 17.3% from$92.8 million in the year endedDecember 31, 2019 , which in turn increased by 77.9% from$52.2 million in the year endedDecember 31, 2018 . Revenue increased by$19.2 million as a result of the adoption of ASC 606 for the year endedDecember 31, 2019 . Prior period annual results have not been restated so this lack of comparability should be considered in reviewing this discussion and analysis. Operating income was$56.7 million for the year endedDecember 31, 2020 , representing a decline of 9.4% from$62.6 million in the year endedDecember 31, 2019 , which in turn increased by 119.9% from$28.5 million in the year endedDecember 31, 2018 . 40 -------------------------------------------------------------------------------- Net loss was$(97.6) million for the year endedDecember 31, 2020 , representing a decrease of (256.0)% from net income of$62.5 million in the year endedDecember 31, 2019 , which in turn increased by 121.2% from$28.3 million in the year endedDecember 31, 2018 . Adjusted EBITDA was$69.5 million for the year endedDecember 31, 2020 , representing an increase of 7.1% from$64.9 million in the year endedDecember 31, 2019 , which in turn increased by 107.4% from$31.3 million in the year endedDecember 31, 2018 . Information regarding use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, is included in "Non-GAAP Financial Measures". Highlights The table below summarizes the total dollar-value of insured loans we facilitated, the number of new contracts we signed with automotive lenders and the number of OEM Captive relationships we entered into for the years endedDecember 31, 2020 , 2019 and 2018: Years ended December 31, 2020 2019 2018 (in thousands,
except number of contracts or OEM
Captives)
Value of insured loans facilitated (1)$ 2,126,327 $ 1,755,175 $ 1,246,551 Number of contracts signed with automotive lenders 55 77 58 Number of OEM Captives contracted - 2 - (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 months in 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. 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 Underwritten Public Offering and Share Repurchase OnDecember 14, 2020 , we completed an underwritten public offering of 9,500,000 shares of our common stock at a public offering price of$28.00 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 41 -------------------------------------------------------------------------------- purchase up to 1,425,000 additional shares of common stock. We did not sell any shares and did not receive any of the proceeds of the offering. Pursuant to a Stock Repurchase Agreement, dated as ofDecember 7, 2020 , betweenOpen Lending and the selling stockholders, we repurchased from the selling stockholders an aggregate number of 1,395,089 shares of our common stock totaling$37.5 million at the same per share price paid by the underwriters to the selling stockholders in the offering. 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. 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 to our 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 our 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 year 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 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 have seen a reduction in loan applications and certified loans throughout most of 2020. As consumers and lenders have adjusted to the pandemic, application and certification levels have increased, but are not back to pre-pandemic levels when comparing existing lending institutions to the same lending institution's prior year performance. Lenders' forbearance programs, government stimulus packages, extended unemployment benefits and other government assistance via the Cares Act passed onMarch 27, 2020 have resulted in a reduction in expected defaults since the onset of the pandemic. As these programs' accessibility diminishes, 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 the impact of the recent COVID-19 pandemic on monetary and fiscal policies. 42 -------------------------------------------------------------------------------- Redemption of Public Warrants As ofOctober 19, 2020 , we redeemed all of our 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 enroll 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 sign 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 materially 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. 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, consumer confidence, the impact of the pandemic crisis 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. In the following quarters of 2020, we have adopted a more favorable near-term outlook as a result of better than anticipated performance through the year-end. 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 30% 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 during the years endedDecember 31, 2020 , 2019 and 2018. Termination or disruption of this relationship could materially adversely impact our revenue. Basis of Presentation 43 -------------------------------------------------------------------------------- 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" of the accompanying consolidated financial statements for more information. Components of Results of Operations Total Revenues Revenue. Our revenue is generated through three streams: program fees paid to us by lenders, profit share and 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 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 with fees 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 3.0% of the total amount of the loan and is not capped. Profit share. Profit share represents our participation in the underwriting profit of our 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 3.0% of the monthly insurance 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 resellers for lead-generation efforts, compensation and benefits expense 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, but 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, share-based compensation, travel, meals and entertainment expenses, IT expenses and professional and consulting fees. In the near term we expect our general and administrative expenses to increase in absolute dollar terms and as a percentage of revenue as we implement the internal control and compliance procedures required of public companies. In the intermediate term, we expect our 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 our selling and marketing expenses to increase in absolute dollars as the total number of certified loans continues to grow, but remain constant in the near to immediate term as a percentage of our 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 its 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 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 fair value of contingent consideration during the twelve months endedDecember 31, 2020 was driven by the change in 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 the debt issuance costs in connection with the notes payable. 44 -------------------------------------------------------------------------------- Other Income (Expense). For the year endingDecember 31, 2020 , other income (expense) includes a$(4.3) million non-cash charge related to a change in the measurement of our Tax Receivable Agreement liability as a result of changes in our blended state tax rate. Please see Note 18 "Income Taxes". During the twelve months endedDecember 31, 2019 and 2018, other income (expense) primarily consists of sponsorship and registration fees for our annualExecutive Leadership Conference . Results of Operations The following table sets forth selected consolidated statements of income data for the years endedDecember 31, 2020 , 2019 and 2018: Years ended December 31, 2020 % Change 2019 % Change 2018 (in thousands) Revenue Program fees $ 43,995 20.0%$ 36,667 46.4%$ 25,044 Profit share 60,392 13.9% 53,038 113.6% 24,835 Claims administration service fees 4,505 43.4% 3,142 35.8% 2,313 Total revenue 108,892 17.3% 92,847 77.9% 52,192 Cost of services 9,786 25.4% 7,806 69.6% 4,603 Gross profit 99,106 16.5% 85,041 78.7% 47,589 Operating expenses General and administrative 32,584 136.6% 13,774 13.6% 12,125 Selling and marketing 7,841 4.8% 7,482 20.9% 6,188 Research and development 1,964 67.9% 1,170 45.9% 802 Operating income 56,717 (9.4)% 62,615 119.9% 28,474 Change in fair value of contingent consideration (131,932) -% - -% - Interest expense (11,601) 3,502.8% (322) (5.6)% (341) Interest income 202 741.7% 24 84.6% 13 Other income (expense) (4,377) (2,321.8)% 197 15.9% 170 Income/ (loss) before income taxes (90,991) (245.6)% 62,514 120.8%
28,316
Provision (benefit) for income taxes 6,573 (22,010.0)% (30) (181.1)%
37
Net income (loss) and comprehensive income (loss) $ (97,564) (256.0)%$ 62,544 121.2%$ 28,279
Key Performance Measures
The following table set forth key performance measures for the years ended
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Years ended December 31,
2020 % Change 2019 % Change 2018
(earned premium in thousands)
Certified loans 94,226 20.1 % 78,434 38.3 % 56,705
Single-pay 76,031 25.1 % 60,794 31.5 % 46,223
Monthly-pay 18,195 3.1 % 17,640 68.3 % 10,482
Average program fees $ 467 (0.2) % $ 468 5.9 % $ 442
Single-pay 430 0.8 % 426 5.2 % 405
Monthly-pay 623 1.8 % 612 0.5 % 609
Insurance partners' annual earned
premium $ 151,006 44.2 % $ 104,720 35.8 % $ 77,101
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Revenue
For Years Ended December 31,
2020 2019 $ Variance % Change
(in thousands)
Program fees $ 43,995 $ 36,667 $ 7,328 20.0 %
Profit share
New certified loan originations 62,032 48,181 13,851 28.7 %
Change in estimated future revenues (1,640) 4,857 (6,497) (133.8) %
Total profit share 60,392 53,038 7,354 13.9 %
Claims administration service fees 4,505 3,142 1,363 43.4 %
Total revenue $ 108,892 $ 92,847 $ 16,045 17.3 %
Total revenue increased by $16.0 million , or 17.3%, for the year ended
December 31, 2020 as compared to the year ended December 31, 2019 . The increase
in total revenue was driven by an increase in anticipated profit share, program
fees and claims administration service fee revenues on new originations.
Program fee revenue increased by $7.3 million , or 20.0%, for the year ended
December 31, 2020 when compared to the year ended December 31, 2019 . Despite the
impact of the COVID-19 pandemic, certified loan volume was up by 20.1% for the
year ended December 31, 2020 , as compared to the prior year.
Profit share revenue increased by $7.4 million , or 13.9%, for the year ended
December 31, 2020 when compared to the year ended December 31, 2019 . This
increase in profit share revenue was driven primarily by a $13.9 million
increase in anticipated profit share from new originations during the current
year as compared to 2019. Despite this increase in new business, our year to
date results were negatively impacted by a $(1.6) 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 pandemic. 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 3.0% of our
insurance partners' annual earned premium, increased by $1.4 million , or 43.4%,
for the year ended December 31, 2020 as compared to 2019 due to a 44.2% increase
in total earned premium.
Cost of Services, Gross Profit and Gross Margin
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For Years Ended December 31,
2020 2019 $ Variance % Change
(in thousands)
Revenue $ 108,892 $ 92,847 16,045 17.3 %
Cost of services 9,786 7,806 1,980 25.4 %
Gross profit $ 99,106 $ 85,041 $ 14,065 16.5 %
Gross margin 91.0 % 91.6 %
Costs of services increased by $2.0 million , or 25.4%, for the year ended
December 31, 2020 compared to the year ended December 31, 2019 primarily driven
by an increase in fees paid to resellers, an increase in employee compensation
and benefits expense and an increase in costs for actuarial services.
Gross profit increased by $14.1 million , or 16.5%, for the year ended
December 31, 2020 as compared to the year ended December 31, 2019 , driven by an
increase in anticipated profit share, programs fees and claims administration
revenues on new originations.
Operating Expenses, Operating Income and Operating Margin
For Years Ended December 31,
2020 2019 $ Variance % Change
(in thousands)
Revenue $ 108,892 $ 92,847 $ 16,045 17.3 %
Gross profit 99,106 85,041 14,065 16.5 %
Operating expenses:
General and administrative 32,584 13,774 18,810 136.6 %
Selling and marketing 7,841 7,482 359 4.8 %
Research and development 1,964 1,170 794 67.9 %
Operating income $ 56,717 $ 62,615 $ (5,898) (9.4) %
Operating margin 52.1 % 67.4 %
General and administrative expenses increased by $18.8 million , or 136.6%, for
the year ended December 31, 2020 when compared to the year ended December 31,
2019 . 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 the second quarter 2020, as a
result of the Business Combination. In connection with the underwritten public
offering by the selling stockholders during the fourth quarter, we incurred
approximately $0.7 million in legal and professional fees. General and
administrative expenses also reflect an increase of $2.1 million in employee
compensation and benefits and $2.4 million in directors and officers liability
insurance, in addition to $2.7 million in professional service fees associated
with public filings and our implementation of enhanced internal control and
compliance procedures required of public companies; offset by a decline of $1.2
million in travel expenses due to the COVID-19 pandemic.
Selling and marketing expenses increased by $0.4 million , or 4.8%, for the year
ended December 31, 2020 as compared to the year ended December 31, 2019
primarily due to an increase of $0.6 million in employee compensation and
benefits expense to sales and account management employees, driven by increased
sales; partially offset by a $0.2 million decrease in marketing and promotion
expenses.
Research and development expenses increased by $0.8 million , or 67.9%, for the
year ended December 31, 2020 as compared to the year ended December 31, 2019 due
to an increase in headcount costs driven by an increase in engineering personnel
to support LPP.
Operating income for the year ended December 31, 2020 , declined by $5.9 million ,
or 9.4%, as compared to the year ended December 31, 2019 , which was primarily
attributable to the increase in operating expenses associated with the Business
Combination including, the $9.1 million transaction bonuses, $4.0 million in
employee compensation and benefits related to increased headcount as we expand
our business, $2.4 million for directors and officers liability insurance, $2.2
million due to the accelerated recognition of share-based compensation, and $3.4
million in professional service fees. The increase in operating expenses was
partially offset by the increase of $14.1 million in gross profit as discussed
above, and a $1.2 million decrease in travel expenses.
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Contingent Consideration
During the year ended December 31, 2020 , we recorded $131.9 million in non-cash
charges for the change in the fair value of contingent consideration from June
10, 2020 through the vesting of the contingent consideration.
Interest Expense
Interest expense during the year ended December 31, 2020 , increased by $11.3
million as compared to the prior year, as a result of entering into our term
loan agreement in first quarter 2020.
Other Income (Expense)
For the year ending December 31, 2020 , other income (expense) includes a $(4.3)
million non-cash charge related to a change in the measurement of our Tax
Receivable Agreement liability as a result of changes in our blended state tax
rate. Please see Note 18 "Income Taxes". During the twelve months ended December
31, 2019 and 2018, other income (expense) primarily consists of sponsorship and
registration fees for our annual Executive Leadership Conference .
Income Taxes
Our effective tax rate for the year ended December 31, 2020 was (7.2)%, as
compared to an effective tax rate of (0.1)% for the year ended December 31,
2019 . The change in the effective tax rate for both comparative periods is due
primarily to the taxable entity structure adopted in connection with the
Business Combination that was consummated on June 10, 2020 . Also, in relation to
the Business Combination, we incurred significant non-deductible expenses
including, but not limited to, the change in fair value of contingent
consideration.
Net Income (Loss)
For the reasons discussed above, we recorded a net loss of $(97.6) million
during the year ended December 31, 2020 , as compared to a net income of $62.5
million during the year ended December 31, 2019 .
Adjusted EBITDA
For the year ended December 31, 2020 , Adjusted EBITDA increased by $4.6 million ,
or 7.1%, as compared to the year ended December 31, 2019 . Adjusted EBITDA margin
for the year ended December 31, 2020 , decreased to 63.8% as compared to 69.9%
for the year ended December 31, 2019 . The decline in Adjusted EBITDA during the
year ended December 31, 2020 as compared to the previous year reflects a $(1.6)
million reduction in estimated future underwriting profits primarily as a result
of the economic impact of the COVID-19 pandemic. Our 2020 results were also
impacted by an increase in general and administrative expenses as we implement
the internal control and compliance procedures required of public companies.
Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
Revenue
Results presented for the year ended December 31, 2019 reflect the impact of our
adoption of Accounting Standards Update 2014-09, "Revenue from Contracts with
Customers" (Topic 606) ("ASC 606") and related cost capitalization guidance,
which was adopted by us on January 1, 2019 , using the modified retrospective
transition method. The adoption of ASC 606 resulted in our recognizing as
revenue the share of our insurance partners' aggregate underwriting profit to
which we expect to be entitled in the future. We therefore makes assumptions
about future premiums and claims to be experienced on our insurance partner's
portfolios. Were these assumptions to differ from actual premium and claims, we
would revise our expectations relating to business underwritten by our insurance
partners in historic periods. These revisions, if positive, are also booked as
revenue or, if negative, are netted against revenue. In application of the
modified retrospective transition method, our prior period results have not been
restated to reflect the impact of ASC 606. This lack of comparability should be
considered in reviewing this discussion and analysis. Refer to Notes to
Consolidated Financial Statements for further information on the impact of the
adoption of ASC 606.
The following table provides the components of our total revenue for the years
ended December 31, 2019 and 2018:
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For Years Ended December 31,
2019 2018 $ Variance % Change
(in thousands)
Program fees $ 36,667 $ 25,044 $ 11,623 46.4 %
Profit share 53,038 24,835 28,203 113.6 %
Claims administration service fees 3,142 2,313 829 35.8 %
Total revenue $ 92,847 $ 52,192 $ 40,655 77.9 %
Total revenue increased by $40.7 million or 77.9% for the year ended
December 31, 2019 as compared to the year ended December 31, 2018 due to a 38.3%
increase in certified loans, along with an overall 1.8% increase in average loan
amount and a $19.2 million increase in profit share revenue that resulted from
the adoption of ASC 606. As our prior period results have not been restated, the
comparability to the year ended December 31, 2018 is impacted.
Program fees revenue increased by $11.6 million , or 46.4%, for the year ended
December 31, 2019 when compared to the year ended December 31, 2018 , primarily
driven by a 38.3% increase in certified loans. Program fee revenue for the year
ended December 31, 2019 also benefited from higher average program fees earned
on single-pay certified loans, which increased by 5.2% as compared to the year
ended December 31, 2018 , and a 68.3% increase in monthly-pay certified loans,
which have higher average program fees per loan. As a result, program fee
revenue from monthly-pay certified loans increased to represent 29.4% of total
program fee revenue in the year ended December 31, 2019 , compared to 25.5% for
the year ended December 31, 2018 . In future periods we expect a significant
increase in certified loans from OEM Captives, which would increase the
proportion of single-pay certified loans.
Profit share revenue increased by $28.2 million , or 113.6%, for the year ended
December 31, 2019 when compared to the year ended December 31, 2018 due to 38.3%
growth in certified loans, which translated into 35.8% growth in our insurance
partners' annual earned premium, and $19.2 million , or 77.4%, due to the
adoption of ASC 606. Of the $19.2 million increase resulting from the adoption
of ASC 606, $14.4 million relates to the recognition of the share of our
insurance partners' aggregate underwriting profit to which we expect to be
entitled. The remaining $4.9 million relates to the revision of our expectations
for claims and premiums related to business written in historic periods.
Revenue from claims administration service fees, which represents 3.0% of our
insurance partners' annual earned premium, increased by $0.8 million , or 35.8%
for the year ended December 31, 2019 as compared to the year ended December 31,
2018 due to a 35.8% increase in total earned premium and a 663.5% increase in
earned premium from CNA pursuant to the CNA Agreement.
Cost of Services, Gross Profit and Gross Margin
The following table shows our revenue, cost of services, gross profit and gross
margin for the years ended December 31, 2019 and 2018:
For Years Ended December 31,
2019 2018 $ Variance % Change
(in thousands)
Revenue $ 92,847 $ 52,192 $ 40,655 77.9 %
Cost of services 7,806 4,603 3,203 69.6 %
Gross profit $ 85,041 $ 47,589 $ 37,452 78.7 %
Gross margin 91.6 % 91.2 %
Costs of services increased by $3.2 million , or 69.6%, for the year ended
December 31, 2019 compared to the year ended December 31, 2018 primarily driven
by an increase in fees paid to resellers, first-time costs associated with
credit risk evaluation, an increase in employee compensation and benefits
expense and an increase in costs for actuarial services.
Gross profit increased by $37.5 million , or 78.7% for the year ended
December 31, 2019 as compared to the year ended December 31, 2018 , due to
organic revenue growth and the impact of adopting ASC 606; offset by the 69.6%
increase in cost of services. For the same reasons, gross margin increased to
91.6% for the year ended December 31, 2019 as compared to 91.2% for the year
ended December 31, 2018 .
Operating Expenses, Operating Income and Operating Margin
49
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The following table shows revenue, the components of our operating expenses,
operating income and operating margin for the years ended December 31, 2019 and
2018:
For Years Ended December 31,
2019 2018 $ Variance % Change
(in thousands)
Revenue $ 92,847 $ 52,192 $ 40,655 77.9 %
Gross profit 85,041 47,589 37,452 78.7 %
Operating expenses:
General and administrative 13,774 12,125 1,649 13.6 %
Selling and marketing 7,482 6,188 1,294 20.9 %
Research and development 1,170 802 368 45.9 %
Operating income $ 62,615 $ 28,474 $ 34,141 119.9 %
Operating margin 67.4 % 54.6 %
General and administrative expenses increased by $1.6 million , or 13.6% for the
year ended December 31, 2019 when compared to the year ended December 31, 2018
primarily due to an increase in employee compensation and benefits expenses,
driven by an increase in headcount, an increase in travel, meals and
entertainment costs, an increase in IT costs, and an increase in professional
and consulting fees. These increases were partially offset by a decline in
share-based compensation expense and a decline in business development expenses.
In the short term, we expect to experience an increase in its general &
administrative expenses as we implement the internal control and compliance
procedures required of public companies.
Selling and marketing expenses increased by $1.3 million , or 20.9%, for the year
ended December 31, 2019 as compared to the year ended December 31, 2018
primarily due to an increase in employee compensation and benefits expense due
to increased sales activity, partially offset by a decline in share-based
compensation and a decline in marketing expenses.
Research and development expenses increased by $0.4 million , or 45.9%, for the
year ended December 31, 2019 as compared to the year ended December 31, 2018 due
to an increase in headcount costs related to an increase in engineering
personnel.
Operating income for the year ended December 31, 2019 , increased by
$34.1 million , or 119.9% as compared to the year ended December 31, 2018
primarily due to the aforementioned 78.7% increase in gross profit, offset
primarily by the 13.6% increase in general administrative expenses and the 20.9%
increase in selling and marketing expenses. As a result of the above, operating
margin increased from 54.6% for the year ended December 31, 2018 to 67.4% for
the year ended December 31, 2019 .
Net Income
For the reasons discussed above and considering the immaterial impact of other
expenses and income tax for the year, our net income for the year ended
December 31, 2019 increased by $34.3 million or 121.2% as compared to the year
ended December 31, 2018 .
Adjusted EBITDA
For the year ended December 31, 2019 , Adjusted EBITDA increased by $33.6 million
or 107.4% as compared to the year ended December 31, 2018 , as a result of the
121.2% increase in net income, offset by a smaller adjustment for share-based
compensation, which decreased by 22.9%. For the same reasons, Adjusted EBITDA
margin for the year ended December 31, 2019 increased to 69.9% as compared to
60.0% in the year ended December 31, 2018 . Please see "Non-GAAP Financial
Measures" for a reconciliation of Adjusted EBITDA to net income.
Liquidity and Capital Resources
Cash Flow and Liquidity Analysis
We assesses liquidity primarily in terms of our ability to generate cash to fund
operating and financing 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. Refer to "Critical Accounting Policies and
Estimates" and "Risk Factors" for a full description of the related estimates,
assumptions, and judgments.
The following table provides a summary of cash flow data:
50
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Years ended December 31,
2020 2019 2018
(in thousands)
Net cash provided by operating activities $ 24,640 $
41,762
Net cash used in investing activities$ (1,196) $
(99)
Net cash provided by (used in) financing activities
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, primarily changes in our accounts receivable, prepaid expenses, contract assets, accounts payable and accrued expenses. Our net cash from operating activities for the year endedDecember 31, 2020 was$24.6 million . For the year endedDecember 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; partially offset by a$26.4 million increase in contract assets. For the year endedDecember 31, 2019 , net cash provided by operating activities was$41.8 million . This cash provided was primarily from an increase in net income. Cash provided by operating activities also resulted from$2.0 million in share-based compensation, which was offset by a$21.7 million increase in contract assets due to the ASC 606 adoption,$1.8 million increase in accounts receivable, and a$0.8 million increase in prepaid expenses. For the year endedDecember 31, 2018 , net cash provided by operating activities was$28.6 million . This cash provided was primarily from an increase in net income. Cash provided by operating activities also resulted from$2.5 million in share-based compensation, which was offset by a$2.6 million change in unbilled revenue, a$0.4 million change in accounts receivable, and a$0.5 million change in prepaid expenses. Net cash payments on notes payable for the years endedDecember 31, 2020 , 2019 and 2018 related to our indebtedness totaled$6.5 million ,$2.5 million and$2.5 million , respectively. Our net cash from operating activities for the years endedDecember 31, 2020 , 2019 and 2018 was$24.6 million ,$41.8 million and$28.6 million , respectively. Accordingly, our net cash from operating activities for the years endedDecember 31, 2020 , 2019 and 2018 was sufficient to cover these payments. Cash Flows from Investing Activities For the years endedDecember 31, 2020 , 2019 and 2018, net cash used in investing activities was$1.2 million ,$0.1 million and$0.1 million , respectively. This cash was used primarily for 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 issuance of long-term debt and the associated debt issuance cost, repayment of notes payable, distributions toOpen Lending, LLC's unitholders, share repurchases, proceeds from stock warrant exercise transactions and our equity recapitalization. For the year endedDecember 31, 2020 , net cash provided by financing activities was$70.8 million . The cash inflow includes$159.9 million in net proceeds associated with our term loan secured through a credit agreement entered intoMarch 11, 2020 , 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. For the year endedDecember 31, 2019 , net cash used in financing activities was$44.9 million . This cash used primarily consisted of a$2.5 million debt principal repayment and a$42.4 million distribution toOpen Lending, LLC's unitholders. For the year endedDecember 31, 2018 , net cash used in financing activities was$21.4 million . This cash used primarily consisted of a$2.5 million debt principal repayment and a$18.9 million distribution toOpen Lending, LLC's unitholders. Long-Term Debt Our long-term debt consists of a$170.0 million Term Loan under the Credit Agreement that we entered into onMarch 11, 2020 . The Term Loan in a principal amount of$170.0 million was funded onMarch 12, 2020 . The proceeds of the Term Loan, together with cash on hand, was used (i) to make investor loans, (ii) to finance a distribution to equity investors prior to the consummation of the Business Combination, (iii) to pay transaction expenses and (iv) for other general corporate purposes and working capital. 51 -------------------------------------------------------------------------------- Tax Receivable Agreement In connection with the Closing, the Company entered into a Tax Receivable Agreement with Nebula, the Blocker, Blocker's sole shareholder, andOpen Lending LLC . The Tax Receivable Agreement generally provides for the payment by the Company to the TRA holders, as applicable, of 85% of the net cash savings, if any, inU.S. federal, state and local income tax that the Company actually realizes (or are deemed to realize in certain circumstances) in periods after the Closing as a result of: (i) certain tax attributes of Blocker and/orOpen Lending LLC that existed prior to the Business Combination and were attributable to the Blocker; (ii) certain increases in the tax basis ofOpen Lending LLC's assets resulting from the Transactions; (iii) imputed interest deemed to be paid by the Company as a result of payments the Company makes under the Tax Receivable Agreement; and (iv) certain increases in tax basis resulting from payments the Company makes under the Tax Receivable Agreement. The Company will retain the benefit of the remaining 15% of these cash savings. As ofDecember 31, 2020 the liability recognized for the Tax Receivable Agreement was$92.4 million . There was a$(4.3) million non-cash charge related to a change in the measurement of our Tax Receivable Agreement liability as a result of changes in our blended state tax rate. Please see Note 18 "Income Taxes". The actual increases in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreements, will vary depending upon a number of factors, including the amount and timing of the taxable income the Company generates in the future, theU.S. federal income tax rates then applicable and the portion of the payments under the Tax Receivable Agreements that constitute imputed interest or give rise to depreciable or amortizable tax basis. The foregoing amount of expected future payments to TRA holders is merely an estimate and the actual payments could differ materially. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding Tax Receivable Agreements payments as compared to the foregoing estimates. Unitholders' Distribution OnMarch 24, 2020 ,Open Lending, LLC's Board of Managers approved a non-liquidating cash distribution to its Members in the amount of$135.0 million and retained cash reserves of$35.0 million in light of recent events, including the uncertainties created by the occurrence of the COVID-19 pandemic. The cash reserve is in excess of the minimum requirements under the Company's Credit Agreement. As ofDecember 31, 2020 , our cash and cash equivalents and restricted cash was$104.1 million . Projected operating cash flows and available cash on hand is expected to support our business operations for the foreseeable future. Given the uncertainty in market and economic conditions related to the COVID-19 pandemic, we will continue to evaluate the nature and extent of the impact to its business and financial position. Our liquidity and ability to fund its capital requirements is dependent on our future financial performance, which is subject to general economic, financial and other factors that are beyond our control and many of which are described under "Risk Factors." If those factors significantly change or other unexpected factors adversely affect us, our business may not generate sufficient cash flow from operations or it may not be able to obtain future financings to meet its liquidity needs. Other Factors Affecting Liquidity and Capital Resources Operating Lease Obligations. Our operating lease obligation consists of a lease of real property under a non-cancellable operating lease executed onJune 17, 2019 (the "G&I Lease"), withG&I VII Barton Skyway LP , aDelaware limited partnership, to lease an office space located at1501 South MoPac Expressway ,Austin, TX 78746 (Suite 450) for a period of 100 months commencing onOctober 1, 2020 . The lease agreement provides an extension option for a period of 60 months beyond the end of the initial term, subject to specific conditions. Under the G&I Lease, there are$0.8 million of operating lease obligations due within the next twelve months. 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, change in fair value of contingent consideration, change in measurement - Tax Receivable Agreement and transaction bonuses as a result of the Business Combination. The following table presents a reconciliation of net income to Adjusted EBITDA for each of the periods indicated: 52 --------------------------------------------------------------------------------
Years Ended December 31,
2020 2019 2018
(in thousands)
Net income (loss) $ (97,564) $ 62,544 $ 28,279
Non-GAAP adjustments:
Change in fair value of contingent consideration 131,932 - -
Transaction bonuses 9,112 - -
Change in measurement - Tax Receivable Agreement 4,292 - -
Interest expense 11,601 322 341
Provision (benefit) for income taxes 6,573 (30) 37
Depreciation and amortization expense 752 105 80
Share-based compensation 2,828 1,984 2,572
Total adjustments 167,090 2,381 3,030
Adjusted EBITDA 69,526 64,925 31,309
Total net revenue $ 108,892 $ 92,847 $ 52,192
Adjusted EBITDA margin 63.8 % 69.9 % 60.0 %
For the year ended December 31, 2020 , Adjusted EBITDA increased by $4.6 million ,
or 7.1%, as compared to year ended December 31, 2019 . Adjusted EBITDA margin for
the year ended December 31, 2020 decreased to 63.8% as compared to 69.9% for the
year ended December 31, 2019 . The increase in Adjusted EBITDA during the year
ended December 31, 2020 reflects our revenue growth driven by an increase in
certified loan volume, year over year, partially offset by an increase in the
cost of sales and operating expenses during the current year. The decline in
Adjusted EBITDA margin during the year ended December 31, 2020 as compared to
the previous year reflects a $(1.6) million reduction in estimated future
underwriting profits primarily as a result of the economic impact of the
COVID-19 pandemic. 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.
For the year ended December 31, 2019 , Adjusted EBITDA increased by $33.6
million , or 107.4%, as compared to year ended December 31, 2018 . Adjusted EBITDA
margin for the year ended December 31, 2019 increased to 69.9% as compared to
60.0% for the year ended December 31, 2018 . The increase in Adjusted EBITDA
during the year ended December 31, 2019 reflects organic revenue growth and the
impact of adopting ASC 606; partially offset by an increase in the cost of sales
and operating expenses.
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, loss
from operations and net loss, as well as on the value of certain assets and
liabilities on its consolidated balance sheets. We bases 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 U.S.
GAAP. To prepare these financial statements, we makes estimates, assumption, and
judgments that affect what we reports 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 revenues 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 bases its estimates, assumptions, and
judgments on its 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 financial
statements for a summary of our significant accounting policies, and discussion
of recent accounting pronouncements.
Profit Share Revenue Recognition
53
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We recognize revenues in accordance with Financial 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 program fees derived from contracts with lending
institutions, and profit share and claims administration service fees from
contracts with insurance carriers, and is recognized when the contractual
performance obligation is satisfied. See Note 11 "Revenue", of the accompanying
consolidated financial statements for more information.
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, and market rate assumptions. 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 the 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.
When we deem it necessary, we back-test the major estimate assumptions to ensure
the accuracy of the revenue recognition model. We also benchmark back-testing
results of our forecast defaults 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 December 31, 2020
resulting from our sensitivity analysis is summarized below:
Assumptions Defaults Prepayments Severity
Stress size 10.0 % (10.0) % 10.0 % (10.0) % 10.0 % (10.0) % Impact on revenue (5.9) % 6.0 % (2.6) % 2.8 %
(5.7) % 5.7 %
Federal and State Income Taxes Prior to closing of the Business Combination,Open Lending, LLC , the sole owner ofLenders Protection, LLC andOpen Lending Services, Inc. , was a treated as a partnership forU.S. federal income tax purposes. Therefore, no provision had historically been made for federal income tax purposes prior to the closing. Subsequent to closing,Open Lending, LLC became a disregarded entity, wholly owned by the Company by and through its wholly owned subsidiaries. As of the close of the Business Combination, the Company has been subject toU.S. federal income tax on a consolidated basis. 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 Sheet. 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. 54 -------------------------------------------------------------------------------- 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 the Company has no material uncertain tax positions as ofDecember 31, 2020 orDecember 31, 2019 , no assurance can be given that the final outcome of these matters will align with the positions reflected within these financial statements. Share-Based Compensation Awards We measure and recognize compensation expense for all share-based awards made to employees based on estimated fair values on the date of grant. The compensation expense is recognized on a straight-line basis over the requisite service period. 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 RSU awards, we utilize a waterfall model set-up using the Monte-Carlo simulation framework for profit interests, and we utilize the Black-Scholes option pricing model to value stock options, both of which models involve inputs for the share value ofOpen Lending , expected share volatility, expected term of the awards, risk-free interest rate and expected dividend. 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 12 "Share-Based Compensation", of the accompanying consolidated financial statements for more information. Emerging Growth Company Pursuant to the JOBS Act, an emerging growth company may adopt new or revised accounting standards that may be issued by FASB or theSEC either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We intend to take advantage of the exemption for complying with new or revised accounting standards within the same time periods as private companies. Accordingly, the information contained herein may be different than the information provided by other public companies. We also intend to take advantage of some of the reduced regulatory and reporting requirements of emerging growth companies pursuant to the JOBS Act so long as we qualify as an emerging growth company, including, but not limited to, an exemption from the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments. New Accounting Standards Issued But Not Yet Adopted See Note 2 "Summary of Significant Accounting and Reporting Policies" to the consolidated financial statements for our discussion about new accounting pronouncements adopted and those pending. 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. Related Party Transactions Pursuant to a Stock Repurchase Agreement, dated as ofDecember 7, 2020 , betweenOpen Lending and the selling stockholders, as part of the underwritten public offering as described above, we repurchased from the selling stockholders an aggregate number of 1,395,089 shares of our common stock totaling$37.5 million at the same per share price paid by the underwriters to the selling stockholders in the offering. OnMarch 25, 2020 ,Mr. Jessup borrowed$6.0 million fromOpen Lending in accordance with the promissory note in place and the loan was paid in full byMr. Jessup onMarch 30, 2020 , with proceeds received as a result of the non-liquidating distribution paid byOpen Lending to its members. We incurred consulting expenses of approximately$0.7 million and$0.6 million in the years endedDecember 31, 2019 and 2018, respectively, with entities owned by members of our management team and board of directors. These expenses include consulting fees paid toEWMW, LP , owned bySandy Watkins , former Chairman of our board of directors, fees related to marketing services provided byObjective Advisors, Inc. , owned by the wife ofJohn Flynn , CEO of our company, and human resource services rendered byHireBetter, LLC , which is owned byKurt Wilkin , a former member of our board of directors. We believe the terms obtained or consideration that it paid, as applicable, in connection with the transactions described above were comparable to terms available or the amounts that would be paid, as applicable, in arm's-length transactions. 55 -------------------------------------------------------------------------------- Contractual Obligations As ofDecember 31, 2020 , our principal commitments consisted of obligations under the Credit Agreement and operating lease obligations. The following table summarizes our contractual obligations as ofDecember 31, 2020 : Payments Due by Period More Less than 1 - 3 3 - 5 than 5 Total 1 Year Years Years Years (in thousands)
Debt principal, interest and fees
$ 38,584 $ 144,301 Operating lease obligations 7,475 774 1,763 1,865 3,073 Other contractual commitments 574 445 129 - - Total contractual obligations$ 245,019 $ 18,657 $ 38,539 $ 40,449 $ 147,374
Please see "Liquidity and Capital Resources" for a discussion of our debt and operating lease obligations.
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