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lpro-20220630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number: 001-39326

OPEN LENDING CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Delaware			84-5031428
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

1501 S. MoPac Expressway Suite 450 Austin, Texas			78746
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (512) 892-0400

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading
Symbol(s)

Name of each exchange
on which registered

Common stock, par value $0.01 per share

LPRO

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 3, 2022, the registrant had 126,225,550 shares of common stock, $0.01 par value per share, outstanding.

OPEN LENDING CORPORATION

FORM 10-Q

TABLE OF CONTENTS


		Page
PART I.	Financial Information	3

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Operations	4

	Condensed Consolidated Statements of Changes in Stockholders’ Equity	5

	Condensed Consolidated Statements of Cash Flows	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27

Item 4.	Controls and Procedures	28

PART II.	Other Information	29

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Default Upon Senior Securities	29

Item 4.	Mine Safety Disclosures	29

Item 5.	Other Information	30

Item 6.	Exhibits	31

SIGNATURES		32

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

OPEN LENDING CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited, in thousands, except share data)


	June 30, 2022		December 31, 2021

Assets
Current assets
Cash and cash equivalents	$	167,695	$	116,454
Restricted cash	3,412		3,055
Accounts receivable, net	6,960		6,525
Current contract assets, net	73,338		70,542
Income tax receivable	4,309		1,345

Other current assets	3,341		4,873

Total current assets	259,055		202,794
Property and equipment, net	2,791		2,663
Operating lease right-of-use assets, net	4,904		5,189
Non-current contract assets, net	33,410		42,414
Deferred tax asset, net	66,501		65,503
Other non-current assets	152		262
Total assets	$	366,813	$	318,825
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	421	$	1,285
Accrued expenses	6,105		3,984

Current portion of debt	3,906		3,125
Third-party claims administration liability	3,037		3,050
Other current liabilities	546		621
Total current liabilities	14,015		12,065

Long-term debt, net of deferred financing costs	140,959		143,135
Non-current operating lease liabilities	4,371		4,643

Total liabilities	$	159,345	$	159,843
Commitments and contingencies
Stockholders’ equity
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding	—		—
Common stock, $0.01 par value; 550,000,000 shares authorized, 128,198,185 shares issued and 126,225,550 shares outstanding as of June 30, 2022 and 128,198,185 shares issued and 126,212,876 shares outstanding as of December 31, 2021	1,282		1,282
Additional paid-in capital	498,745		496,983
Accumulated deficit	(236,159)		(282,439)
Treasury stock at cost, 1,972,635 shares at June 30, 2022 and 1,985,309 at December 31, 2021, respectively	(56,400)		(56,844)
Total stockholders’ equity	207,468		158,982
Total liabilities and stockholders’ equity	$	366,813	$	318,825

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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OPEN LENDING CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited, in thousands, except share data)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Revenue
Profit share	$	29,157	$	38,842	$	57,467	$	66,572
Program fees	20,731		20,597		40,457		35,508
Claims administration and other service fees	2,156		1,686		4,188		3,053
Total revenue	52,044		61,125		102,112		105,133
Cost of services	5,085		4,140		9,873		7,502
Gross profit	46,959		56,985		92,239		97,631
Operating expenses
General and administrative	7,968		8,381		15,450		16,593
Selling and marketing	3,994		2,954		7,727		5,351
Research and development	2,188		773		4,011		1,364
Total operating expenses	14,150		12,108		27,188		23,308
Operating income	32,809		44,877		65,051		74,323

Interest expense	(1,124)		(1,122)		(1,927)		(4,411)
Interest income	22		58		47		142
Gain on extinguishment of tax receivable agreement	—		55,422		—		55,422
Loss on extinguishment of debt	—		—		—		(8,778)
Other expense	—		(2)		—		(133)
Income before income taxes	31,707		99,233		63,171		116,565
Income tax expense	8,581		23,267		16,891		27,737
Net income	$	23,126	$	75,966	$	46,280	$	88,828



Net income per common share
Basic	$	0.18	$	0.60	$	0.37	$	0.70
Diluted	$	0.18	$	0.60	$	0.37	$	0.70
Weighted average common shares outstanding
Basic	126,221,689		126,230,752		126,218,710		126,515,343
Diluted	126,222,366		126,274,197		126,219,115		126,554,082

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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OPEN LENDING CORPORATION

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited, in thousands, except share and unit data)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Treasury Stock			Total Stockholders’ Equity
	Shares	Amount		Amount		Amount		Shares	Amount		Amount
Balance as of December 31, 2021	128,198,185	$	1,282	$	496,983	$	(282,439)	(1,985,309)	$	(56,844)	$	158,982

Share-based compensation	—	—		1,281		—		—	—		1,281
Restricted stock units issued, net of shares withheld for taxes	—	—		(207)		—		5,079	168		(39)
Net income	—	—		—		23,154		—	—		23,154
Balance as of March 31, 2022	128,198,185	$	1,282	$	498,057	$	(259,285)	(1,980,230)	$	(56,676)	$	183,378
Share-based compensation	—	—		988		—		—	—		988
Restricted stock units issued, net of shares withheld for taxes	—	—		(300)		—		7,595	276		(24)
Net income	—	—		—		23,126		—	—		23,126
Balance as of June 30, 2022	128,198,185	$	1,282	$	498,745	$	(236,159)	(1,972,635)	$	(56,400)	$	207,468



	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Treasury Stock			Total Stockholders’ Equity
	Shares	Amount		Amount		Amount		Shares	Amount		Amount
Balance as of December 31, 2020	128,198,185	$	1,282	$	491,246	$	(428,406)	(1,395,089)	$	(37,500)	$	26,622
Share-based compensation	—	—		701		—		—	—		701
Net income	—	—		—		12,862		—	—		12,862
Balance as of March 31, 2021	128,198,185	$	1,282	$	491,947	$	(415,544)	(1,395,089)	$	(37,500)	$	40,185
Share-based compensation	—	—		927		—		—	—		927
Share repurchase	—	—		—		—		(612,745)	(20,000)		(20,000)
Net income	—	—		—		75,966		—	—		75,966
Balance as of June 30, 2021	128,198,185	$	1,282	$	492,874	$	(339,578)	(2,007,834)	$	(57,500)	$	97,078

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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OPEN LENDING CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)


	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities
Net income	$	46,280	$	88,828
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation	2,269		1,628
Depreciation and amortization	614		537
Non-cash operating lease cost	285		268

Gain on extinguishment of tax receivable agreement	—		(55,422)
Loss on extinguishment of debt	—		8,778
Deferred income taxes	(998)		16,903
Changes in assets & liabilities:
Accounts receivable, net	(435)		(3,217)
Contract assets, net	6,208		(22,591)

Other current and non-current assets	1,477		(1,133)
Accounts payable	(885)		(1,455)
Accrued expenses	2,094		1,377
Income tax payable/receivable	(2,964)		(1,720)
Operating lease liabilities	(240)		(349)
Third-party claims administration liability	(13)		299
Other current and non-current liabilities	(105)		252
Net cash provided by operating activities	53,587		32,983
Cash flows from investing activities
Purchase of property and equipment	(364)		(841)
Net cash used in investing activities	(364)		(841)
Cash flows from financing activities
Proceeds from term loans	—		125,000
Proceeds from revolving facility	—		50,000
Payments on term loans	(1,562)		(167,628)
Payments on revolving facility	—		(25,000)
Payment of deferred financing costs	—		(1,669)
Shares withheld for taxes for restricted stock units	(63)		—
Settlement of tax receivable agreement	—		(36,948)
Share repurchase	—		(20,000)



Net cash used in financing activities	(1,625)		(76,245)
Net change in cash and cash equivalents and restricted cash	51,598		(44,103)
Cash and cash equivalents and restricted cash at the beginning of the period	119,509		104,148
Cash and cash equivalents and restricted cash at the end of the period	$	171,107	$	60,045
Supplemental disclosure of cash flow information:
Interest paid	$	1,756	$	3,776
Income tax paid, net	20,853		12,452

Non-cash investing and financing:
Internally developed software costs accrued but not paid	27		660
Property and equipment accrued but not paid	21		—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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OPEN LENDING CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1—Description of Business, Background and Nature of Operations

Open Lending Corporation (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 (“U.S.”), which allows each lending institution to book incremental near-prime and non-prime automotive loans out of their existing business flow. The Company also operates as a third-party administrator that adjudicates insurance claims and refunds on its automotive loans.

Nebula Acquisition Corporation (“Nebula”), our predecessor, was originally incorporated in Delaware on October 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. On June 10, 2020 (the “Closing Date”), Nebula consummated a business combination (the “Business Combination”) pursuant to that certain Business Combination Agreement, dated as of January 5, 2020 (as amended by that certain Amendment No. 1 and Waiver, dated as of March 18, 2020, that certain Amendment No. 2 and Consent, dated as of March 26, 2020, that certain Amendment No. 3, dated as of May 13, 2020, and that certain amendment No. 4, dated as of June 9, 2020, the “Business Combination Agreement”) by and among Nebula, Open Lending, LLC, a Texas limited liability company, BRP Hold 11, Inc., a Delaware corporation (“Blocker”), the Blocker’s sole stockholder, Nebula Parent Corp., a Delaware Corporation (“ParentCo”), NBLA Merger Sub LLC, a Texas limited liability company, NBLA Merger Sub Corp., a Delaware corporation, and Shareholder Representative Services LLC, a Colorado limited liability company, as the Securityholder Representative.

Unless the context otherwise requires, “we,” “us,” “our,” “Open Lending,” and the “Company” refers to Open Lending Corporation, the combined company and its subsidiaries following the Business Combination. “Open Lending, LLC” and “Nebula” refers to Open Lending, LLC and Nebula Acquisition Corporation prior to the Closing Date.

The Company has evaluated how it is organized and managed and has identified only 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 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 retained earnings.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted from these condensed consolidated financial statements, as permitted by Securities and Exchange Commission (“SEC”) rules and regulations. The Company believes the disclosures made in these condensed consolidated financial statements are adequate to make the information herein not misleading. The Company recommends that these 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, 2021 (“Annual Report”).

The interim data includes all adjustments that are, 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 six months ended June 30, 2022 are not necessarily indicative of the Company’s operating results for the entire fiscal year ending December 31, 2022.

Concentrations of revenue and credit risks

The Company’s three largest insurance carrier partners accounted for 38%, 11% and 11% of the Company’s total revenue during the three months ended June 30, 2022 and 38%, 13% and 10% during the six months ended June 30, 2022. The Company’s two largest insurance carriers accounted for 43% and 24% of the Company’s total revenue during the three months ended June 30, 2021 and accounted for 43% and 23% for the six months ended June 30, 2021. In the event that one or more of the Company’s significant insurance carriers terminates their relationship with the Company, it could have a material and adverse effect on the Company’s business and, in turn, its revenue. Financial instruments that potentially subject the Company

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OPEN LENDING CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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.

Cash and cash equivalents are deposited in commercial analysis and savings accounts at two financial institutions, both with high credit standing. Restricted cash relates to funds held by the Company on behalf of the insurance carriers, delegated for the use of insurance claim payments. Restricted cash is deposited in commercial analysis accounts at one financial 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.

At June 30, 2022, the Company had one customer that individually accounted for 10% of the Company’s net accounts receivable. At December 31, 2021, the Company had two customers that each represented 10% of the Company’s net accounts receivable.

The Company does not have material accounts receivable or contract asset balances that are past due and has not written off any material balance in its portfolio for the periods presented. The allowance for expected credit losses on accounts receivable and contract assets receivable was less than $0.2 million at June 30, 2022 and December 31, 2021.

Use of estimates and judgments

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the 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, the recognition of the valuations of share-based compensation arrangements, and assessing the realizability of deferred tax assets. These estimates, although based on actual historical trend and modeling, may potentially show significant variances over time.

In connection with profit share revenue recognition and the estimation of contract assets under Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), the Company uses forecasts of loan-level earned premium and insurance claim payments. These forecasts are driven by the projection of loan defaults, prepayments and default severity rates. These assumptions are based on the Company’s observations of the historical behavior for loans with similar risk characteristics. The assumptions also take into consideration the forecast adjustments under various macroeconomic conditions, including the current mix of the underlying portfolio of our insurance partners. As a result of the changes in facts and circumstances and general market conditions for the three and six months ended June 30, 2022, management has accordingly adjusted these assumptions.

Recently issued but not yet adopted accounting pronouncements

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform within Topic 848, which provides optional expedients and exceptions to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022 for which an entity has elected certain optional expedients and are retained through the end of the hedging relationship. The amendments in this update also include a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. If elected, the optional expedients for contract modifications must be applied consistently for all eligible contracts or eligible transactions within the relevant ASC Topic or Industry Subtopic that contains the guidance that otherwise would be required to be applied. The amendments in this update were effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company has not experienced any unintended outcomes or consequences of reference rate reform that would necessitate the adoption of this guidance. The Company will not need to consider the application of this guidance related to its credit agreements as such agreements provide for a replacement rate when LIBOR is discontinued. The Company will continue to closely monitor all potential instances of reference rate reform to determine if the adoption of ASU 2020-04 becomes necessary in the future.

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OPEN LENDING CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 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 profit share revenue, program fee revenue and claims administration services revenue (“TPA fees”) 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 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 six months ended June 30, 2022, contract asset adjustments attributable to profit share revenue forecast were $2.8 million and $5.5 million, respectively, as compared to contract asset adjustments of $11.8 million and $16.9 million, during the three and six months ended June 30, 2021, respectively.

Contract assets balances for the periods indicated below are as follows:


	Contract Assets
	Profit Share		TPA Fees		Program Fees		Total
	(in thousands)
Ending balance as of March 31, 2022	$	100,008	$	1,360	$	6,084	$	107,452
Increase due to new business generation	26,333		2,155		20,731		49,219
Change in estimates of revenue from performance obligations satisfied in previous periods	2,824		—		—		2,824
Receivables transferred from contract assets upon billing the lending institutions	—		—		(20,178)		(20,178)
Payments received from insurance carriers	(30,496)		(2,078)		—		(32,574)
Provision for expected credit losses	3		—		2		5
Ending balance as of June 30, 2022	$	98,672	$	1,437	$	6,639	$	106,748


	Contract Assets
	Profit Share		TPA Fees		Program Fees		Total
	(in thousands)
Ending balance as of December 31, 2021	$	105,486	$	1,316	$	6,154	$	112,956
Increase due to new business generation	52,002		4,185		40,457		96,644
Change in estimates of revenue from performance obligations satisfied in previous periods	5,465		—		—		5,465
Receivables transferred from contract assets upon billing the lending institutions	—		—		(39,978)		(39,978)
Payments received from insurance carriers	(64,327)		(4,065)		—		(68,392)
Provision for expected credit losses	46		1		6		53
Ending balance as of June 30, 2022	$	98,672	$	1,437	$	6,639	$	106,748

As of June 30, 2022 and December 31, 2021, the portion of the contract assets’ balance estimated to be received within one year consisted of $73.3 million and $70.5 million, respectively, and the portion of estimated to be received beyond one year consisted of $33.4 million and $42.4 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.

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OPEN LENDING CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 4—Debt

Debt balances for the periods indicated below were as follows:


	June 30, 2022		December 31, 2021
	(in thousands)
Revolving Facility, matures in 2026	$	25,000	$	25,000
Term Loan due 2026	121,094		122,656
Less: unamortized deferred financing costs	(1,229)		(1,396)
Total debt	144,865		146,260
Less: current portion of debt	(3,906)		(3,125)
Total long-term debt, net of deferred financing costs	$	140,959	$	143,135

Term Loan due 2027

On March 11, 2020, the Company entered into a credit agreement with UBS A.G. as the administrative agent and the lenders from time to time party thereto (the “Credit Agreement”). Pursuant to the Credit Agreement, the lenders thereto funded a term loan (the “Term Loan due 2027”) in a principal amount of $170.0 million bearing an interest rate per annum of LIBOR plus 6.5% (subject to a LIBOR floor of 1%), with a maturity date in March 2027. The Term Loan due 2027 was retired by the Company paying off its outstanding principal and interest with proceeds from issuance of the Term Loan due 2026 and the Revolving Facility (both as defined below) in March 2021. The transaction was deemed a debt extinguishment under ASC Topic 405-20, “Liabilities—Extinguishments of Liabilities,” and accordingly, the Company recognized a non-cash debt extinguishment loss of $8.8 million, which was recorded under the caption loss on extinguishment of debt in the consolidated statements of operations during the six months ended June 30, 2021. The loss on debt extinguishment was calculated as the difference between the carrying amount of the debt and the price paid to retire the debt, which primarily consisted of the write-off of the unamortized deferred financing costs related to the Term Loan due 2027.

New Credit Agreement—Term Loan due 2026 and Revolving Credit Facility

On March 19, 2021, the Company entered into a credit agreement with Wells Fargo Bank, N.A. as the administrative agent (the “New Credit Agreement”), pursuant to which the lenders thereto (i) funded a senior secured term loan in an aggregate principal amount of $125.0 million maturing in March 2026 (the “Term Loan due 2026”) and (ii) committed to provide a $50.0 million senior secured revolving credit facility, including a $10.0 million letter of credit sub-facility, maturing in March 2026 (the “Revolving Facility”). The obligations of the Company under the Term Loan due 2026 and the Revolving Facility 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.

Interest under the Term Loan due 2026 and the Revolving Facility are, at the option of the Company, either at an Alternate Base rate (“ABR”) plus a spread ranging from 0.75% to 1.50%, or LIBOR plus a spread ranging from 1.75% to 2.50%. With respect to the ABR loans, interest will be payable at the end of each calendar quarter. With respect to the LIBOR loans, interest will be payable at the end of the selected interest period. Additionally, there is a commitment fee payable at the end of each quarter at a rate per annum ranging from 0.200% to 0.275% based on the average daily unused portion of the Revolving Facility, and other customary letter of credit fees. Pursuant to the New Credit Agreement, the interest rate spreads and commitment fees increase or decrease in increments as the Company’s Funded Secured Debt/EBITDA ratio increase or decreases.

As of June 30, 2022, both the Term Loan due 2026 and the Revolving Facility are subject a LIBOR rate of 1.66% plus a spread of 1.75% per annum. Commitment fees were accrued at 0.20% under the Revolving Facility’s unused commitment balance of $25.0 million at June 30, 2022.

In connection with the issuance of the Term Loan due 2026 and the Revolving Facility, the Company incurred total deferred financing costs of $1.7 million, of which $1.2 million was allocated to the Term Loan due 2026 and $0.5 million was allocated to the Revolving Facility. The deferred financing costs were capitalized as a contra-liability against the principal balance of the loans and are amortized as interest expense using the effective interest method. Unamortized deferred financing costs were $1.2 million as of June 30, 2022. As of June 30, 2022, the weighted average effective interest rate on the Company’s outstanding borrowings was 3.64%.

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OPEN LENDING CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The New Credit Agreement contains a maximum total net leverage ratio financial covenant and a minimum fixed charge coverage ratio financial covenant that are tested quarterly. The maximum total net leverage ratio is 3.5 to 1.0 for periods on or prior to December 31, 2022, and then decreases to 3.0 to 1.0 after December 31, 2022. The minimum fixed charge coverage ratio is 1.25 to 1.0. As of June 30, 2022, the Company was in compliance with all required covenants under the New Credit Agreement.

Note 5—Share-Based Compensation

2020 Stock Option and Incentive Plan (the “2020 Plan”)

The 2020 Plan, approved on June 9, 2020, provides for the grant of stock options, stock appreciation rights, restricted stock units and other stock or cash-based awards. The Company initially reserved 9,693,750 shares, approximately 10% of the number of shares of its common stock outstanding upon the Closing Date, as the “Initial Limit” for the issuance of awards under the 2020 Plan. The 2020 Plan provides that beginning on January 1, 2021, the number of shares reserved and available for issuance under the plan will automatically increase each January 1st by 4% of the outstanding number of shares of the Company’s common stock on the immediately preceding December 31st, or the “Annual Increase.” This limit is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. As of June 30, 2022, there were 18,801,465 shares reserved and available for issuance under the 2020 Plan, which includes the 4% annual increase in 2022 less restricted stock units, performance stock units and stock options granted under the 2020 Plan.

Share-based compensation expense recorded for each type of award is as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(in thousands)
Time-Based Restricted Stock Units	$	1,005	$	458	$	1,912	$	691
Performance-Based Restricted Stock Units	(195)		276		11		553
Stock Options	178		193		346		384
Total share-based compensation expense	$	988	$	927	$	2,269	$	1,628

For performance-based restricted units, the Company evaluates the probability of achieving performance goals on a quarterly basis and recognizes share based compensation to the extent achievement of performance goals is considered probable. During the three months ended June 30, 2022 the Company determined certain performance goals are improbable of being achieved and recorded a reduction to share-based compensation of $0.3 million representing a change in estimate from previously reported share-based compensation. The Company evaluated the probability of achieving performance goals related to the performance-based restricted stock units awarded during the three months ended June 30, 2022, and determined that achievement of the performance goals is not probable, and accordingly, share-based compensation has not been recorded related to the awards.

During the three and six months ended June 30, 2022 and 2021, share-based compensation expense was allocated to cost of services, general and administrative, selling and marketing, and research and development, generally based on the functional responsibilities of the award recipient in the accompanying condensed consolidated statements of operations as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(in thousands)
General and administrative	$	643	$	773	$	1,565	$	1,327
Selling and marketing	150		91		330		182
Research and development	111		34		206		62
Cost of services	84		29		168		57
Total	$	988	$	927	$	2,269	$	1,628

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OPEN LENDING CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following table provides information related to the Company’s share-based compensation award activity for the six months ended June 30, 2022:


	Time-Based Restricted Stock Units			Stock Options			Performance-Based Restricted Stock Units
	Number of Awards	Weighted Average Fair Value at Grant Date		Number of Awards	Weighted Average Exercise Price		Number of Awards	Weighted Average Fair Value at Grant Date
Outstanding as of December 31, 2021	231,625	$	35.17	194,348	$	33.56	99,289	$	33.44
Granted	352,177	20.80		—	—		139,662	16.11
Vested	(17,691)	30.95		—	—		—	—
Forfeited or expired	(22,752)	23.32		(8,440)	33.56		(4,874)	33.44
Outstanding as of June 30, 2022	543,359	$	26.49	185,908	$	33.56	234,077	$	23.10

The following table reflects the future share-based compensation expense for the outstanding awards at June 30, 2022:

Unrecognized Share-based Compensation Expense

Weighted Average Amortization Period

(in thousands)

Time-Based Restricted Stock Units

11,837

3.13 years

Performance-Based Restricted Stock Units

4,296

2.07 years

Stock Options

1,800

2.50 years

Total unrecognized share-based compensation expense

17,933

2.81 years

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 six months ended June 30, 2022 and 2021 were time-based restricted stock units. The potentially dilutive common shares during the same periods did not include unvested stock options and performance-based restricted stock units containing unmet performance conditions. The potentially dilutive common shares are included in the calculation of diluted net income per share only when their effect is dilutive.

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OPEN LENDING CORPORATION

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 six months ended June 30, 2022 and 2021:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(in thousands, except shares and per share data)
Basic net income per share:
Numerator
Net income attributable to common stockholders	$	23,126	$	75,966	$	46,280	$	88,828
Denominator
Weighted average common shares	126,221,689		126,230,752		126,218,710		126,515,343
Basic net income per share attributable to common stockholders	$	0.18	$	0.60	$	0.37	$	0.70

Diluted net income per share:
Numerator
Net income attributable to common stockholders	$	23,126	$	75,966	$	46,280	$	88,828
Denominator
Basic weighted average common shares	126,221,689		126,230,752		126,218,710		126,515,343
Dilutive effect of outstanding Time-Based Restricted Stock Units	677		43,445		405		38,739
Diluted weighted average common shares	126,222,366		126,274,197		126,219,115		126,554,082
Diluted net income per share attributable to common stockholders	$	0.18	$	0.60	$	0.37	$	0.70

The following potentially dilutive outstanding securities as of June 30, 2022 and 2021 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 June 30,		Six Months Ended June 30,
	2022	2021	2022	2021
Unvested Time-Based Restricted Stock Units	543,359	—	543,359	—
Unvested Performance-Based Restricted Stock Units	234,077	99,289	234,077	99,289
Unvested and not exercised Stock Options	185,908	199,764	185,908	199,764
Total	963,344	299,053	963,344	299,053

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 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.

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OPEN LENDING CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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.

Fair Value Hierarchy

The following table presents the placement in the fair value hierarchy of the Company’s debt, net of deferred financing costs at June 30, 2022 and December 31, 2021:


	Carrying value		Fair value measurement at June 30, 2022
			Level 1		Level 2		Level 3
	(in thousands)
Liabilities:
Debt at fair value	$	144,865	$	—	$	144,865	$	—
Total	$	144,865	$	—	$	144,865	$	—


	Carrying value		Fair value measurement at December 31, 2021
			Level 1		Level 2		Level 3
	(in thousands)
Liabilities:
Debt at fair value	$	146,260	$	—	$	146,260	$	—
Total	$	146,260	$	—	$	146,260	$	—

The carrying amount of the Company’s debt approximates its fair value due to its variable interest rate that is tied to the current LIBOR plus an applicable spread. 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 June 30, 2022 and December 31, 2021.

The Company does not have any long-lived asset which is being measured at fair value on a recurring basis.

Note 8—Income Taxes

During the three and six months ended June 30, 2022, the Company recognized income tax expense of $8.6 million and $16.9 million, respectively, as compared to income tax expense of $23.3 million and $27.7 million, respectively, during the three and six months ended June 30, 2021. The effective tax rate for the three and six months ended June 30, 2022 was 27.1% and 26.7%, respectively, as compared to 23.4% and 23.8%, respectively during the three and six months ended June 30, 2021. The Company’s income tax expense for the three and six months ended June 30, 2022 and June 30, 2021 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 162m.

As of June 30, 2022, the Company has assessed whether it is more likely than not that its 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 June 30, 2022.

The Company has evaluated the aggregate exposure for uncertain tax positions for all open tax years and concluded that the Company and its predecessor have no material uncertain tax positions as of June 30, 2022 or for any open tax years. When applicable, tax penalties and interest are recognized within general and administrative expenses in the condensed consolidated statements of operations. The Company has not recorded any penalties or interest related to uncertain tax positions as of June 30, 2022 or for any open tax years.

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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 condensed consolidated results of operations and financial condition. The discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto on Form 10-K for the year ended December 31, 2021. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under the heading “Risk Factors” set forth elsewhere in this Quarterly Report on Form 10-Q and our Annual Report. 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 condensed consolidated subsidiaries.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “appears,” “shall,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

•our financial performance;

•changes in our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects and plans;

•expansion plans and opportunities;

•the impact of the relative strength of the overall economy, including its effect on unemployment, consumer spending and consumer demand for automotive products;

•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 in absolute dollars and as a percentage of revenue;

•selling and marketing expenses in absolute dollars and as a percentage of revenue;

•research and development expenses in absolute dollars and as a percentage of revenue;

•the impact of projected operating cash flows and available cash on hand on our business operations in the future;

•the turnover in automotive lenders, as well as varying activation rates and volatility in usage of our Lenders Protection Platform (“LPP”) by automotive lenders;

•the outcome of any known and unknown litigation and regulatory proceedings, including such legal proceedings that may be instituted in connection with the Business Combination and transactions contemplated thereby;

•the ability to maintain the listing of our common stock on Nasdaq;

•our ability to recognize the anticipated benefits of the Business Combination, which may be affected by, among other things, competition and our ability to grow and manage growth profitably;

•expenses associated with our growth as a result of demands on our operational, marketing, compliance and accounting infrastructure;

•regulatory agreements between us and state agencies regarding issues including automotive lender conduct and oversight and loan pricing;

•changes in applicable laws or regulations;

•applicable taxes, inflation, supply chain disruptions, including global hostilities and responses thereto, interest rates and the regulatory environment; and

•the effects of the ongoing COVID-19 pandemic on our business.

All forward-looking statements are based on information and estimates available to us at the time of this Quarterly Report on Form 10-Q and are not guarantees of future financial performance. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and our Annual Report. We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. You should not rely upon forward-looking statements as predictions of future events.

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Business Overview

We are a leading provider of lending enablement and risk analytics to credit unions, regional banks and Original Equipment Manufacturers. 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 approximately $16.0 billion in automotive loans, accumulating over 20 years of proprietary data and developing over two million unique risk profiles.

We specialize in risk-based pricing and modeling and provide automated decision-technology for automotive lenders throughout the U.S. We believe that we address the financing needs of near-prime and non-prime borrowers, or borrowers with a credit bureau score between 560 and 699, who are underserved in the automotive finance industry. Traditional lenders focus on prime borrowers, where an efficient market has developed with interest rate competition that benefits borrowers. Independent finance companies focus on sub-prime borrowers. Borrowers that utilize the near-prime and non-prime automotive lending market have fewer lenders focused on loans with longer terms or higher advance rates. As a result, many near-prime and non-prime borrowers turn to sub-prime lenders, resulting in higher interest rate loan offerings than such borrower’s credit profile often merits or warrants. We seek to make this market more competitive, resulting in more attractive loan terms.

Our flagship product, LPP, enables automotive lenders to make loans that are largely insured against losses from defaults. We have been developing and advancing the proprietary underwriting models used by LPP for over 20 years. We believe LPP provides significant benefits to our growing ecosystem of automotive lenders, automobile dealers, borrowers and insurers.

A key element of LPP is the ability to facilitate risk-based interest rates that are appropriate for each loan and lender and electronically submitted to our automotive lenders within approximately five seconds after we receive a loan application. Our interest rate pricing is customized to each automotive lender, reflecting the cost of capital, loan servicing costs, loan acquisition costs, expected recovery rates and target return on assets of each automotive lender. Using our risk models, we project monthly loan performance results, including expected losses and prepayments for automotive lenders that use LPP. The product of this process is a risk-based interest rate, inclusive of elements to recover all projected costs, program fees and insurance premiums, given the risk of the loan, to return a targeted return on asset goal.

We believe that our market opportunity is significant. The near-prime and non-prime automotive loan origination market is estimated at $270 billion annually. We are currently serving less than 2% 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 increasing our penetration of the near-prime and non-prime automotive loan market while diversifying our customer base and refining our data analysis capabilities.

We facilitated 44,531 and 88,475 certified loans during the three and six months ended June 30, 2022, respectively, as compared to 46,408 and 79,726 certified loans during the same periods in 2021, respectively.

Total revenue was $52.0 million and $102.1 million for the three and six months ended June 30, 2022, respectively, as compared to $61.1 million and $105.1 million, respectively, during the same periods in 2021.

Operating income was $32.8 million and $65.1 million for the three and six months ended June 30, 2022, respectively, as compared to $44.9 million and $74.3 million, respectively, in same periods in 2021.

Net income was $23.1 million and $46.3 million for the three and six months ended June 30, 2022, respectively, as compared to net income of $76.0 million and $88.8 million, respectively, for the same periods in 2021.

Adjusted EBITDA was $34.0 million and $67.8 million for the three and six months ended June 30, 2022, respectively, as compared to $46.1 million and $76.3 million, respectively, during the same periods in 2021. 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.”

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Highlights

The table below summarizes all loans certified by lenders during the periods indicated.


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Certified loans	44,531		46,408		88,475		79,726
Value of insured loans facilitated (in thousands)	$	1,293,525	$	1,170,461	$	2,475,898	$	1,950,822
Average loan size per certified loan	$	29,043	$	25,221	$	27,984	$	24,469
Number of contracts signed with automotive lenders	18		22		36		36

Historically, we have defined active lenders as certifying at least one loan during the preceding 12 months. As of June 30, 2022 and 2021, we had 414 and 380 active lenders, respectively. The table below represents lender count information for lenders with certified loan activity during the periods indicated.


	Three Months Ended June 30,		Six Months Ended June 30,
	2022	2021	2022	2021
Lenders certifying loans at the beginning of the period	377	328	396	354
New lenders (1)	10	20	31	33
Net change in lenders (2)	(16)	—	(31)	(25)
Lenders certifying loans at the end of the period	371	348	396	362

(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 and using 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 companies such as ours, with recurring revenue streams.

Certified Automotive Loans

We refer to “certified loans” as the number of loans facilitated through LPP during a given period. Additionally, we refer to loans with a one-time upfront program fee payment as “single-pay” loans. For certain loans, the program fee is paid to us over 12 monthly installments and we refer to these loans as “monthly-pay” loans.

Average Program Fee

We define “average program fee” as the total program fee revenue recognized for a period divided by the number of certified loans in that period.

Insurers’ Underwriting Profit

We define “insurers’ underwriting profit” as the total underwriting profit expected to be received by insurers over the expected life of the insured loans.

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Insurers’ Earned Premium

We define “insurers’ earned premium” as the total insurance premium earned by insurers in a given period. Earned premiums were $70.9 million and $138.1 million, respectively, for the three and six months ended June 30, 2022 and $53.9 million and $100.6 million for the same periods in 2021, respectively.

Recent Developments

Fourth Insurance Carrier Partner

On May 2, 2022, we signed a program management agreement with a fourth insurance carrier partner, Arch Specialty Insurance Company, a part of Arch Capital Group Ltd., who will act as an additional provider of credit default insurance policies for LPP, from which we can earn profit share revenue and claims administration fees.

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 Active Automotive Lenders

The growth trend in active automotive lenders using LPP is a critical factor 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 and add new automotive lenders.

Competition

We face competition to acquire and maintain automotive lenders as customers, as well as competition to facilitate the funding of near-prime and non-prime auto loans. For LPP, which combines lending enablement, risk analytics, near-prime and non-prime auto loan performance data, real-time loan decisioning, risk-based pricing and auto loan default insurance, we do not believe there are any direct competitors. The emergence of direct competitors, providing risk analytics and loss mitigation, which are core elements of our business, could materially impact our ability to acquire and maintain automotive 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 historical vintages generate an increase in our contract asset, additional revenues and future expected cash flows, while negative change in estimates generate a decrease in our contract asset, a reduction in revenues and future expected cash flows. 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 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 inflation, interest rate levels, changes in monetary and related policies, market volatility, supply chain disruptions, consumer confidence, the impact of the pandemic and, particularly, the unemployment rate also influence consumer spending and borrowing patterns.

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Concentration

Our three largest insurance carrier partners accounted for 38%, 11% and 11% of our total revenue during the three months ended June 30, 2022, and 38%, 13% and 10% during the six months ended June 30, 2022. Our two largest insurance carriers accounted for 43% and 24% of the Company’s total revenue during the three months ended June 30, 2021, and accounted for 43% and 23% for the six months ended June 30, 2021. Termination or disruption of these relationships could materially and adversely impact our revenue.

Components of Results of Operations

Total Revenues

Our revenue is generated through three streams: (i) profit share paid to us by insurance partners, (ii) program fees paid to us by lenders and (iii) claims administration service fees paid to us by insurance partners.

Profit share. Profit share represents our participation in the underwriting profit of third-party insurance partners who provide lenders with credit default insurance on loans the lenders make using LPP. We receive a percentage of the aggregate monthly insurance underwriting profit. Monthly insurance underwriting profit is calculated as the monthly earned premium less expenses and losses (including reserves for incurred but not reported losses), with losses accrued and carried forward for future profit share calculations.

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 receipt of the loan by the consumer. The fee percentage rate varies by type of loan. For loans with a one-time upfront payment, there is a sliding scale of rates representing volume discounts to the lender with fees generally capped at $600 per loan. This cap may vary for certain large volume lenders. For monthly pay loans, the fee paid by the lender is a flat 3% of the total amount of the loan and is not capped.

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 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 loan remains outstanding.

Cost of Services and Operating Expenses

Cost of services. Cost of services primarily consists of fees paid to third party partners for lead-generation efforts, compensation and benefits expenses relating to employees engaged in lenders’ services and claims administration activities, fees paid for actuarial services related to the development of the monthly premium program, fees for integration with loan origination systems of automotive lenders and fees paid to credit bureaus and data service providers for credit applicant data. In the near to intermediate term, we generally expect cost of services to increase as a percentage of our program fee revenue as we continue to expand our third-party partner relationships.

General and administrative expenses. General and administrative expenses are comprised primarily of expenses relating to employee compensation and benefits, non-cash share-based compensation, travel, meals and entertainment expenses, data and software expenses and professional and consulting fees. In the near to intermediate term, we expect general and administrative expenses to remain relatively constant.

Selling and marketing expenses. Selling and marketing expenses consist primarily of compensation and benefits of employees engaged in selling and marketing activities. We generally expect selling and marketing expenses to increase as a percentage of our program fee revenue in the near to immediate term as we continue to expand our sales and marketing team.

Research and development expenses. Research and development expenses primarily consist of employee compensation and benefits expenses for employees engaged in ongoing research and development of our software technology platform. We generally expect our research and development costs to increase in absolute dollars as our business continues to grow.

Other Income (Expense)

Interest expense. Interest expense primarily includes interest payments and the amortization of deferred financing costs in connection with the issuance of the debt.

Loss on extinguishment of debt. Loss on extinguishment of debt primarily reflects unamortized deferred financing costs, which were written off in connection with the refinancing of our Term Loan due 2027 on March 19, 2021.

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Results of Operations

The following table sets forth our results of operations for the periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		% Change		2022		2021		% Change
	($ in thousands)
Revenue
Profit share	$	29,157	$	38,842	(25)	%	$	57,467	$	66,572	(14)	%
Program fees	20,731		20,597		1	%	40,457		35,508		14	%
Claims administration and other service fees	2,156		1,686		28