Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1—Description of Business, Background and Nature of Operations
Open Lending Corporation (either individually or together with its subsidiaries, as the context requires, the “Company”), headquartered in Austin, Texas, provides loan analytics, risk-based loan pricing, risk modeling and automated decision technology for automotive lenders throughout the United States of America (the “U.S.”), which enables each lending institution to book near-prime and non-prime automotive loans, coupled with real-time underwriting of loan default insurance, out of their existing business flow. The Company also operates as a third-party administrator that adjudicates insurance claims and premium adjustments on automotive loans.
The Company’s flagship product, Lenders ProtectionTM platform (“LPP”), is a cloud-based automotive lending enablement platform. LPP supports loans made to near-prime and non-prime borrowers and is designed to underwrite default insurance by linking automotive lenders to our insurance partners. The platform uses risk-based pricing models that enable automotive lenders to assess the credit risk of a potential borrower using data driven analysis. The Company’s proprietary risk models project loan performance, including expected losses and prepayments in arriving at the optimal contract interest rate. LPP recommends a risk-based, all-inclusive interest rate for a loan that is customized to each automotive lender, reflecting cost of capital, loan servicing and acquisition costs, expected recovery rates and target return on assets.
Unless the context otherwise requires, “we,” “us,” “our,” “Open Lending,” and the “Company” refers to Open Lending Corporation, the combined company and its subsidiaries.
The Company has evaluated how it is organized and managed and has identified one operating segment. All of the Company’s operations and assets are in the U.S., and all of its revenues are attributable to U.S. customers.
Note 2—Summary of Significant Accounting and Reporting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and include the accounts of Open Lending and all its subsidiaries that are directly or indirectly owned or controlled by the Company.All intercompany transactions and balances have been eliminated upon consolidation. Certain prior year amounts have been reclassified to conform to the Company’s current presentation. Such reclassifications had no effect on the Company’s previously reported net income, earnings per share, cash flows or accumulated deficit.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted from these unaudited condensed consolidated financial statements, as permitted by Securities and Exchange Commission (“SEC”) rules and regulations. The Company believes the disclosures made in these unaudited condensed consolidated financial statements are adequate to make the information herein not misleading. The Company recommends that these unaudited condensed consolidated financial statements be read in conjunction with its audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “Annual Report”).
The interim data includes all adjustments that are of a normal recurring nature, in the opinion of the Company’s management, necessary for a fair statement of the results for the interim periods presented. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the Company’s operating results for the entire fiscal year ending December 31, 2024.
(a) Concentrations of revenue and credit risks
The Company’s largest insurance carrier partner accounted for 35% of the Company’s total revenue during the three and nine months ended September 30, 2024. The Company’s largest insurance carrier partners accounted for 29% and 10% of the Company's total revenue during the three months ended September 30, 2023 and 32% and 11% during the nine months ended September 30, 2023.
Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, restricted cash, accounts receivable and contract assets to the extent of the amounts recorded on the balance sheets.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Cash and cash equivalents are deposited in commercial analysis accounts, money market funds and U.S. Treasury securities at financial institutions with high credit standing. Restricted cash relates to funds held by the Company on behalf of the insurance partners, designated for the use of insurance claim payments. Restricted cash is deposited in commercial analysis accounts at one financial institution. At times, such deposits may be in excess of the Federal Deposit Insurance Corporation insurance limits of $250,000 per institution. The Company has not experienced any losses on its deposits of cash and cash equivalents and management believes the Company is not exposed to significant risks on such accounts.
The Company’s accounts receivable and contract assets are derived from revenue earned from customers. The Company maintains an allowance for expected credit losses, which represents an estimate based primarily on market implied lifetime probabilities of default and loss severities for assets with similar risk characteristics. As these inputs are derived from market observations, they inherently include forward-looking expectations about macro-economic conditions. The allowance is evaluated quarterly by the Company for adequacy by taking into consideration factors such as reasonableness of the market implied loss statistics, historical lifetime loss data and credit quality of the customer base. Provisions for the allowance for expected credit losses attributable to bad debt are recorded as general and administrative expenses. Account balances deemed uncollectible are written off, net of actual recoveries. If circumstances related to specific customers change, the Company’s estimate of the recoverability of its contract assets could be further adjusted. The Company does not have any material accounts receivable or contract assets receivable balances that are past due and has not written off any balances in its portfolio for the periods presented. The allowance for expected credit losses on accounts receivable and contract assets receivable, in the aggregate, was less than $0.1 million at September 30, 2024 and December 31, 2023.
At September 30, 2024 and December 31, 2023, the Company had one customer that represented at least 10% of the Company’s accounts receivable, net.
(b) Use of estimates and judgments
The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates, and those differences may be material. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively.
The most significant items subject to such estimates and assumptions include, but are not limited to, profit share revenue recognition and the corresponding impact on contract assets and assessing the realizability of deferred tax assets. The Company bases its estimates on historical trends and relevant assumptions that it believes to be reasonable under the circumstances. Accordingly, actual results could be materially different from those estimates.
In connection with profit share revenue recognition and the estimation of contract assets, the Company uses a forecast model to estimate variable consideration based on undiscounted expected future profit share to be received from the insurance partners. The forecast model projects loan-level earned premiums and insurance claim payments driven by projections of prepayment rate, loan default rate and severity of loss. These assumptions are derived from an analysis of the historical performance of the active loan portfolio, prevailing default and prepayment trends, and macroeconomic projections. Estimates of variable consideration generated by the forecast model are constrained to the extent that it is probable that a significant reversal of revenue will not occur in future periods.
The Company continually assesses the default and prepayment assumptions of the forecast model against reported performance and lender delinquency data. The forecast model is updated to consider the actual prepayment rate, default, and severity experience with macroeconomic conditions.
(c) Recently issued but not yet adopted accounting pronouncements
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which improves the disclosures about a public entity's reportable segments through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and should be applied retrospectively to all prior periods presented
Notes to Condensed Consolidated Financial Statements
(Unaudited)
in the financial statements. Early adoption is permitted. The Company believes this ASU will have no impact on its consolidated financial statements, but will result in additional disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which enhances the transparency and decision usefulness of income tax disclosures. The ASU requires additional disclosure related to rate reconciliation, income taxes paid, and other disclosures to improve the effectiveness of income tax disclosures. The ASU is effective for annual periods beginning after December 15, 2024, and applied on a prospective basis. Early adoption and retrospective application is permitted. The Company believes this ASU will have no impact on its consolidated financial statements, but may result in additional disclosures.
Although there may be new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or may adopt, as applicable, the Company believes none of these accounting pronouncements has materially impacted or will materially impact the Company’s consolidated financial position or results of operations.
Note 3—Contract Assets
Changes in the Company’s contract assets primarily result from the timing difference between the satisfaction of its performance obligation and receipt of the customer’s payment. The Company fulfills its obligation under a contract with a customer by transferring services in exchange for consideration from the customer. The Company recognizes contract assets when it transfers services to a customer, recognizes revenue for amounts not yet billed and the right to consideration is conditional on something other than the passage of time. Accounts receivable are recorded when the customer has been billed or the right to consideration is unconditional.
For performance obligations related to profit share revenue that were satisfied in previous periods, the Company evaluates and updates its profit share revenue forecast on a quarterly basis and adjusts contract assets accordingly. During the three and nine months ended September 30, 2024, contract asset adjustments attributable to profit share revenue forecast revisions resulted in decreases of $7.0 million and $14.8 million, respectively, as compared to decreases of $8.1 million and $8.5 million, respectively, during the three and nine months ended September 30, 2023.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Contract assets balances for the periods indicated below were as follows:
Contract Assets
Profit Share
Program Fees
Claims Administration and Other Service Fees
Total
(in thousands)
Ending balance as of December 31, 2023
$
22,855
$
4,738
$
1,721
$
29,314
Increase of contract assets due to new business generation
44,801
43,377
7,605
95,783
Change in estimates of revenue from performance obligations satisfied in previous periods(1)
(14,764)
—
—
(14,764)
Payables (receivables) transferred from contract assets
3,646
(44,666)
—
(41,020)
Payments received from insurance carriers
(21,807)
—
(7,568)
(29,375)
Provision for expected credit losses
(37)
5
2
(30)
Ending balance as of September 30, 2024
$
34,694
$
3,454
$
1,760
$
39,908
Contract Assets
Profit Share
Program Fees
Claims Administration and Other Service Fees
Total
(in thousands)
Ending balance as of June 30, 2024
$
27,900
$
3,629
$
2,202
$
33,731
Increase of contract assets due to new business generation
13,782
14,192
2,493
30,467
Change in estimates of revenue from performance obligations satisfied in previous periods(1)
(6,960)
—
—
(6,960)
Payables (receivables) transferred from contract assets
2,968
(14,367)
—
(11,399)
Payments received from insurance carriers
(2,981)
—
(2,936)
(5,917)
Provision for expected credit losses
(15)
—
1
(14)
Ending balance as of September 30, 2024
$
34,694
$
3,454
$
1,760
$
39,908
(1) Includes $(3.0) million of estimated, non-recurring charges associated with future claim payments and previous profit share receipts.
As of September 30, 2024 and December 31, 2023, the portion of the Company’s contract assets estimated to be received within one year consisted of $17.8 million and $28.7 million, respectively, and the portion estimated to be received beyond one year consisted of $22.1 million and $0.6 million, respectively.
Contract Costs
The fulfillment costs associated with the Company’s contracts with customers do not meet the criteria for capitalization and therefore are expensed as incurred.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 4—Long-term Debt
The following table provides a summary of the Company’s debt as of the periods indicated:
September 30, 2024
December 31, 2023
(in thousands)
Term Loan due 2027
$
142,500
$
145,313
Revolving Credit Facility
—
—
Less: Unamortized deferred financing costs
(998)
(1,268)
Total debt
141,502
144,045
Less: current portion of debt
(7,500)
(4,688)
Total long-term debt, net of deferred financing costs
$
134,002
$
139,357
Credit Agreement—Term Loan due 2027 and Revolving Credit Facility
On September 9, 2022, the Company entered into a First Amendment to its existing Credit Agreement (the “First Amendment”) with Wells Fargo Bank, N.A., as the administrative agent, and the financial institutions party thereto, as the lenders. The First Amendment provided the Company senior secured credit facilities in an aggregate principal amount of $300 million, which (i) established a term loan due 2027 with a principal amount of $150 million (the “Term Loan due 2027”), and (ii) increased the borrowing capacity on the existing revolving credit facility to $150 million (the “Revolving Credit Facility”), both scheduled to mature on September 9, 2027 (collectively, the “Credit Agreement”).
The Company used proceeds from the Term Loan due 2027 to pay off all outstanding amounts under its prior credit agreement and pay transaction costs related to the First Amendment. The remaining proceeds were used for working capital and other general corporate purposes. The transaction was treated as a debt modification under ASC Topic 470-50, Debt —Modifications and Extinguishments.
The obligations of the Company under the Credit Agreement are guaranteed by all of the Company’s U.S. subsidiaries and are secured by substantially all of the assets of the Company and its U.S. subsidiaries, subject to customary exceptions.
Borrowings under the Credit Agreement bear interest at a rate equal to either (i) an Alternate Base rate (“ABR”) or (ii) the term Secured Overnight Financing Rate (“SOFR”) plus 0.10% (“Adjusted SOFR”) plus a spread that is based upon the Company’s total net leverage ratio. The spread ranges from 0.625% to 1.375% per annum for ABR loans and 1.625% to 2.375% per annum for Adjusted SOFR loans. With respect to the ABR loans, interest will be payable at the end of each calendar quarter. With respect to the Adjusted SOFR loans, interest will be payable at the end of the selected interest period (at least quarterly). Additionally, there is an unused commitment fee payable at the end of each quarter at a rate per annum ranging from 0.15% to 0.225% based on the average daily unused portion of the Revolving Credit Facility and other customary letter of credit fees. Pursuant to the Credit Agreement, the interest rate spread and commitment fees increase or decrease in increments as the Company’s Funded Secured Debt/EBITDA ratio increases or decreases.
As of September 30, 2024, the Credit Agreement was subject to an Adjusted SOFR rate of 5.348% plus a spread of 2.375% per annum. Commitment fees were accrued at 0.225% under the Revolving Credit Facility’s unused commitment balance of $150 million as of September 30, 2024. As of September 30, 2024, the effective interest rate on the Company’s outstanding borrowings was 7.968%.
In connection with the Credit Agreement, the Company incurred aggregate deferred financing costs of $2.6 million, of which (i) $2.1 million was allocated to the related term loans and capitalized as a contra-liability against the principal balance of the term loans, and (ii) $0.5 million was allocated to the Revolving Credit Facility and included within Other assets on the unaudited Condensed Consolidated Balance Sheets. These deferred financing costs are amortized as interest expense using the effective interest method over the term of the Credit Agreement. Unamortized deferred financing costs related to the Term Loan due 2027 and the Revolving Credit Facility were $1.0 million and $0.2 million, respectively, as of September 30, 2024.
The Credit Agreement contains a maximum total net leverage ratio financial covenant and a minimum fixed charge coverage ratio financial covenant, which are tested quarterly. The maximum total net leverage ratio is 3.0:1 and the
Notes to Condensed Consolidated Financial Statements
(Unaudited)
minimum fixed charge coverage ratio is 1.25:1. As of September 30, 2024, the Company was in compliance with all required covenants under the Credit Agreement.
Note 5—Income Taxes
During the three months ended September 30, 2024 and 2023, the Company recognized income tax expense of $0.7 million and $1.5 million, respectively, resulting in effective tax rates of 32.4% and 33.8%, respectively. During the nine months ended September 30, 2024 and 2023, the Company recognized income tax expense of $4.6 million and $9.9 million, respectively, resulting in effective tax rates of 32.6% and 26.9%, respectively. The Company’s income tax expense for the three and nine months ended September 30, 2024 and 2023 differs from amounts computed by applying the U.S. federal statutory tax rate of 21% primarily due to state income tax expenses, and the officer’s compensation limitation under Section 162(m). The decrease in effective tax rates for the three and nine months ended September 30, 2024 compared to the same periods in 2023 is primarily due to decreased income before income taxes.
As of September 30, 2024, the Company has assessed whether it is more likely than not that the Company’s deferred tax assets will be realized. In making this determination, the Company considers all available positive and negative evidence and makes certain assumptions. The Company considers, among other things, the reversal of its deferred tax liabilities, the overall business environment, its historical earnings and losses, current industry trends and its outlook for future years. The Company believes it is more-likely-than-not all deferred tax assets will be realized and has not recorded any valuation allowance as of September 30, 2024.
As of September 30, 2024, the Company has a receivable of $3.3 million related to a state income tax refund claim filed for a prior tax year. The liability for unrecognized tax benefits includes $3.8 million of tax expense associated with these refund claims and tax uncertainties in various state jurisdictions due to the complexity of applying evolving state tax laws and uncertainties with respect to sustaining the Company’s refund claims. The Company believes it is not reasonably possible that the unrecognized tax benefits will significantly change during the next twelve months.
Note 6—Net Income per Share
Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed based on the weighted average number of common shares outstanding plus the effect of potentially dilutive common shares outstanding during the period using the applicable methods. The potentially dilutive common shares during the three and nine months ended September 30, 2024 and 2023 include unvested and unexercised stock options, unvested time-based restricted stock units and unvested performance-based restricted stock units whose performance conditions have been satisfied. The potentially dilutive common shares during the same periods did not include performance-based restricted stock units if the performance conditions of these awards have not been satisfied. The potentially dilutive common shares are included in the calculation of diluted net income per share only when their effect is dilutive.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table sets forth the computation of basic and diluted net income per share attributable to common stockholders for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands, except shares and per share data)
Basic net income per share:
Numerator
Net income attributable to common stockholders
$
1,437
$
3,003
$
9,426
$
26,912
Denominator
Weighted average common shares outstanding
119,252,503
120,217,857
119,128,801
121,318,872
Basic net income per share attributable to common stockholders
$
0.01
$
0.02
$
0.08
$
0.22
Diluted net income per share:
Numerator
Net income attributable to common stockholders
$
1,437
$
3,003
$
9,426
$
26,912
Denominator
Basic weighted average common shares outstanding
119,252,503
120,217,857
119,128,801
121,318,872
Dilutive effect of time-based and performance-based restricted stock units outstanding
228,074
1,081,023
299,151
746,846
Diluted weighted average common shares outstanding
119,480,577
121,298,880
119,427,952
122,065,718
Diluted net income per share attributable to common stockholders
$
0.01
$
0.02
$
0.08
$
0.22
The following potentially dilutive outstanding securities as of September 30, 2024 and 2023 were excluded from the computation of diluted net income per share because their effect would have been anti-dilutive for the periods presented, or issuance of such shares is contingent upon the satisfaction of certain conditions that were not satisfied by the end of the periods:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Unvested and unexercised stock options
122,965
146,655
122,965
146,655
Unvested time-based restricted stock units
1,159,316
277,037
421,614
277,037
Unvested performance-based restricted stock units
697,238
424,675
697,238
424,675
Total
1,979,519
848,367
1,241,817
848,367
Note 7—Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants. In arriving at a fair value measurement, the Company uses a fair value
Notes to Condensed Consolidated Financial Statements
(Unaudited)
hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable. The three levels of inputs used to establish fair value are the following:
•Level 1 — Quoted prices in active markets for identical assets or liabilities;
•Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
•Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
In situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances, including expected cash flows and appropriately risk-adjusted discount rates, available observable and unobservable inputs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis. These assets, including property and equipment and operating lease right-of-use assets, are subject to fair value adjustments whenever events or circumstances indicate the carrying value of the assets may not be recoverable and are subsequently written down to fair value when impaired. During the three and nine months ended September 30, 2024 and 2023, the Company had no impairment charges related to its property and equipment or operating lease right-of-use assets.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company’s financial assets measured at fair value on a recurring basis were as follows:
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The amounts reported in the unaudited Condensed Consolidated Balance Sheets as current assets or current liabilities, including Cash, Restricted cash, Accounts receivable, net, Current contract assets, net, Other current assets, Accounts payable and Accrued expenses, each approximate their fair value due to the short-term maturities of the instruments.
Financial Instruments Not Carried at Fair Value
The following table provides the fair value of financial assets that are not measured at fair value:
September 30, 2024
December 31, 2023
(in thousands)
Carrying value
Fair value
Carrying value
Fair value
Liabilities:
Debt
$
141,502
$
141,502
$
144,045
$
144,045
Total
$
141,502
$
141,502
$
144,045
$
144,045
The carrying amount of the Company’s debt approximates its fair value due to its variable interest rate. The fair value was determined using the Adjusted SOFR as of September 30, 2024 and December 31, 2023 plus an applicable spread, a Level 2 classification in the fair value hierarchy.
The Company’s accounting policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of any level for the periods ended September 30, 2024 and December 31, 2023.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of Open Lending Corporation’s unaudited condensed consolidated results of operations and financial condition. The discussion should be read in conjunction with the audited consolidated financial statements and notes thereto in our Annual Report. 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 (this “Quarterly Report”) and our Annual Report. Actual results may differ materially from those contained in any forward-looking statements. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is intended to mean the business and operations of Open Lending Corporation and its consolidated subsidiaries.
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “appears,” “shall,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report include, but are not limited to, statements about:
•our financial performance;
•changes in our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects and plans;
•the impact of the relative strength of the overall economy, including its effect on unemployment, consumer spending and consumer demand for automotive products;
•the turnover in automotive lenders, as well as varying activation rates and volatility in usage of LPP by automotive lenders;
•the growth in loan volume from our top ten automotive lenders relative to that of other automotive lenders and associated concentration of risks;
•the costs of services in absolute dollars and as a percentage of revenue;
•general and administrative expenses, selling and marketing expenses and research and development expenses in absolute dollars and as a percentage of revenue;
•the impact of projected operating cash flows and available cash on hand on our business operations in the future;
•our compliance with regulatory requirements, including federal and state consumer lending and consumer protection laws;
•expansion plans and opportunities;
•the ability to maintain the listing of our common stock on the Nasdaq Stock Market LLC;
•regulatory agreements between us and state agencies regarding issues including automotive lender conduct and oversight and loan pricing;
•changes in applicable laws or regulations; and
•applicable taxes, inflation, supply chain disruptions, including global hostilities and responses thereto, interest rates and the regulatory environment.
All forward-looking statements are based on information and estimates available to us at the time of this Quarterly Report and are not guarantees of future financial performance. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law.
The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report and our Annual Report. We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report. You should not rely upon forward-looking statements as predictions of future events.
Business Overview
We are a leading provider of lending enablement and risk analytics to credit unions, regional banks, finance companies and the captive finance companies of automakers. Our customers, collectively referred to herein as automotive lenders, make automotive consumer loans to underserved near-prime and non-prime borrowers by harnessing our risk-based interest rate 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
$24.3 billion in automotive loans, accumulated more than 20 years of proprietary data and developed over two million unique risk profiles. We currently serve 406 active lenders.
We specialize in risk-based pricing and modeling and provide automated decision-technology for automotive lenders throughout the U.S. We target the financing needs of near-prime and non-prime borrowers, or borrowers with a credit bureau score generally 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 who must 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, is a cloud-based automotive lending enablement platform. LPP supports loans made to near-prime and non-prime borrowers and is designed to underwrite default insurance by linking automotive lenders to our insurance partners. The platform uses risk-based pricing models which enable automotive lenders to assess the credit risk of a potential borrower using data driven analysis. Our proprietary risk models project loan performance, including expected losses and prepayments in arriving at the optimal contract interest rate. With five-second decisioning, LPP recommends a risk-based, all-inclusive interest rate for a loan that is customized to each automotive lender, reflecting cost of capital, loan servicing and acquisition costs, expected recovery rates and target return on assets. LPP risk models use a proprietary score in assessing and pricing risk on automotive loan applications. This score combines credit bureau data and Fair Credit Reporting Act-compliant alternative consumer data to more effectively assess risk and determine the appropriate insurance premium for any given loan application.
LPP is powered by technology that delivers speed and scalability in providing interest rate decisioning to automotive lenders. It supports the full transaction lifecycle, including credit application, underwriting, real-time insurance approval, settlement, servicing, invoicing of insurance premiums and fees and advance data analytics of the automotive lender’s portfolio under the program. Through electronic system integration, our software technology connects us to parties in our ecosystem.
A key element of LPP is the unique database that drives risk decisioning using data accumulated for more than 20 years. When a loan is insured at origination, all attributes of the transaction are stored in our database. Through the claims management process, we ultimately obtain loan life performance data on each insured loan. Having granular origination and performance data allows our data scientists and actuaries to constantly evolve and refine risk models, based on actual experience and third-party information sources.
We believe the automotive industry is still seeking solutions to address the near-prime and non-prime borrower market. The near-prime and non-prime automotive loan origination market is a large, underserved sector, estimated at $270 billion annually. We currently serve approximately 1% of this market, providing a significant growth opportunity. In addition, our market opportunity related to the refinancing of near-prime and non-prime automotive loans is estimated at $40 billion annually.
Executive Overview
We facilitate certified loans and have achieved financial success by targeting the financing needs of near-prime and non-prime borrowers who are underserved in the automotive finance industry.
We facilitated 27,435 and 84,587 certified loans during the three and nine months ended September 30, 2024, as compared to 29,959 and 96,721 certified loans during the three and nine months ended September 30, 2023.
Total revenue was $23.5 million and $80.9 million for the three and nine months ended September 30, 2024, as compared to $26.0 million and $102.5 million during the three and nine months ended September 30, 2023.
Operating income was $1.9 million and $13.2 million for the three and nine months ended September 30, 2024, as compared to $4.5 million and $37.4 million in the three and nine months ended September 30, 2023.
Net income was $1.4 million and $9.4 million for the three and nine months ended September 30, 2024, as compared to $3.0 million and $26.9 million for the three and nine months ended September 30, 2023.
Adjusted EBITDA was $7.8 million and $30.1 million for the three and nine months ended September 30, 2024, as compared to $10.3 million and $52.3 million during the three and nine months ended September 30, 2023.
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 dollar value of insured loans facilitated and the number of new contracts we signed with automotive lenders for the three and nine months ended September 30, 2024 and 2023.
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Certified loans
27,435
29,959
84,587
96,721
Value of insured loans facilitated (in thousands)
$
772,469
$
883,470
$
2,379,621
$
2,850,133
Average loan size per certified loan
$
28,156
$
29,489
$
28,132
$
29,468
Number of contracts signed with automotive lenders
21
8
45
29
We define “active lenders” as lenders who certify at least one loan during the preceding 12 months. As of September 30, 2024 and 2023, we had 406 and 463 active lenders, respectively. The table below represents lender count information for lenders with certified loan activity during the periods indicated.
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Lenders certifying loans at beginning of period
383
398
402
438
New lenders (1)
11
17
29
38
Net change in lenders (2)
—
(15)
(5)
(34)
Lenders certifying loans at end of period
394
400
426
442
(1) New lenders using LPP to certify loans for the first time during the period.
(2) Net change in the number of lenders previously onboarded who use LPP to certify loans during the period. Certain lenders experience periods of inactivity followed by periods of activity, causing the lender count to fluctuate from period to period.
Key Performance Measures
We review several key performance measures, discussed below, to evaluate business and results, measure performance, identify trends, formulate plans and make strategic decisions. We believe that the presentation of such metrics is useful to our investors and counterparties because such metrics are used to measure and model the performance of similar companies, with recurring revenue streams.
Certified Loans
We refer to “certified loans” as the loans facilitated through LPP during a given period. Additionally, we refer to loans with a one-time upfront program fee payment as “single-pay” loans. For certain loans, the program fee is paid to us over 12 monthly installments and we refer to these loans as “monthly-pay” loans.
Average Program Fee
We define “average program fee” as the total program fee revenue recognized for a period divided by the number of certified loans in that period.
Underwriting Profit
We define “underwriting profit” as the total underwriting profit expected to be received by insurers over the expected life of the certified loans.
We define “earned premium” as the total insurance premium earned by insurers in a given period. Earned premiums were $83.7 million and $253.5 million for the three and nine months ended September 30, 2024, respectively, as compared to $85.6 million and $249.1 million, for the three and nine months ended September 30, 2023, respectively.
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 factor directly affecting revenue and financial results as it influences the number of loans funded on LPP. Growth in our active automotive lender relationships will depend on our ability to retain existing automotive lenders and add new ones.
Competition
We face competition to acquire and maintain automotive lenders as customers, as well as competition to facilitate the funding of near-prime and non-prime auto loans. 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, is a unique solution for which we have not identified 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 lender customers. The near-prime and non-prime lending market is highly fragmented and competitive. We face competition from a diverse landscape of consumer lenders, including traditional banks and credit unions, as well as alternative technology-enabled lenders. The emergence of other insurers, in competition with our insurers, could materially impact our business.
Profit Share Assumptions
We rely on assumptions to calculate the value of profit share revenue, which is our share of insurance partners’ underwriting profit. For example, positive change in estimates associated with historic vintages generate an increase in our contract asset, additional revenues and future expected cash flows, while negative change in estimates generate a decrease in our contract asset, a reduction in revenues and future expected cash flows. Please refer to Critical Accounting Policies and Estimates for more information on these assumptions.
Industry Trends and General Economic Conditions
Our results of operations have been and may continue to be impacted by the relative strength of the overall economy and its effect on unemployment, consumer spending, consumer demand for automotive financing and our lender customer’s liquidity. 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 enter into loans to finance purchases and consumers’ ability to afford financial obligations. Specific economic factors such as inflation, rising interest rate levels, changes in monetary and related policies, market volatility, supply chain disruptions, consumer confidence and, particularly, the unemployment rate also influence consumer spending and borrowing patterns.
Concentration
The Company’s largest insurance partner accounted for 35% of the Company’s total revenue during the three and nine months ended September 30, 2024. The Company’s largest insurance partners accounted for 29% and 10% of the Company's total revenue during the three months ended September 30, 2023 and 32% and 11% during the nine months ended September 30, 2023.
Termination or disruption of these relationships could materially and adversely impact our revenue. See “Item 1A—Risk Factors—Risks Related to Our Business—If we lose one or more of our insurance carriers and are unable to replace their commitments, it could have a material adverse effect on our business” in our Annual Report.
Components of Results of Operations
Total Revenues
Our revenue is generated through three streams: (i) program fees paid to us by automotive lenders, (ii) profit share paid to us by insurance partners and (iii) claims administration service fees paid to us by insurance partners.
Program fees. Program fees are paid by automotive lenders for the use of LPP, which provides loan analytics solutions and automated issuance of credit default insurance with third-party insurance providers. These fees are based on a percentage of each certified loan’s original principal balance and are recognized as revenue upfront upon certification of the loan by the lending institution. The fee percentage rate varies based on the agreement with each lender. For loans with a one-time upfront payment, there is a sliding scale of rates representing volume discounts for certain lenders. Fees are calculated as a percentage of the funded loan amount and may be subject to a cap. For monthly-pay loans, the fee paid by the lender is typically 3% of the initial amount of the loan and is not capped.
Profit share. Profit share represents our participation in the underwriting profit of third-party insurance partners who provide automotive lenders with credit default insurance on loans those 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 to future profit share calculations.
Claims administration service fees. Claims administration service fees are paid to us by third-party insurance partners for credit default insurance claims adjudication services performed by our subsidiary, Insurance Administrative Services, LLC, on its insured servicing portfolio. The administration fee is equal to 3% of the monthly insurance earned premium for as long as the LPP certified loan remains outstanding.
Cost of Services and Operating Expenses
Cost of services. Cost of services primarily consists of fees paid to third-party partners for lead-generation efforts, compensation and benefit expenses relating to employees engaged in automotive lender customer service, product support and claims administration activities, fees paid for actuarial services related to the development of the monthly premium program, fees for integration with the loan origination systems of automotive lenders and fees paid to credit bureaus and data service providers for credit applicant data. In the near term, we generally expect cost of services to remain constant as a percentage of our program fee revenue.
General and administrative expenses. General and administrative expenses are comprised primarily of expenses relating to corporate-level employee compensation and benefits, non-cash share-based compensation, travel, meals and entertainment expenses, data and software expenses and professional and consulting fees. In the near term, we expect general and administrative expenses to remain constant.
Selling and marketing expenses. Selling and marketing expenses consist primarily of compensation and benefits of employees engaged in selling and marketing activities. We generally expect selling and marketing expenses to remain constant as a percentage of our program fee revenue in the near term.
Research and development expenses. Research and development expenses primarily consist of compensation and benefits of employees engaged in ongoing research and development. We generally expect our research and development expenses to remain constant in the near term.
Other Income (Expense)
Interest expense. Interest expense primarily includes interest payments and the amortization of deferred financing costs in connection with the issuance of our debt.
Interest income. Interest income primarily includes interest earned on money market funds and U.S. Treasury securities.
Comparison of Three and Nine Months Ended September 30, 2024 and 2023
Revenue
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands)
Program fees
$
14,161
$
15,416
$
43,306
$
50,610
Profit share
New certified loan originations
13,782
16,079
44,801
52,950
Change in estimated revenues
(6,960)
(8,057)
(14,764)
(8,517)
Total profit share
6,822
8,022
30,037
44,433
Claims administration and other service fees
2,493
2,568
7,605
7,478
Total revenue
$
23,476
$
26,006
$
80,948
$
102,521
Total revenue decreased by $2.5 million, or 10%, for the three months ended September 30, 2024 as compared to the same period in 2023, driven by a $1.2 million decrease in profit share revenue and a $1.3 million decrease in program fees.
Total revenue decreased by $21.6 million, or 21%, for the nine months ended September 30, 2024, as compared to the same period in 2023, driven by a $14.4 million decrease in profit share revenue and a $7.3 million decrease in program fees, which was partially offset by increased claims administration and other service fee revenues of $0.1 million.
Program fees revenue decreased by $1.3 million, or 8%, during the three months ended September 30, 2024 as compared to the same period in 2023 driven by an 8% decrease in certified loan volume.
Program fees revenue decreased by $7.3 million, or 14%, for the nine months ended September 30, 2024 as compared to the same period in 2023. The decrease in program fees revenue was driven by a 13% decrease in certified loan volume and a 3% decrease in unit economics per certified loan.
Profit share revenue decreased by $1.2 million, or 15%, during the three months ended September 30, 2024, as compared to the same period in 2023. Profit share revenue associated with new certified loan originations decreased $2.3 million, or 14%, primarily due to an 8% decrease in certified loans and a 7% decrease in unit economics during the three months ended September 30, 2024, as compared to the same period in 2023. Profit share revenue associated with change in estimate increased $1.1 million, or 14%, during those same periods.
During the three months ended September 30, 2024, we recorded $13.8 million in anticipated profit share associated with 27,435 new certified loans for an average of $502 per loan as compared to $16.1 million in anticipated profit share associated with 29,959 certified loans for an average of $537 per loan during the three months ended September 30, 2023. In addition, during the three months ended September 30, 2024, we recorded a reduction of $7.0 million in profit share revenue related to business in historic vintages. Of the $7.0 million, $4.0 million is primarily due to higher than anticipated loan defaults, partially offset by lower than anticipated severity of losses. The incremental $3.0 million reduction in profit share revenue represents an estimated, non-recurring liability for future claim payments and previous profit share receipts. During the three months ended September 30, 2023, we recorded a decrease of $8.1 million in profit share revenue related to business in historic vintages primarily due to higher than anticipated prepayments and loan defaults, partially offset by lower than anticipated severity of losses.
Profit share revenue decreased by $14.4 million, or 32%, during the nine months ended September 30, 2024, as compared to the same period in 2023. Profit share revenue associated with new certified loan originations decreased $8.1 million, or 15%, primarily due to a 13% decrease in certified loans and a 3% decrease in unit economics during the nine months ended September 30, 2024, as compared to the same period in 2023. Profit share revenue associated with change in estimate decreased $6.2 million, or 73%, during those same periods.
During the nine months ended September 30, 2024, we recorded $44.8 million in anticipated profit share associated with 84,587 new certified loans for an average of $530 per loan as compared to $53.0 million in anticipated profit
share associated with 96,721 certified loans for an average of $547 per loan during the nine months ended September 30, 2023. In addition, during the nine months ended September 30, 2024, we recorded a reduction of $14.8 million in profit share revenue related to business in historic vintages. Of the $14.8 million, $11.8 million is primarily due to higher than anticipated loan defaults, partially offset by lower than anticipated severity of losses. The incremental $3.0 million reduction in profit share revenue represents an estimated, non-recurring liability for future claim payments and previous profit share receipts. During the nine months ended September 30, 2023, we recorded a reduction of $8.5 million in profit share revenue related to business in historic vintages primarily due to higher than anticipated prepayments and loan defaults, partially offset by lower than anticipated severity of losses.
Revenue from claims administration and other service fees decreased by $0.1 million, or 3%, for the three months ended September 30, 2024 as compared to the same period in the prior year, due to a 2% decrease in total earned premiums during the three months ended September 30, 2024 as compared to the same period in the prior year.
Revenue from claims administration and other service fees increased $0.1 million, or 2%, for the nine months ended September 30, 2024 as compared to the same period in the prior year, due to a 2% increase in total earned premiums during the nine months ended September 30, 2024 as compared to the same period in the prior year.
Cost of Services, Gross Profit and Gross Margin
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(in thousands)
Total revenue
$
23,476
$
26,006
$
80,948
$
102,521
Cost of services
6,127
5,369
17,590
16,917
Gross profit
$
17,349
$
20,637
$
63,358
$
85,604
Gross margin
74
%
79
%
78
%
83
%
Cost of services increased $0.8 million, or 14%, during the three months ended September 30, 2024, as compared to the same period in 2023. Cost of services increased $0.7 million, or 4%, during the nine months ended September 30, 2024, as compared to the same period in 2023. For the three and nine months ended September 30, 2024, as compared to the same periods in 2023, the change is primarily due to increased employee compensation and benefits of $0.4 million and $0.7 million, respectively, and increased fees paid to data service providers of $0.3 million and $0.8 million, respectively. For the nine months ended September 30, 2024, these increased costs were partially offset by a $1.3 million decrease in partner commissions, driven by lower loan certifications in 2024 versus 2023.
Gross profit decreased by $3.3 million, or 16%, and $22.2 million, or 26%, during the three and nine months ended September 30, 2024, as compared to the same periods in 2023, primarily driven by decreases in anticipated profit share and program fees, as discussed above.
Operating Expenses, Operating Income and Operating Margin
General and administrative expenses decreased by $0.3 million, or 3%, during the three months ended September 30, 2024 as compared to the same period in 2023 primarily driven by a decrease in employee compensation and benefit costs due to a decrease in the bonus accrual. General and administrative expenses increased by $2.3 million, or 7%, during the nine months ended September 30, 2024, as compared to the same period last year primarily driven by higher employee compensation and benefit costs of $3.5 million partially offset by decreased business taxes of $0.8 million due to non-recurring events in 2023.
Selling and marketing expenses increased by $0.4 million and $0.1 million, or 9% and 1%, during the three and nine months ended September 30, 2024 as compared to the same periods in 2023, primarily driven by higher employee compensation and benefit costs. For the nine months ended September 30, 2024, these increased costs were partially offset by a $0.3 million decrease in direct marketing expenses.
Research and development expenses decreased $0.7 million, or 42% during the three months ended September 30, 2024, as compared to the same period in 2023. Research and development expenses decreased by $0.5 million, or 12%, during the nine months ended September 30, 2024, as compared to the same period in 2023, primarily due to increased focus on product support and the development of internal use software.
Operating income for the three and nine months ended September 30, 2024 decreased by $2.7 million and $24.2 million, or 59% and 65%, respectively, as compared to the prior year periods, primarily driven by decreases in total revenues as well as changes in operating expenses, as discussed above.
Interest Expense
Interest expense increased $0.2 million, or 6%, for the three months ended September 30, 2024, as compared to the same period in 2023. Interest expense increased $0.6 million, or 8%, for the nine months ended September 30, 2024, as compared to the same period in 2023. For both periods, interest expense increased as a result of higher borrowing costs during 2024.
Interest Income
During the three and nine months ended September 30, 2024, interest income increased $0.4 million and $2.0 million, respectively, compared to the same periods in 2023, primarily due to an increase in interest earned on U.S. Treasury Securities and Money Market accounts.
Income Taxes
During the three months ended September 30, 2024 and 2023, we recognized income tax expense of $0.7 million and $1.5 million, respectively, with effective tax rates of 32.4% and 33.8%, respectively. During the nine months ended September 30, 2024 and 2023, we recognized income tax expense of $4.6 million and $9.9 million, respectively, with effective tax rates of 32.6% and 26.9%, respectively.
Income tax expense decreased $0.8 million and $5.3 million, or 55% and 54%, respectively, during the three and nine months ended September 30, 2024 as compared to the three and nine months ended September 30, 2023, primarily as a result of the decrease in income before income taxes.
Liquidity and Capital Resources
Cash Flow and Liquidity Analysis
We assess liquidity primarily in terms of our ability to generate cash to fund operating and investing activities. A significant portion of our cash from operating activities is derived from our profit share arrangements with our insurance partners, which are subject to judgments and assumptions and is, therefore, subject to variability. We believe that our existing cash resources and the Revolving Credit Facility will provide sufficient liquidity to fund our near-term working capital needs. We regularly evaluate alternatives for managing our capital structure and liquidity profile in consideration of expected cash flows, growth and operating capital requirements and capital market conditions. Refer to Critical Accounting Policies and Estimates in this Quarterly Report and our Annual Report for a full description of the related estimates, assumptions and judgments.
Based on our assessment of the underlying provisions and circumstances of our contractual obligations, other than the risks that we and other similarly situated companies face with respect to the condition of the capital markets (as described in “Risk Factors” in our Annual Report), there is no known trend, demand, commitment, event, or
uncertainty that is reasonably likely to occur that would have a material adverse effect on our consolidated results of operations, financial condition, or liquidity.
The following table provides a summary of cash flow data:
Nine Months Ended September 30,
2024
2023
(in thousands)
Net cash provided by operating activities
$
20,976
$
65,903
Net cash used in investing activities
$
(2,738)
$
(1,588)
Net cash used in financing activities
$
(3,960)
$
(34,423)
Cash Flows from Operating Activities
Our cash flows provided by operating activities reflect net income adjusted for certain non-cash items and changes in operating assets and liabilities.
The following table summarizes the non-cash adjustments in the operating activities in the unaudited Condensed Statement of Cash Flows:
Nine Months Ended September 30,
2024
2023
(in thousands)
Net income
$
9,426
$
26,912
Non-cash adjustments
13,020
8,816
Non-cash (gains) losses
37
10
Change in contract assets
(10,594)
26,199
Change in other assets and liabilities
9,087
3,966
Net cash provided by operating activities
$
20,976
$
65,903
Net cash provided by operating activities decreased by $44.9 million for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. The decrease was primarily attributable to decreased cash collections of $58.8 million related to reduced profit share, program fees and claims administration service fee revenues, and $2.0 million increase in interest expense payments. The decrease in cash was offset by a $9.8 million reduction in income tax payments, $2.0 million increase in interest income received, $1.8 million decrease in cash payments related to cost of services and operating expenses and $2.3 million reduction in working capital during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023.
Cash Flows from Investing Activities
For the nine months ended September 30, 2024 and 2023, net cash used in investing activities was $2.7 million and $1.6 million, respectively. For the nine months ended September 30, 2024 and 2023, the investments were primarily related to internal use software development costs.
Cash Flows from Financing Activities
Our cash flows used in financing activities primarily consist of share repurchases, payments of debt and deferred financing costs.
For the nine months ended September 30, 2024, net cash used in financing activities was $3.9 million which includes a $2.8 million principal payment on our Term Loan due 2027 and $1.1 million for shares withheld for payroll taxes associated with the vesting of restricted stock awards.
For the nine months ended September 30, 2023, net cash used in financing activities was $34.4 million and is primarily related to the repurchase of 4,296,927 shares of our common stock held in treasury stock for a total of $31.3 million, excluding excise tax, as well as $2.8 million principal payment on our Term Loan due 2027.
As of September 30, 2024, we had no amounts outstanding under the Revolving Credit Facility and $141.5 million outstanding under our Term Loan due 2027.
Share Repurchase Program
The Board of Directors authorized a share repurchase program (the “Share Repurchase Program”), allowing the Company to repurchase up to $75.0 million of the Company’s outstanding common stock until March 31, 2024. Pursuant to the Share Repurchase Program, the Company repurchased 5,233,065 and 2,643,306 shares at an average price of $7.13 and $6.82 for a total of $37.3 million and $18.0 million, excluding excise tax, during the years ended December 31, 2023 and 2022, respectively. These shares were recorded to Treasury stock, at cost in the unaudited Condensed Consolidated Balance Sheets, which includes $0.3 million of excise tax paid in October 2024. This excise tax payable is included within Accrued expenses in the unaudited Condensed Consolidated Balance Sheets.
Dividends
Any decision to declare and pay dividends in the future will be made at the sole discretion of our Board of Directors and will depend on, among other things, results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends is limited by covenants in our existing indebtedness and may be limited by the agreements governing other indebtedness that we or our subsidiaries may incur in the future.
Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures 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. These measures further provide useful analysis of period-to-period comparisons of our business, as they exclude the effect of certain non-cash items and certain variable charges. Adjusted EBITDA is defined as GAAP net income excluding interest expense, income taxes, depreciation and amortization expense of property and equipment and share-based compensation expense. Adjusted EBITDA margin is defined as Adjusted EBITDA expressed as a percentage of total revenue.
The following table presents a reconciliation of GAAP net income to Adjusted EBITDA for each of the periods indicated:
For the three and nine months ended September 30, 2024, Adjusted EBITDA decreased by $2.6 million and $22.2 million, or 25% and 42%, respectively, as compared to the three and nine months ended September 30, 2023. Adjusted EBITDA margin for the three months ended September 30, 2024 decreased to 33% as compared to 40% during the same period in 2023. Adjusted EBITDA margin for the nine months ended September 30, 2024 decreased to 37% as compared to 51% during the same period in 2023.
The decrease in Adjusted EBITDA during the three and nine months ended September 30, 2024 reflects our reduced revenue due to lower certified loan volume and the impact of profit share revenue change in estimate as well as increased cost of services and operating expenses during each period.
Critical Accounting Policies and Estimates
There have not been any material changes during the three and nine months ended September 30, 2024 to the methodology applied by management for critical accounting policies previously disclosed in our Annual Report. Please refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report for further description of our critical accounting policies and estimates.
Contractual Obligations
We had no material changes in our contractual commitments and obligations during the three and nine months ended September 30, 2024 from the amounts listed under “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” in our Annual Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our operations include activities in the U.S. These operations expose us to a variety of market risks, including the effects of changes in interest rates and changes in consumer attitudes toward financing a vehicle purchase. We monitor and manage these financial exposures as an integral part of our overall risk management program.
Market Risk
In the normal course of business, we are exposed to market risk and have established policies designed to protect against the adverse effects of this exposure. We are exposed to risks associated with general economic conditions and the impact of the economic environment on consumer spending levels, the willingness of consumers to enter into loans to finance purchases and consumers ability to afford financial obligations. Consumer spending and borrowing patterns related to auto purchases are influenced by economic factors such as unemployment rates, inflation, rising interest rate levels, changes in monetary and related policies, market volatility and overall consumer confidence. We also face risk from competition to acquire, maintain and develop new relationships with automotive lenders as well as competition from a wide variety of automotive lenders who are (or are affiliated) with financial institutions and have capacity to hold loans on their balance sheets.
Concentration Risk
We rely on our three largest insurance partners for a significant portion of our profit share and claims administration service fee revenue. Termination or disruption of these relationships could materially and adversely impact our revenue. See “Item 1A—Risk Factors—Risks Related to Our Business—If we lose one or more of our insurance carriers and are unable to replace their commitments, it could have a material adverse effect on our business” in our Annual Report.
Interest Rate Risk
Our earnings and cash flows are subject to fluctuations due to changes in interest rates on investment of available cash balances in money market funds and U.S. Treasury securities. Our Term Loan due 2027 also exposes us to changes in short-term interest rates since interest rates on the underlying obligations are variable.
As of September 30, 2024, we had outstanding amounts of $142.5 million under the Term Loan due 2027, which is scheduled to mature on September 9, 2027. There were no amounts outstanding under the Revolving Credit Facility as of September 30, 2024. Borrowings under the Credit Agreement bear interest at a rate equal to Adjusted SOFR plus a spread that is based upon our total net leverage ratio. The spread ranges from 1.625% to 2.375% per annum for Adjusted SOFR loans. We are also charged an unused commitment fee that ranges from 0.15% to 0.225% per annum on the average daily unused portion of the Revolving Credit Facility, which is paid quarterly in arrears and is based on our total net leverage ratio.
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, regardless of how well they were designed and are operating, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(f) or 15d-15(f) of the Exchange Act during the period covered by this Quarterly Report, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As of the date of this Quarterly Report, we were not a party to any material legal proceedings. In the future, we may become party to legal matters and claims arising in the ordinary course of business, the resolution of which we do not anticipate would have a material adverse impact on our financial position, results of operations or cash flows.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under Part I, Item 1A. “Risk Factors” in our Annual Report, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or future results. There have been no material changes in our risk factors from those described in the Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information with respect to our repurchases of shares of common stock during the three months ended September 30, 2024.
Period
Total number of shares purchased (1)
Average price paid per share
Total number of shares purchased as part of publicly announced plans or programs
Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions)
07/01/2024-07/31/2024
—
$
—
—
$
—
08/01/2024-08/31/2024
637
$
5.40
—
$
—
09/01/2024-09/30/2024
1,004
$
6.18
—
$
—
Total
1,641
—
(1) Includes no shares in July 2024, 637 shares in August 2024 and 1,004 shares in September 2024, which were purchased from employees to satisfy their payroll tax withholding obligations related to share-based awards that vested during those months.
Item 3. Default Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
Insider Trading Arrangements
During the three months ended September 30, 2024, no director or officer of the Company adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” as each term is defined in Item 408(a) of Regulation S-K.
The following financial statements from Open Lending Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2024, formatted in iXBRL (Inline eXtensible Business Reporting Language):
(i) Condensed Consolidated Balance Sheets
(ii) Condensed Consolidated Statement of Operations
(iii) Condensed Consolidated Statements of Changes in Stockholders’ Equity
(iv) Condensed Consolidated Statements of Cash Flows
(v) Notes to Condensed Consolidated Financial Statements
104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OPEN LENDING CORPORATION
/s/ Charles D. Jehl
Charles D. Jehl
November 8, 2024
Chief Executive Officer and Interim Chief Financial Officer (Principal Executive, Financial, and Accounting Officer)
