Open Lending Corp (LPRO)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing in Item 8. Financial Statements and Supplementary Data. This section of our Annual Report generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Annual Report can be found in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those factors discussed below and elsewhere in this Annual Report, particularly in Item 1A—Risk Factors and Cautionary Note Regarding Forward-Looking Statements, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

Business Overview

We are a leading provider of lending enablement and risk analytics to credit unions, regional banks, finance companies and OEM captive finance companies. 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 one million automotive loans representing over $25.1 billion in originations, accumulated more than 20 years of proprietary data and developed over two million unique risk profiles. We currently serve 441 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 interest 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 FCRA-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 advanced 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 evolve and refine risk models, based on actual experience and third-party information sources.

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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 110,652 and 122,984 certified loans during the years ended December 31, 2024 and 2023, respectively.

Total revenue was $24.0 million and $117.5 million for the years ended December 31, 2024 and 2023, respectively.

Operating loss was $65.4 million and operating income was $29.1 million for the years ended December 31, 2024 and 2023, respectively.

Net loss was $135.0 million and net income was $22.1 million for the years ended December 31, 2024 and 2023, respectively.

Impact Related to Profit Share Revenue Change in Estimates

Each quarter, we evaluate and update our profit share revenue forecast and make adjustments to our profit share revenue and related contract assets accordingly. During the year ended December 31, 2024, we recorded a reduction in estimated profit share revenues of $96.1 million, of which $81.3 million was recorded in the fourth quarter of 2024, primarily due to heightened delinquencies and corresponding defaults associated with loans originated in 2021 through 2024.

As discussed below, three factors primarily contributed to this reduction of estimated profit share during the fourth quarter of 2024.

First, there was continued deterioration of our 2021 and 2022 vintages. These certified loans were generated when used car values reached an all-time high in late 2021, driven by pandemic-related disruptions in the supply chain. The subsequent decline in used car values has increased the likelihood of default on vehicles that are now worth significantly less than their corresponding outstanding loan balances. Adjustments to the forecasted performance of our 2021 and 2022 vintages accounted for approximately 40% of our total negative change in estimate for the fourth quarter of 2024.

Second, continued elevated claims and delinquencies as a result of broader macroeconomic conditions accounted for approximately 20% of our total negative change in estimate for the fourth quarter of 2024.

Finally, we identified two cohorts of borrowers, borrowers with credit builder tradelines and borrowers with fewer positive tradelines, that caused our 2023 and 2024 vintages to underperform. Adjustments to the forecasted performance of loans to these two cohorts of borrowers accounted for approximately 40% of our total negative change in estimate for the fourth quarter.

As a result of the profit share change in estimate adjustment, for the year ended December 31, 2024, we reduced our contract assets by $48.5 million and recorded an excess profit share receipts liability of $47.6 million, attributable to the change in our expected profit share revenue. Any future adjustments to profit share revenue forecasts, positive or negative, will impact profit share revenue. Refer to Note 3—Contract Assets and Excess Profit Share Receipts for further discussion.

Highlights

The table below summarizes the total dollar-value of insured loans we facilitated, the number of new contracts we signed with automotive lenders and the number of active lenders for the years ended December 31, 2024 and 2023:

(1) Active lenders is defined as lenders who certify at least one loan during the preceding 12 months. This number includes 39 and 47 new lenders using LPP to certify loans for the first time during the years ended December 2024 and 2023, respectively.

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Key Performance Measures

We review several key performance measures 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 with recurring revenue streams.

The following table sets forth key performance measures for the years ended December 31, 2024 and 2023:

(1) Excludes one-time adjustment of $0.6 million for the year ended December 31, 2023.

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, excluding one-time adjustments, divided by the number of certified loans in that period.

Earned Premium

We earn a monthly claims administration service fee, which is calculated by our insurance partners as 3% of the monthly net insurance earned premium collected over the life of the underlying loan. We define “earned premium” as the total insurance premium earned by insurers in a given period. Earned premiums were $336.9 million and $335.0 million for the years ended December 31, 2024 and 2023, respectively.

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, fluctuating interest rates, tariffs, uncertainty or 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

We rely on our insurance partners for a significant portion of our revenue. Refer to Note 2 — Summary of Significant Accounting and Reporting Policies for the concentration of revenues from these customers.

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 partners and are unable to replace their commitments, it could have a material adverse effect on our business.”

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Components of Results of Operations

Total Revenue

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. Our revenue grows as we increase active automotive lenders using LPP 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.

Program fees. Program fees are paid by automotive lenders for the use of LPP, our cloud-based automotive lending enablement platform, 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 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 over the term of the underlying insured loan. 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. Thus, the profit share payments received from the insurance carriers are based on the monthly activity of the aggregated loan portfolio at the insurance partner level and can vary each period. In periods where the expenses and losses on the loan portfolio exceed the monthly earned premiums, no profit share payments are received and future monthly insurance underwriting profits earned are reduced until the earned premiums for the aggregate loan portfolio exceed the accumulated losses at the insurance partner level.

Upon placement of the insurance, we estimate the total variable consideration we expect to receive from the insurance company over the term of the underlying insured loan using a forecast model based on undiscounted expected future profit share to be received from our 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 on the Company’s remaining active loan portfolio as of the reporting date. These assumptions are derived from an analysis of the historical portfolio performance, 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. We recognize the estimated profit share revenue upon the placement of the insurance as all performance obligations are satisfied at that time and record a contract asset for the consideration we expect to receive over the term of the underlying insured loan.

On a quarterly basis, we update the assumptions used in the forecast model and recognize a change in estimate adjustment to our profit share revenue and contract assets and the related excess profit share receipts liability in the period, which could be material. We rely on assumptions to calculate the value of profit share revenue, which is our share of insurance partners’ underwriting profit. We continue to assess the assumptions used in our forecast model against reported performance and lender delinquency data and make updates to the forecast model in an effort to help ensure that default, severity and prepayment rate projections align with actual experience. Positive change in estimates associated with historic vintages generate additional revenues and future expected cash flows, while negative change in estimates generate a reduction in revenues and future expected cash flows. Please refer to Critical Accounting Policies and Estimates for more information on these assumptions.

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, IAS, 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.

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Cost of Services and Operating Expenses

Cost of services. Cost of services primarily consists of fees paid to third party partners for partner commissions, 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, fees paid to credit bureaus and data service providers for credit applicant data and amortization of capitalized software development costs related to our cloud-based solutions. In the near term, we generally expect cost of services to decrease as a percentage of our program fee revenue.

General and administrative expenses. General and administrative expenses are comprised primarily of employee compensation and benefits as well as travel, meals and entertainment expenses, for corporate level employees, data and software expenses and professional and consulting fees. In the near term, we expect general and administrative expenses to decrease as we focus on cost saving initiatives.

Selling and marketing expenses. Selling and marketing expenses consist primarily of compensation and benefits, as well as travel, meals and entertainment expenses, for employees engaged in selling and marketing activities and costs of our business development and marketing programs. We generally expect selling and marketing expenses to remain constant in the near term.

Research and development expenses. Research and development expenses primarily consist of employee compensation and benefits, as well as travel, meals and entertainment expenses, for employees engaged in product development activities. We generally expect our research and development costs to increase in the near term as we continue to invest in new and existing products and services. In addition, we capitalize certain research and development expenses related to the development of new functionality for our cloud-based solutions, which may cause our research and development expense to fluctuate from period to period.

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. Since the borrowings outstanding under our debt currently bear interest at variable rates, we expect our interest expense may continue to fluctuate as a result of changes in interest rates.

Interest income. Interest income primarily includes interest earned on money market funds and U.S. Treasury securities.

Comparison of Year Ended December 31, 2024 and 2023

Revenue

Total revenue decreased by $93.4 million, or 80%, primarily driven by a $86.4 million decrease in profit share revenue and a $7.1 million decrease in program fees revenue. Claims administration fee revenue was flat compared to the year ended December 31, 2023.

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Program Fees. Program fees revenue decreased $7.1 million, or 11%, primarily driven by a 10% decrease in certified loan volume and a 2% decrease in unit economics per certified loan as compared to the year ended December 31, 2023.

Profit Share. Profit share revenue decreased by $86.4 million, or 200%, primarily due to an increase in the negative change in estimate adjustment during the period and a decrease in anticipated profit share revenue associated with new certified loan originations.

During the year ended December 31, 2024, we recorded $53.0 million in anticipated profit share associated with 110,652 certified loans for an average of $479 per loan, as compared to $66.1 million in anticipated profit share associated with 122,984 certified loans for an average of $538 per loan during the year ended December 31, 2023. The decrease in the average revenue per loan was due to a decrease in expected future profit share to be received from our insurance partners on the loans certified based on current estimates of loan default rates, prepayment rates and severity of losses.

In addition, during the year ended December 31, 2024, we recorded a reduction in estimated profit share revenues of $96.1 million for changes in estimates of variable consideration related to performance obligations satisfied in previous periods, or historic vintages, primarily as a result of forecast assumption changes due to higher than anticipated loan default rates associated with loans originated in 2021 through 2024, partially offset by lower than anticipated severity of losses. As the expected profit share variable consideration is recorded and updated on a quarterly basis, the reduction in estimated profit share revenue includes adjustments to revenue recorded in the previous quarters of the same fiscal year reported.

During the year ended December 31, 2023, we recorded a reduction of $22.8 million in estimated profit share revenues related to business in historic vintages primarily as a result of forecast assumptions changes due to higher than anticipated loan default rates and prepayment rates, partially offset by lower than anticipated severity of losses.

Claims Administration and Other Service Fees. Revenue from claims administration and other service fees, which primarily represents 3% of our insurance partners’ annual earned premium, was relatively flat for the year ended December 31, 2024 as compared to the year ended December 31, 2023.

Cost of Services, Gross Profit and Gross Margin

Cost of Services. Cost of services increased $1.6 million, or 7%, primarily due to a $0.8 million in increase employee compensation and benefit costs associated with our focus on product support and the growth of our claims administration team and $1.1 million increase in fees paid to data service providers, partially offset by a decrease in other variable cost of services.

Gross Profit. Gross profit decreased by $95.0 million, or 100%, primarily driven by decreases in program fees and profit share revenues and an increase in cost of services, as discussed above.

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Operating Expenses, Operating Income (Loss) and Operating Margin

General and Administrative. General and administrative expenses increased by $0.8 million, or 2%, primarily driven by an increase in corporate employee compensation and benefit costs of $3.2 million, partially offset by a $2.0 million decrease in business taxes due to non-recurring events in 2023.

Selling and Marketing. Selling and marketing expenses decreased by $0.3 million, or 2%, primarily driven by a $0.6 million decrease in marketing expenses, mostly associated with reduced spending on events, media relations and branding, partially offset by a $0.5 million increase in employee compensation and benefits.

Research and Development. Research and development expenses decreased by $1.1 million, or 20%, primarily due to a decrease in employee compensation and benefit costs due to an increase in capitalized employee costs related to our LPP platform.

Operating income (loss). Operating income (loss) decreased by $94.5 million, or 325%, primarily driven by decreases in total revenues as well as changes in cost of services and operating expenses, as discussed above.

Interest Expense and Interest Income

Interest expense increased $0.7 million, or 6%, as a result of higher borrowing costs during 2024 primarily due to an increase in applicable margins based on our total net leverage ratio, partially offset by a decrease in interest rates.

Interest income increased $1.8 million, or 17%, primarily due to an increase in interest earned on our U.S Treasury securities and Money Market accounts.

Income Taxes

Income tax expense increased $63.6 million during the year ended December 31, 2024 as compared to the year ended December 31, 2023, primarily as a result of the impact of recording a valuation allowance on all of our deferred tax assets during the period. Refer to Note 12 — Income Taxes for further discussion.

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Liquidity and Capital Resources

Our principal liquidity requirements are to (i) meet working capital, tax and capital expenditure needs, and (ii) service and repay our indebtedness.

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 forecast model assumptions and is, therefore, subject to variability. Changes in these assumptions have resulted in negative impacts to our estimated profit share revenues, which may adversely affect our future expected cash flows. Despite this uncertainty, 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 and Item 1A — Risk Factors for a full description of the related estimates, assumptions, and judgments.

Based on our assessment of the underlying provisions and circumstances of our contractual obligations, other than the risks that we and other similarly situated companies face with respect to macroeconomic conditions and the condition of the capital markets (as described in Item 1A—Risk Factors), there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur that would have a material adverse effect on our consolidated results of operations, financial condition, or liquidity.

The following table provides a summary of cash flow data:

Cash Flows from Operating Activities

Our cash flows provided by operating activities reflect net income (loss) adjusted for certain non-cash items and changes in operating assets and liabilities.

The following table summarizes the adjustments in the operating activities in the Statement of Cash Flows:

Net cash provided by operating activities decreased by $65.1 million for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The decrease was primarily attributable to decreased cash collections of $79.3 million related to program fees, profit share and claims administration service fee revenues, and a $2.3 million increase in interest payments. This decrease in cash was partially offset by a $13.0 million reduction in income tax payments and an $1.8 million increase in interest income received during the year ended December 31, 2024 as compared to the year ended December 31, 2023.

The net change in contract assets and excess profit share receipts liability reported in net cash provided by operating activities includes the impact of a reduction in estimated profit share revenues of $96.1 million for changes

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in estimates of variable consideration. Refer to Note 3—Contract Assets and Excess Profit Share Receipts for further discussion.

Cash Flows from Investing Activities

For the years ended December 31, 2024 and 2023, net cash used in investing activities was $3.9 million and $2.2 million, respectively, and primarily related to capitalized software development costs related to our cloud-based solution and other software developed for internal use.

Cash Flows from Financing Activities

Our cash flows used in financing activities primarily consist of share repurchases, and payments of debt and deferred financing costs.

For the year ended December 31, 2024, net cash used in financing activities was $6.4 million which includes a $4.7 million principal payment on our Term Loan due 2027, $1.4 million for shares withheld for payroll taxes associated with the vesting of restricted stock awards and $0.3 million for payments of accrued excise tax on shares repurchased during 2023.

For the year ended December 31, 2023, net cash used in financing activities was $42.3 million and is primarily related to the repurchase of 5,233,065 shares of our common stock held in treasury stock for a total of $37.3 million, excluding excise tax.

Debt

As of December 31, 2024, we had no amounts outstanding under our Revolving Credit Facility and $140.6 million outstanding under our Term Loan due 2027. Refer to Note 5—Long-term Debt for further discussion.

Share Repurchase Program

In November 2022, 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 Consolidated Balance Sheets, which includes $0.3 million of excise tax paid in October 2024.

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 (loss) excluding interest expense, income tax expense, depreciation expense of property and equipment, amortization expense of capitalized software development costs and share-based compensation expense. Adjusted EBITDA margin is defined as Adjusted EBITDA expressed as a percentage of total revenue.

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The following table presents a reconciliation of GAAP net income (loss) to Adjusted EBITDA for each of the periods indicated:

For the year ended December 31, 2024, Adjusted EBITDA decreased by $93.1 million, or 186%, as compared to year ended December 31, 2023. The decrease in Adjusted EBITDA reflects the decrease in operating income primarily driven by the decrease in estimated future profit share revenue on historic vintages, partially offset by decreased operating expenses.

Critical Accounting Policies and Estimates

In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, income from operations and net income, as well as on the value of certain assets and liabilities on our Consolidated Balance Sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions.

The consolidated financial statements have been prepared in accordance with GAAP. To prepare these financial statements, we make estimates, assumptions, and judgments that affect what we report as our assets and liabilities, what we disclose as contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the periods presented.

In accordance with our policies, we regularly evaluate our estimates, assumptions, and judgments, including, but not limited to, those concerning revenue recognition, depreciation and amortization, contingencies, share-based compensation, and income taxes, and base our estimates, assumptions, and judgments on historical experience and on factors we believe reasonable under the circumstances. The results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. If our assumptions or conditions change, the actual results we report may differ from these estimates. We believe the following critical accounting policies affect the more significant estimates, assumptions, and judgments we use to prepare these consolidated financial statements. Refer to Note 2 — Summary of Significant Accounting and Reporting Policies in the accompanying consolidated financial statements for a summary of our significant accounting policies.

Profit Share Revenue Recognition

We recognize revenue in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). Application of ASC 606 requires us to make judgments and estimates related to the classification, measurement and recognition of revenue. Our revenue primarily consists of program fees derived from contracts with lending institutions, profit share and claims administration service fees from contracts with insurance partners and is recognized when the contractual performance obligation is satisfied.

The primary judgment relating to the recognition of revenue is the estimation of our profit share with our insurance partners. 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 over the term of the underlying insured loan.

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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.

Upon placement of the insurance, we estimate the total variable consideration we expect to receive from the insurance company over the term of the underlying insured loan, typically 5 to 7 years, using a forecast model based on undiscounted expected future profit share to be received from our 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 portfolio performance, prevailing default and prepayment trends, and macroeconomic projections. Prepayment trends impact the estimate of profit share revenue in the event a loan is paid off early or defaults before the original term, future earned premium cash flows will be impacted. Claim severity is also a key factor in the calculation of profit share revenue and is dependent on the realized value from the sale of a vehicle and the wholesale value which are impacted by auto market volatility. We continue to assess the default and prepayment assumptions of our forecast model against reported performance and lender delinquency data and make updates to the forecast model in an effort to help ensure that default and prepayment rate projections align with actual experience.

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. We consider various factors in constraining the estimates of variable consideration to determine whether some, or all, of the estimated amount can be included in the transaction price. These factors include: 1) the amount of consideration is highly susceptible to factors outside our control, 2) the uncertainty about the amount of consideration is not expected to be resolved for a long period of time, and 3) the contract has a large number and broad range of possible consideration amounts. In addition, while we have significant history facilitating insurance placement, changes in the current economic behavior of the loans can impact the forecast models and cause the estimated profit share consideration to deviate from the historical patterns.

We recognize the estimated profit share revenue upon the placement of the insurance as all performance obligations are satisfied at that time. On a quarterly basis, we update the assumptions used in the forecast model, including the constraints applied, and recognize a change in estimate adjustment to our profit share revenue and contract assets and the related excess profit share receipts liability in the period, which could be material. The profit share revenue change in estimate adjustments increase or decrease our contract asset. To the extent a negative change in estimate exceeds the associated contract asset balance at a loan level, or if cash consideration received is in excess of the expected profit share consideration, the amount is recorded as an excess profit share receipt liability and will be impacted by future changes in estimate related to the profit share revenue forecast.

We evaluate our forecast assumptions for prepayment rate, loan default rate and severity of loss by performing a sensitivity analysis calculating the impact on the cumulative profit share revenue of a hypothetical 10% increase and decrease in each assumption. The below table summarizes the results of the sensitivity analysis as of December 31, 2024:

(1) Cumulative revenue is calculated as the actual and projected loan-level earned premiums and insurance claims for loans originated through the end of the reporting period.

Refer to Note 2 — Summary of Significant Accounting and Reporting Policies and Note 3—Contract Assets and Excess Profit Share Receipts in the accompanying consolidated financial statements for additional discussion regarding our profit share revenue and related contract assets.

Income Taxes

Our effective tax rate is based on income at statutory tax rates, adjusted for non-taxable and non-deductible items and tax credits. Management’s best estimate of future events and their impact is included in our effective tax rate. Certain changes or future events, such as changes in tax legislation, could have an impact on our estimates and effective tax rate. Audit periods remain open for review until the statute of limitations has passed.

The calculation of income taxes involves estimating the actual current tax liability together with assessing temporary differences in recognition of income for tax and accounting purposes. These differences result in deferred tax assets

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and liabilities, which are included in our Consolidated Balance Sheets. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, we are required to develop estimates of the anticipated timing of the reversal of existing deferred tax liabilities, as well as estimates of future taxable income in some instances. Judgment is inherent in this process and differences between the estimated and actual amounts could result in a material impact on our consolidated financial statements.

We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine whether the weight of available evidence indicates that the tax position has met the threshold for recognition. Therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Recent Accounting Pronouncements

Refer to Note 2 — Summary of Significant Accounting and Reporting Policies to the accompanying consolidated financial statements for our discussion about new accounting pronouncements adopted and those pending.

Contractual and Other Obligations

As of December 31, 2024, our estimated future obligations include both current and long-term obligations. For our debt described in Note 5 — Long-term Debt, we have a current obligation of $7.5 million and a long-term obligation of $133.1 million. Under our operating leases described in Note 10 — Commitments and Contingencies, we have a current obligation of $0.8 million and a long-term obligation of $3.3 million. In addition, as of December 31, 2024, we have a non-cancellable minimum purchase commitment of $6.0 million associated with third-party credit data services, of which $2.0 million require us to make cash payments in the next 12 months. See Note 10 — Commitments and Contingencies for additional discussion of our non-cancellable purchase commitment.

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing in Item 8. Financial Statements and Supplementary Data. This section of our Annual Report generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Annual Report can be found in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those factors discussed below and elsewhere in this Annual Report, particularly in Item 1A—Risk Factors and Cautionary Note Regarding Forward-Looking Statements, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

Business Overview

We are a leading provider of lending enablement and risk analytics to credit unions, regional banks, 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 $21.9 billion in automotive loans, accumulated more than 20 years of proprietary data and developed over two million unique risk profiles. We currently serve 454 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 platform. LPP supports loans made to near-prime and non-prime borrowers and is designed to underwrite default insurance by linking automotive lenders to insurance companies. 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 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 FCRA-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 advanced 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.

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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 122,984 and 165,211 certified loans during the years ended December 31, 2023 and 2022, respectively.

Total revenue was $117.5 million and $179.6 million for the years ended December 31, 2023 and 2022, respectively.

Operating income was $29.1 million and $97.6 million for the years ended December 31, 2023 and 2022, respectively.

Net income was $22.1 million and $66.6 million for the years ended December 31, 2023 and 2022, respectively.

Adjusted EBITDA, as defined below, was $50.2 million and $105.7 million for the years ended December 31, 2023 and 2022, respectively. Information regarding use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, is included in “Non-GAAP Financial Measures.”

Highlights

The table below summarizes the total dollar-value of insured loans we facilitated and the number of new contracts we signed with automotive lenders for the years ended December 31, 2023 and 2022:

Historically, we have defined “active lenders” as lenders who certify at least one loan during the preceding 12 months. As of December 31, 2023 and 2022, we had 454 and 438 active lenders, respectively. The table below represents lender count information for lenders with certified loan activity during the periods indicated.

(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 with recurring revenue streams.

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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, excluding one-time adjustments, 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 insured loans.

Earned Premium

We define “earned premium” as the total insurance premium earned by insurers in a given period. Earned premiums were $335.0 million and $294.0 million, respectively, for the years ended December 31, 2023 and 2022, respectively.

Recent Developments

On February 15, 2024, we entered into a program management agreement with Core Specialty, who will provide auto loan default insurance policies for LPP certified loans, from which we expect to 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 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, 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. 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

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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, fluctuating interest rates, 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.

On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “IR Act”) which includes, among other provisions, changes to the U.S. corporate income tax system, including a 15% minimum tax based on “adjusted financial statement income” exceeding $1 billion and a 1% excise tax on net repurchases of stock after December 31, 2022. The IR Act may impact the cost efficiency of the Share Repurchase Program.

Concentration

Our largest insurance partner accounted for 30% of our total revenue during the year ended December 31, 2023. Our largest insurance partners accounted for 34%, 11% and 10%, respectively, of our total revenue during the year ended December 31, 2022.

There were no lender customers who accounted for more than 10% of our total revenue during the years ended December 31, 2023 and 2022.

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.”

Basis of Presentation

We conduct business through one operating segment and we operate in one geographic region, the U.S. Refer to Note 2—Summary of Significant Accounting and Reporting Policies of the accompanying consolidated financial statements for more information.

Components of Results of Operations

Total Revenue

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 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 typically capped at $600 per loan or calculated as a percentage of the funded loan amount. 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.

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Claims administration service fees. Claims administration service fees are paid to us by third-party insurance carrier partners for credit default insurance claims adjudication services performed by our subsidiary, IAS, on its insured servicing portfolio. The administration fee is equal to 3% of the monthly insurance earned premium for as long as the 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 benefits 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 system 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 increase as we focus on strategic initiatives.

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 term as we focus on our go-to-market strategy.

Research and development expenses. Research and development expenses primarily consist of employee compensation and benefits for employees engaged in ongoing research and development of our software technology platform. We generally expect our research and development costs to increase in the near term as we continue to invest in new and existing products and services.

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.

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Results of Operations

The following table sets forth our results of operations for the years ended December 31, 2023 and 2022:

Key Performance Measures

The following table sets forth key performance measures for the years ended December 31, 2023 and 2022:

(1) Excludes one-time adjustment for $0.6 million for the year ended December 31, 2023.

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Comparison of Year Ended December 31, 2023 and 2022

Revenue

Total revenue decreased by $62.1 million, or 35%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022, driven by a $16.5 million and $46.8 million decrease in program fees revenue and profit share revenue, respectively, which was partially offset by increased claims administration fee revenues of $1.1 million as compared to the year ended December 31, 2022.

Program fees revenue decreased $16.5 million, or 20%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022. This decrease in program fees revenue was driven by a 26% decrease in certified loan volume, partially offset by an 8% increase in unit economics per certified loan, as compared to the year ended December 31, 2022.

Profit share revenue decreased by $46.8 million, or 52%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022. During the year ended December 31, 2023, we recorded $66.1 million in anticipated profit share associated with 122,984 certified loans for an average of $538 per loan, as compared to $95.7 million in anticipated profit share associated with 165,211 certified loans for an average of $579 per loan during the year ended December 31, 2022.

In addition, during the year ended December 31, 2023, we recorded a reduction of $22.8 million in estimated profit share revenues related to business in historic vintages primarily as a result of higher than anticipated loan default rates and prepayment rates, partially offset by lower than anticipated severity of losses. During the year ended December 31, 2022, we recorded a reduction of $5.7 million in estimated profit share revenues related to business in historic vintages primarily as a result of higher than anticipated prepayment rates, partially offset by lower loan default rates and severity of losses.

Revenue from claims administration and other service fees, which primarily represents 3% of our insurance partners’ annual earned premium, increased $1.1 million, or 13%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022, due to a 14% increase in total earned premiums.

Cost of Services, Gross Profit and Gross Margin

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Cost of services increased $2.3 million, or 12% during the year ended December 31, 2023, as compared to the year ended December 31, 2022, primarily due to higher employee compensation and benefit costs associated with our focus on product support and the growth of our claims administration team.

Gross profit decreased by $64.4 million, or 40%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily driven by decreases in program fees and profit share revenues and an increase in cost of services, as discussed above.

Operating Expenses, Operating Income and Operating Margin

General and administrative expenses increased by $7.1 million, or 20%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily driven by higher corporate employee compensation and benefit costs of $5.5 million.

Selling and marketing expenses decreased by $0.4 million, or 2%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily driven by a $1.5 million decrease in employee compensation and benefits partially offset by a $1.2 million increase in marketing expenses, mostly associated with event costs, media relations and branding.

Research and development expenses decreased by $2.6 million, or 32%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to increased focus on product support and the development of internal use software.

Operating income for the year ended December 31, 2023, decreased by $68.5 million, or 70%, as compared to the year ended December 31, 2022, primarily driven by decreases in total revenues as well as changes in cost of services and operating expenses, as discussed above.

Interest Expense

Interest expense increased $4.8 million, or 83%, for the year ended December 31, 2023, as compared to the year ended December 31, 2022. Interest expense increased as a result of higher borrowing costs during 2023.

Interest Income

During the year ended December 31, 2023, interest income increased $8.3 million compared to the year ended December 31, 2022 primarily due to interest earned on U.S Treasury securities.

Income Taxes

During the years ended December 31, 2023 and 2022, we recognized income tax expense of $6.8 million and $26.9 million, respectively. The effective tax rate for the year ended December 31, 2023 was 23.5%, as compared to an effective tax rate of 28.8% for the year ended December 31, 2022. Income tax expense decreased $20.1 million, or 75% during the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily as a result of a decrease in income before income taxes. Refer to Note 11 – Income Taxes for further discussion.

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Liquidity and Capital Resources

Our principal liquidity requirements are to (i) meet working capital, tax and capital expenditure needs, (ii) service and repay our indebtedness and (iii) repurchase shares of our common stock.

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 and Item 1A — Risk Factors for a full description of the related estimates, assumptions, and judgments.

Based on our assessment of the underlying provisions and circumstances of our contractual obligations, other than the risks that we and other similarly situated companies face with respect to the condition of the capital markets (as described in Item 1A—Risk Factors), there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur that would have a material adverse effect on our consolidated results of operations, financial condition, or liquidity.

The following table provides a summary of cash flow data:

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 adjustments in the operating activities in the Statement of Cash Flows:

Net cash provided by operating activities decreased by $24.8 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022. The decrease was primarily attributable to decreased cash collections of $53.2 million related to program fees, profit share and claims administration service fee revenues, a $6.8 million increase in interest payments and a $1.8 million increase in cash payments related to cost of services and operating expense. This decrease in cash was partially offset by a $27.0 million reduction in income tax payments and an $8.3 million increase in interest income received during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

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Cash Flows from Investing Activities

For the years ended December 31, 2023 and 2022, net cash used in investing activities was $2.2 million and $0.6 million, respectively. For the years ended December 31, 2023 and 2022, the investments primarily related to software developed for internal use.

Cash Flows from Financing Activities

Our cash flows used in financing activities primarily consist of share repurchases, and payments of debt and deferred financing costs.

For the year ended December 31, 2023, net cash used in financing activities was $42.3 million and is primarily related to the repurchase of 5,233,065 shares of our common stock held in treasury stock for a total of $37.3 million, excluding excise tax.

For the year ended December 31, 2022, net cash used in financing activities was $17.8 million. The cash inflow of $150.0 million relates to proceeds from our Term Loan due 2027, which paid off our existing debt as of that date, less $1.0 million in deferred financing costs associated with the loan. Debt principal payments were $123.6 million, primarily related to payment in full of the Term Loan due 2026. In addition, we paid off all amounts outstanding under the Company’s prior revolving credit facility totaling $25.0 million and repurchased 2,643,306 shares of our common stock held in treasury stock for a total of $18.0 million.

Debt

As of December 31, 2023, we had no amounts outstanding under our Revolving Credit Facility and $145.3 million outstanding under our Term Loan due 2027.

Share Repurchase Program

On November 17, 2022, the Board of Directors authorized the Share Repurchase Program allowing the Company to repurchase up to $75.0 million of the Company’s outstanding common stock until November 17, 2023. On October 26, 2023, the Board of Directors extended the expiration date of the Share Repurchase Program to March 31, 2024. Repurchases may be made at management’s discretion from time to time on the open market. The Share Repurchase Program may be suspended, amended, or discontinued at any time. Pursuant to the Share Repurchase Program, the Company repurchased 5,233,065 shares at an average price of $7.13 for a total of $37.3 million, excluding excise tax, during the year ended December 31, 2023 and 2,643,306 shares at an average price of $6.82 for a total of $18.0 million during the year ended December 31, 2022, leaving $19.6 million available under our current Share Repurchase Program as of December 31, 2023. These shares were recorded to treasury stock at cost in the Consolidated Balance Sheets, which includes $0.3 million of excise tax expected to be paid in April 2024. This excise tax payable is included within Accrued expenses in the Consolidated Balance Sheets.

Non-GAAP Financial Measures

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure used by management to evaluate its operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources. Accordingly, we believe this measure provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors. This measure further provides useful analysis of period-to-period comparisons of our business, as it excludes 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 fixed assets, share-based compensation expense, gain on extinguishment of the TRA, and loss on extinguishment of debt. Adjusted EBITDA margin is defined as Adjusted EBITDA expressed as a percentage of total revenue.

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The following table presents a reconciliation of GAAP net income to Adjusted EBITDA for each of the periods indicated:

For the year ended December 31, 2023, Adjusted EBITDA decreased by $55.6 million, or 53%, as compared to year ended December 31, 2022. The decrease in Adjusted EBITDA during the year ended December 31, 2023 reflects the decrease in operating income primarily driven by the decrease in estimated future revenues on historic vintages and increased operating expenses.

Critical Accounting Policies and Estimates

In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, income from operations and net income, as well as on the value of certain assets and liabilities on our Consolidated Balance Sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions.

The consolidated financial statements have been prepared in accordance with GAAP. To prepare these financial statements, we make estimates, assumption, and judgments that affect what we report as our assets and liabilities, what we disclose as contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the periods presented.

In accordance with our policies, we regularly evaluate our estimates, assumptions, and judgments, including, but not limited to, those concerning revenue recognition, depreciation and amortization, contingencies, share-based compensation, and income taxes, and base our estimates, assumptions, and judgments on historical experience and on factors we believe reasonable under the circumstances. The results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. If our assumptions or conditions change, the actual results we report may differ from these estimates. We believe the following critical accounting policies affect the more significant estimates, assumptions, and judgments we use to prepare these consolidated financial statements. Refer to Note 2—Summary of Significant Accounting and Reporting Policies in the accompanying consolidated financial statements for a summary of our significant accounting policies.

Profit Share Revenue Recognition

We recognize revenue in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). Application of ASC 606 requires us to make judgments and estimates related to the classification, measurement and recognition of revenue. Our revenue primarily consists of program fees derived from contracts with lending institutions, profit share and claims administration service fees from contracts with insurance carriers and is recognized when the contractual performance obligation is satisfied.

The primary judgment relating to the recognition of revenue is the estimation of our profit share with our insurance partners. On a quarterly basis, we use a forecast model to project loan-level earned premiums and insurance claim payments. Our forecasts are driven by our projections of prepayment rate, loan default rate and severity of loss.

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These forecast assumptions are derived from an analysis of the historical performance of the active loan portfolio, prevailing default and prepayment trends, and macroeconomic projections. To the extent these forecast assumptions change, our profit share revenue will be adjusted.

We continually assess the default and prepayment assumptions of our core forecast model against reported performance and lender delinquency data. We make updates to the forecast model to ensure that default and prepayment rate projections align with actual experience.

We evaluate our forecast assumptions for prepayment rate, loan default rate and default severity of loss by performing a sensitivity analysis calculating the impact on profit share revenue of a hypothetical 10% increase and decrease in each assumption. The below table summarizes the results of the sensitivity analysis as of December 31, 2023:

Income Taxes

Prior to closing of the Business Combination, Open Lending, LLC, the sole owner of Lenders Protection, LLC and Open Lending Services, Inc., was treated as a partnership for income tax purposes. Therefore, no provision had historically been made for income tax purposes prior to the closing.

Subsequent to closing, Open Lending, LLC became a disregarded entity, wholly owned by us through its wholly owned subsidiaries. As of the close of the Business Combination, we are subject to income tax on a consolidated basis.

Our effective tax rate is based on income at statutory tax rates, adjusted for non-taxable and non-deductible items and tax credits. Management’s best estimate of future events and their impact is included in our effective tax rate. Certain changes or future events, such as changes in tax legislation, could have an impact on our estimates and effective tax rate. Audit periods remain open for review until the statute of limitations has passed.

The calculation of income taxes involves estimating the actual current tax liability together with assessing temporary differences in recognition of income for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, we are required to develop estimates of the anticipated timing of the reversal of existing deferred tax liabilities, as well as estimates of future taxable income in some instances. Judgment is inherent in this process and differences between the estimated and actual amounts could result in a material impact on our consolidated financial statements.

We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine whether the weight of available evidence indicates that the tax position has met the threshold for recognition. Therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Recent Accounting Pronouncements

Refer to Note 2—Summary of Significant Accounting and Reporting Policies to the accompanying consolidated financial statements for our discussion about new accounting pronouncements adopted and those pending.

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Contractual Obligations

As of December 31, 2023, our estimated future obligations include both current and long-term obligations. For our debt described in Note 4—Debt, we have a current obligation of $4.7 million and a long-term obligation of $140.6 million. Under our operating lease described in Note 9—Commitments and Contingencies, we have a current obligation of $0.6 million and a long-term obligation of $3.5 million.

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing in Item 8. Financial Statements and Supplementary Data. This section of our Annual Report generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report can be found in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those factors discussed below and elsewhere in this Annual Report, particularly in Item 1A—Risk Factors and Cautionary Note Regarding Forward-Looking Statements, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

Business Overview

We are a leading provider of lending enablement and risk analytics to credit unions, regional banks, 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 $18.3 billion in automotive loans, accumulated more than 20 years of proprietary data and developed over two million unique risk profiles. We currently serve 438 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 platform. LPP supports loans made to near-prime and non-prime borrowers and is designed to underwrite default insurance by linking automotive lenders to insurance companies. 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 rate. With five second decisioning, LPP generates 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 FCRA 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 automotive lender’s portfolio under the program. Through electronic system integration, our software technology connects us to certain 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.

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Executive Overview

We facilitate certified loans, as described below, and have achieved financial success by executing on our strategy of penetrating the near-prime and non-prime automotive loan market and refining our data analysis capabilities.

We facilitated 165,211 and 171,697 certified loans during the years ended December 31, 2022 and 2021, respectively.

Total revenue was $179.6 million and $215.7 million for the years ended December 31, 2022 and 2021, respectively.

Operating income was $97.6 million and $150.3 million for the years ended December 31, 2022 and 2021, respectively.

Net income was $66.6 million and $146.1 million for the years ended December 31, 2022 and 2021, respectively.

Adjusted EBITDA, as defined below, was $105.7 million and $155.0 million for the years ended December 31, 2022 and 2021, respectively. Information regarding use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, is included in “Non-GAAP Financial Measures.”

Highlights

The table below summarizes the total dollar-value of insured loans we facilitated and the number of new contracts we signed with automotive lenders for the years ended December 31, 2022 and 2021:

Historically, we have defined “active lenders” as lenders who certify at least one loan during the preceding 12 months. As of December 31, 2022 and 2021, we had 438 and 396 active lenders, respectively. The table below represents lender count information for lenders with certified loan activity during the periods indicated.

(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 us, with recurring revenue streams.

Certified 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.

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Underwriting Profit

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

Earned Premium

We define “earned premium” as the total insurance premium earned by insurers in a given period. Earned premiums were $294.0 million and $223.3 million, respectively, for the years ended December 31, 2022 and 2021, respectively.

Recent Developments

Insurance Carrier Partners

On May 2, 2022, we signed a program management agreement with Arch Specialty Insurance Company, a part of Arch Capital Group Ltd., who provides credit default insurance policies for LPP, from which we earn profit share revenue and claims administration fees.

On January 24, 2023, CNA, one of our insurance carriers, informed us of their intent not to renew their producer and claims service agreements with us when they expire on December 31, 2023. CNA will continue to provide auto loan default insurance policies for LPP certified loans until the terms of their producer and claims service agreements expire on December 31, 2023, unless mutual agreements with CNA are reached to transition new originations to our other insurance carriers prior to December 31, 2023. In addition, CNA will continue to service and provide claim funding for any of its existing default insurance policies for the remaining life of the loans associated with such policies. During the period until the expiration of these agreements, we expect to transition our customers that use CNA to our other insurance carriers.

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.”

2022 Credit Agreement

On September 9, 2022, we entered into a first amendment to our existing credit agreement with Wells Fargo Bank, N.A., as the administrative agent, and the financial institutions party thereto, as the lenders (the “First Amendment”). The First Amendment provided us senior secured Credit Facilities in an aggregate principal amount of $300.0 million by (i) establishing a new senior secured term loan facility in an aggregate principal amount of $150.0 million (the “New Term Loan due 2027”) and (ii) increasing the aggregate principal amount of commitments to $150.0 million (the “New Revolving Credit Facility”), both maturing on September 9, 2027 (collectively, the “2022 Credit Agreement”). Refer to Note 5—Debt for further discussion on our 2022 Credit Agreement.

Share Repurchase Program

On November 17, 2022, our Board of Directors authorized the Share Repurchase Program for up to $75.0 million of our outstanding common stock, which enables us to repurchase shares of our common stock through November 17, 2023. Repurchases may be made at management’s discretion from time to time on the open market. The Share Repurchase Program may be suspended, amended, or discontinued at any time. Refer to Note 7—Stockholders’ Equity for further discussion on our Share Repurchase Program activity during the year.

Key Factors Affecting Operating Results

Our future operating results and cash flows are dependent upon a number of opportunities, challenges and other factors, including the growth in the number of financial institutions and transaction volume, competition, profit share assumptions and industry trends and general economic conditions. Key factors affecting our operating results include the following:

Growth in the Number of Financial Institutions

The growth trend in active automotive lenders using LPP is a critical variable directly affecting revenue and financial results. It influences the number of loans funded on LPP and as such, the fees we earn and the cost of the services we provide. Growth in our active automotive lender relationships will depend on our ability to retain existing as well as add new automotive lenders.

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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 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, rising 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.

On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “IR Act”) which includes, among other provisions, changes to the U.S. corporate income tax system, including a 15% minimum tax based on “adjusted financial statement income” exceeding $1 billion and a 1% excise tax on net repurchases of stock after December 31, 2022. The IR Act may impact the cost efficiency of the Share Repurchase Program.

Concentration

Our three largest insurance partners accounted for 34%, 11% and 10%, respectively, of our total revenue during the year ended December 31, 2022. Our two largest insurance partners accounted for 41% and 22%, respectively, of our total revenue during the year ended December 31, 2021. 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.”

Basis of Presentation

We conduct business through one operating segment and we operate in one geographic region, the U.S. Refer to Note 2—Summary of Significant Accounting and Reporting Policies of the accompanying consolidated financial statements for more information.

Components of Results of Operations

Total Revenue

Our revenue is generated through three streams: (i) profit share paid to us by insurance partners, (ii) program fees paid to us by automotive 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 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 for future profit share calculations.

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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 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. Fees are either capped at $600 per loan or calculated as a percentage of the funded loan amount. For monthly-pay loans, the fee paid by the lender is 3% of the initial 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, IAS, on its insured servicing portfolio. The administration fee is equal to 3% of the monthly insurance earned premium for as long as the loan remains outstanding.

Cost of Services and Operating Expenses

Cost of services. Cost of services primarily consists of fees paid to third party partners for lead-generation efforts, compensation and benefits expenses relating to employees engaged in automotive lenders’ services and claims administration activities, fees paid for actuarial services related to the development of the monthly premium program, and fees for integration with the loan origination system 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 increase as a percentage of our program fee revenue as we continue to grow our third-party partner relationships and expand our employee support team.

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 increase as a result of our headcount growth.

Selling and marketing expenses. Selling and marketing expenses consist primarily of compensation and benefits expenses 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 term as we continue to expand our sales and marketing team.

Research and development expenses. Research and development expenses consist primarily 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 decrease in absolute dollars as the near-term focus shifts to internal software development projects.

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.

Gain on extinguishment of tax receivable agreement. Gain on extinguishment of tax receivable agreement (“TRA”) reflects gain recognized upon the early termination of our TRA with our Predecessor and affiliates in 2021.

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 years ended December 31, 2022 and 2021:

Key Performance Measures

The following table sets forth key performance measures for the years ended December 31, 2022 and 2021:

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Comparison of Year Ended December 31, 2022 and 2021

Revenue

Total revenue decreased by $36.1 million, or 17%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021, driven by a $43.2 million decrease in profit share revenue, which was partially offset by increased program fee and claims administration fee revenues of $5.0 million and $2.1 million respectively, as compared to the year ended December 31, 2021.

Profit share revenue decreased by $43.2 million, or 32%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021. During the year ended December 31, 2022, we recorded $95.7 million in anticipated profit share associated with 165,211 certified loans for an average of $579 per loan, as compared to $102.3 million in anticipated profit share associated with 171,697 certified loans for an average of $596 per loan during the year ended December 31, 2021.

In addition, during the year ended December 31, 2022, we recorded a $5.7 million reduction in estimated future profit share revenues related to business in historic vintages primarily as a result of higher than anticipated prepayment rates, partially offset by lower loan default rates and severity of losses. During the year ended December 31, 2021, we recorded a $30.9 million increase in estimated future profit share revenues on certified loans originated in historic vintages primarily due to lower than anticipated prepayment rates, loan default rates and severity of losses.

Program fees revenue increased $5.0 million, or 7%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase in program fees revenue was driven by an 11% increase in unit economics per certified loan, partially offset by a 4% decrease in certified loan volume, as compared to the year ended December 31, 2021.

Revenue from claims administration and other service fees, which primarily represents 3% of our insurance partners’ annual earned premium, increased $2.1 million, or 31%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021, due to a 32% increase in total earned premiums.

Cost of Services, Gross Profit and Gross Margin

Cost of services increased $1.3 million, or 7% during the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to increased fees of $1.8 million paid to third party partners for lead-generation efforts and higher employee compensation and benefit costs of $1.0 million associated with the growth of our implementation and claims

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administration operations, both partially offset by one-time costs associated with customer implementation efforts of $1.5 million incurred during the year ended December 31, 2021.

Gross profit decreased by $37.4 million, or 19%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily driven by a decrease in anticipated profit share on historic vintages partially offset by increases in both program fees and claims administration service fees, as discussed above.

Operating Expenses, Operating Income and Operating Margin

General and administrative expenses increased by $5.6 million, or 18%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily driven by higher corporate employee compensation and benefit costs of $5.3 million.

Selling and marketing expenses increased by $5.9 million, or 49%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily driven by increases in employee compensation and benefit costs of $3.5 million, as well as increases in expenses related to travel, marketing and business development of $1.6 million associated with increased levels of business activity.

Research and development expenses increased by $3.9 million, or 89%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to increases in employee compensation and benefit costs and other services associated with our investment in research and development technology of $5.1 million.

Operating income for the year ended December 31, 2022, decreased by $52.7 million, or 35%, as compared to the year ended December 31, 2021, primarily driven by decreased estimated profit share on historic vintages, as well as increases in operating expenses related to general and administrative, selling and marketing, and research and development, as discussed above.

Income Taxes

During the years ended December 31, 2022 and 2021, we recognized income tax expense of $26.9 million and $45.1 million, respectively. The effective tax rate for the year ended December 31, 2022 was 28.8%, as compared to an effective tax rate of 23.6% for the year ended December 31, 2021. Income tax expense decreased $18.2 million, or 40% during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily as a result of a decrease in income before income taxes. Refer to Note 14 – Income Taxes for further discussion.

Liquidity and Capital Resources

Our principal liquidity requirements are to (i) meet working capital, tax and capital expenditure needs, (ii) service and repay our indebtedness and (iii) repurchase shares of our common stock.

Cash Flow and Liquidity Analysis

We assess liquidity primarily in terms of our ability to generate cash to fund operating and investing activities. A significant portion of our cash from operating activities is derived from our profit share arrangements with our insurance partners, which are subject to judgments and assumptions and is, therefore, subject to variability. We believe that our existing cash resources and revolving credit facility will provide sufficient liquidity to fund our near-term working capital needs. We regularly evaluate alternatives for managing our capital structure and liquidity profile in consideration of expected cash flows, growth and

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operating capital requirements and capital market conditions. Refer to Critical Accounting Policies and Estimates and Item 1A — Risk Factors for a full description of the related estimates, assumptions, and judgments.

Based on our assessment of the underlying provisions and circumstances of our contractual obligations, other than the risks that we and other similarly situated companies face with respect to the condition of the capital markets (as described in Item 1A—Risk Factors), there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur that would have a material adverse effect on our consolidated results of operations, financial condition, or liquidity.

The following table provides a summary of cash flow data:

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 adjustments in the operating activities in the statement of cash flows:

Net cash provided by operating activities increased by $12.3 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase was primarily attributable to increased cash collections of $28.2 million related to profit share, program fees and claims administration service fee revenues and a $1.7 million reduction in interest payments. This increase was offset by increased cash payments related to cost of services and operating expenses of $8.3 million and income tax payments of $10.8 million during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Cash Flows from Investing Activities

For the years ended December 31, 2022 and 2021, net cash used in investing activities was $0.6 million and $2.0 million, respectively. For the years ended December 31, 2022 and 2021, the investments primarily related to software developed for internal use.

Cash Flows from Financing Activities.

Our cash flows used in financing activities primarily consist of proceeds from debt, payments of debt and deferred financing costs, and shares repurchased.

For the year ended December 31, 2022, net cash used in financing activities was $17.8 million. The cash inflow of $150.0 million relates to proceeds from our New Term Loan due 2027, which paid off our existing debt as of that date, less $1.0 million in deferred financing costs associated with the loan. Debt principal payments were $123.6 million, primarily related to payment in full of the Term Loan due 2026. In addition, we paid off all amounts outstanding under the 2021 Revolving Credit

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Facility (as defined hereinafter) totaling $25.0 million and repurchased 2,643,306 shares of our common stock held in treasury stock for a total of $18.0 million.

For the year ended December 31, 2021, net cash used in financing activities was $77.8 million. The cash used primarily consisted of $36.9 million in early termination and settlement of the TRA with our Predecessor and affiliates, $20.0 million related to our repurchase of 612,745 shares of our common stock held in treasury stock and debt principal payments of $169.2 million, primarily related to the payment in full of the Term Loan due 2027 in March 2021. In addition, we paid down the 2021 Revolving Credit Facility by $25.0 million. The cash inflow relates to $175.0 million in proceeds associated with the 2021 Credit Agreement (as defined hereinafter), which refinanced our existing debt as of that date, less $1.7 million in deferred financing costs associated with this facility.

Debt

As of December 31, 2022, we had no amounts outstanding under our New Revolving Credit Facility and $149.1 million outstanding under our New Term Loan due 2027.

Share Repurchase Program

On November 17, 2022, the Board of Directors authorized the Share Repurchase Program allowing the Company to repurchase up to $75.0 million of the Company’s outstanding common stock until November 17, 2023. Repurchases may be made at management’s discretion from time to time on the open market. The Share Repurchase Program may be suspended, amended, or discontinued at any time. Pursuant to the Share Repurchase Program, the Company repurchased 2,643,306 shares at an average price of $6.80 for a total of $18.0 million during the year ended December 31, 2022, leaving $57.0 million available under our current Share Repurchase Program as of December 31, 2022. These shares were recorded to treasury stock at cost.

Non-GAAP Financial Measures

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure used by management to evaluate its operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources. Accordingly, we believe this measure provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors. This measure further provides useful analysis of period-to-period comparisons of our business, as it excludes 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, share-based compensation expense, gain on extinguishment of the TRA, and loss on extinguishment of debt. Adjusted EBITDA margin is defined as Adjusted EBITDA expressed as a percentage of total revenue.

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The following table presents a reconciliation of GAAP net income (loss) to Adjusted EBITDA for each of the periods indicated:

For the year ended December 31, 2022, Adjusted EBITDA decreased by $49.3 million, or 32%, as compared to year ended December 31, 2021. The decrease in Adjusted EBITDA during the year ended December 31, 2022 reflects the decrease in operating income primarily driven by the decrease in estimated future revenues on historic vintages and increased operating expenses.

Critical Accounting Policies and Estimates

In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, income (loss) from operations and net income (loss), as well as on the value of certain assets and liabilities on our consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions.

The consolidated financial statements have been prepared in accordance with GAAP. To prepare these financial statements, we make estimates, assumption, and judgments that affect what we report as our assets and liabilities, what we disclose as contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the periods presented.

In accordance with our policies, we regularly evaluate our estimates, assumptions, and judgments, including, but not limited to, those concerning revenue recognition, depreciation and amortization, contingencies, share-based compensation, and income taxes, and base our estimates, assumptions, and judgments on historical experience and on factors we believe reasonable under the circumstances. The results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. If our assumptions or conditions change, the actual results we report may differ from these estimates. We believe the following critical accounting policies affect the more significant estimates, assumptions, and judgments we use to prepare these consolidated financial statements. Refer to Note 2—Summary of Significant Accounting and Reporting Policies in the accompanying consolidated financial statements for a summary of our significant accounting policies.

Profit Share Revenue Recognition

We recognize revenue in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). Application of ASC 606 requires us to make judgments and estimates related to the classification, measurement and recognition of revenue. Our revenue primarily consists of profit share, program fees derived from contracts with lending institutions and claims administration service fees from contracts with insurance carriers and is recognized when the contractual performance obligation is satisfied.

The primary judgment relating to the recognition of revenue is the estimation of our profit share with our insurance partners. On a quarterly basis, we use a forecast model to project loan-level earned premiums and insurance claim payments. Our forecasts are driven by our projections of prepayment rate, loan default rate and severity of loss. These forecast assumptions are derived

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from an analysis of the historical performance of the active loan portfolio, prevailing default and prepayment trends, and macroeconomic projections. To the extent these forecast assumptions change, our profit share revenue will be adjusted.

We continually assess the default and prepayment assumptions of our core forecast model against reported performance and lender delinquency data. We make updates to the forecast model to ensure that default and prepayment rate projections align with actual experience.

We evaluate our forecast assumptions for prepayment rate, loan default rate and default severity of loss by performing a sensitivity analysis calculating the impact on profit share revenue of a hypothetical 10% increase and decrease in each assumption. The below table summarizes the results of the sensitivity analysis as of December 31, 2022:

Income Taxes

Prior to closing of the Business Combination, Open Lending, LLC, the sole owner of Lenders Protection and Open Lending Services, Inc., was treated as a partnership for income tax purposes. Therefore, no provision had historically been made for income tax purposes prior to the closing.

Subsequent to closing, Open Lending, LLC became a disregarded entity, wholly owned by us through its wholly owned subsidiaries. As of the close of the Business Combination, we are subject to income tax on a consolidated basis.

Our effective tax rate is based on income at statutory tax rates, adjusted for non-taxable and non-deductible items and tax credits. Management’s best estimate of future events and their impact is included in our effective tax rate. Certain changes or future events, such as changes in tax legislation, could have an impact on our estimates and effective tax rate. Audit periods remain open for review until the statute of limitations has passed.

The calculation of income taxes involves estimating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, we are required to develop estimates of the anticipated timing of the reversal of existing deferred tax liabilities, as well as estimates of future taxable income in some instances. Judgment is inherent in this process and differences between the estimated and actual amounts could result in a material impact on our consolidated financial statements.

We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine whether the weight of available evidence indicates that the tax position has met the threshold for recognition. Therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Share-Based Compensation Awards

We measure and recognize compensation expense for all share-based awards made to employees and non-employee directors based on estimated fair values on the date of grant. To determine the fair value of the share-based awards, we use the closing price of our common stock publicly traded on the Nasdaq on the date of grant for time-based and performance-based restricted stock awards, and we utilize the Black-Scholes option pricing model to value stock options, which involves inputs for the share value of Open Lending, expected share volatility, expected term of the awards, risk-free interest rate and expected dividend. The expected volatility was based on the average of implied and observed historical volatility of comparable companies as we do not have enough history as a public company. The determination of fair value is affected by assumptions regarding a number of highly complex and subjective variables. Changes in the subjective assumptions can materially affect the estimate of their fair value.

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The compensation expense is recognized on a straight-line basis over the requisite service or performance period. Performance-based restricted units (“PSUs”) are evaluated on a quarterly basis for probability of meeting performance metrics and any adjustments to share-based compensation expense are then made in the quarter of evaluation. Forfeitures are recognized as occurred.

For PSUs, we make assumptions regarding the likelihood of achieving performance metrics. If actual results differ significantly from these estimates, share-based compensation expense and our results of operations could be materially affected. Refer to Note 8—Share-Based Compensation of the accompanying consolidated financial statements for more information.

Recent Accounting Pronouncements

Refer to Note 2—Summary of Significant Accounting and Reporting Policies to the accompanying consolidated financial statements for our discussion about new accounting pronouncements adopted and those pending.

Contractual Obligations

As of December 31, 2022, our estimated future obligations include both current and long-term obligations. For our debt described in Note 5—Debt, we have a current obligation of $3.8 million and a long-term obligation of $145.3 million. Under our operating lease described in Note 11—Commitments and Contingencies, we have a current obligation of $0.6 million and a long-term obligation of $4.1 million.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing in “Item 8. Financial Statements and Supplementary Data.” This section of our Annual Report generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Annual Report can be found in “Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those factors discussed below and elsewhere in this Annual Report, particularly in “Item 1A. Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements,” all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

Business Overview

We are a leading provider of lending enablement and risk analytics to credit unions, regional banks, non-bank auto finance companies and OEM Captives. Our clients, collectively referred to herein as automotive lenders or lenders, make automotive consumer loans to underserved near-prime and non-prime borrowers by harnessing our risk-based pricing models, powered by our proprietary data and real-time underwriting of automotive loan default insurance coverage from insurers. Since our inception in 2000, we have facilitated over $13.5 billion in automotive loans, accumulating over 20 years of proprietary data and developed over two million unique risk profiles. We currently cater to 396 active automotive lenders.

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

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

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

We believe that our market opportunity is significant. The near-prime and non-prime automotive loan market is $250 billion annually, resulting in an approximately $12.4 billion annual revenue opportunity. We are currently serving less than 2% of this market, providing a significant growth opportunity.

Executive Overview

We facilitate certified loans, as described below, and have achieved financial success by increasing our penetration of the near-prime and non-prime automotive loan market and refining our data analysis capabilities.

We facilitated 171,697 and 94,226 certified loans during the years ended December 31, 2021 and 2020, respectively.

Total revenue was $215.7 million and $108.9 million for the years ended December 31, 2021 and 2020, respectively.

Operating income was $150.3 million and $56.7 million for the years ended December 31, 2021 and 2020, respectively.

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Net income (loss) was $146.1 million and $(97.6) million for the years ended December 31, 2021 and 2020, respectively.

Adjusted EBITDA was $155.0 million and $69.5 million for the years ended December 31, 2021 and 2020, respectively. Information regarding use of Adjusted EBITDA, a non-GAAP measure, and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, is included in “Non-GAAP Financial Measures.”

Highlights

The table below summarizes the total dollar-value of insured loans we facilitated, the number of new contracts we signed with automotive lenders for the years ended December 31, 2021 and 2020:

(1) Value of insured loans are calculated as the total original loan amount with active institutions as of the end of each reporting period.

Key Performance Measures

We review several key performance measures, discussed below, to evaluate business and results, measure performance, identify trends, formulate plans and make strategic decisions. We believe that the presentation of such metrics is useful to our investors and counterparties because such metrics are used to measure and model the performance of companies such as us, with recurring revenue streams.

Certified Automotive Loans

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

Average Program Fee

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

Insurers’ Aggregate Underwriting Profit

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

Insurers’ Earned Premium

We define “insurers’ earned premium” as the total insurance premium earned by insurers in a given period. Earned premiums were $223.3 million and $148.6 million, respectively, for the years ended December 31, 2021 and 2020, respectively.

Recent Developments

Term Loan due 2027

On March 11, 2020, we entered into a credit agreement with UBS A.G. as the administrative agent and the lenders from time to time party thereto (the “Credit Agreement”). Pursuant to the Credit Agreement, the lenders thereto funded a term loan (the “Term Loan due 2027”) in a principal amount of $170.0 million bearing an interest rate per annum of LIBOR plus 6.5% (subject to a LIBOR floor of 1%), with a maturity date in March 2027. The Term Loan due 2027 was retired by paying off our outstanding principal and interest with proceeds from issuance of the Term Loan due 2026 and the Revolving Facility (both as defined below) in March 2021. The transaction was deemed as a debt extinguishment under ASC Topic 405-20, “Liabilities—

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Extinguishments of Liabilities,” and, accordingly, we recognized a non-cash debt extinguishment loss of $8.8 million during the year ended December 31, 2021, and is recorded under the caption loss on extinguishment of debt in the consolidated statements of operations and comprehensive income (loss). The loss on debt extinguishment was calculated as the difference between the carrying amount of the debt and the price paid to retire the debt, which primarily consisted of the write off of the unamortized deferred financing costs related to the Term Loan due 2027.

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

On March 19, 2021, we 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”). Our obligations under the Term Loan due 2026 and the Revolving Facility are guaranteed by all of our U.S. subsidiaries and are secured by substantially all of the assets of the Company and our 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 LIBOR loans, interest will be payable at the end of the selected interest period. Additionally, there is a commitment fee payable at the end of each quarter at a rate per annum ranging from 0.200% to 0.275% based on the average daily unused portion of the Revolving Facility, and other customary letter of credit fees. Pursuant to the New Credit Agreement, the interest rate spreads and commitment fees increase or decrease in increments as our Funded Secured Debt/EBITDA ratio increase or decreases. As of December 31, 2021, both the Term Loan due 2026 and the Revolving Facility are subject to LIBOR of 0.099% plus a spread of 1.75% per annum. In June 2021, we made a payment of $25.0 million to the outstanding balance of the Revolving Facility and have an unused commitment balance of $25.0 million under the Revolving Facility at December 31, 2021. Commitment fees were accrued at a weighted average of 0.200% on the unused commitment balance and is recorded under the caption accrued expenses in the consolidated balance sheets.

In connection with the issuance of the Term Loan due 2026 and the Revolving Facility, we incurred total deferred financing costs of $1.7 million, of which $1.2 million was allocated to the Term Loan due 2026 and $0.5 million was allocated to the Revolving Facility. The deferred financing costs were capitalized as a contra-liability against the principal balance of the loans and are amortized as interest expense using the effective interest method. As of December 31, 2021, we had outstanding amounts of $122.7 million under the Term Loan due 2026 and $25.0 million under the Revolving Facility with an average weighted average effective interest rate of outstanding borrowings was 2.15%.

The New Credit Agreement contains a maximum total net leverage ratio financial covenant and a minimum fixed charge coverage ratio financial covenant that are tested quarterly. The maximum total net leverage ratio is 3.5 to 1.0 for periods on or prior 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 December 31, 2021, we were in compliance with all required covenants under the New Credit Agreement.

Underwritten Public Offering

On April 6, 2021, we completed an underwritten public offering of 9,000,000 shares of our common stock at a public offering price of $34.00 per share. All shares were sold by existing stockholders, including Nebula Holdings, LLC and its affiliates, Bregal Sagemount and certain of our executive officers. The selling stockholders also granted the underwriters a 30-day option to purchase up to 1,350,000 additional shares of common stock. We did not issue any shares and did not receive any of the proceeds of the offering.

Share Repurchase

Pursuant to a Stock Repurchase Agreement, dated as of March 29, 2021, between us and the selling stockholders, we repurchased from the selling stockholders on April 6, 2021 an aggregate number of 612,745 shares of our common stock totaling $20.0 million at the same per share price paid by the underwriters to the selling stockholders in the offering. The $20.0 million stock repurchase was recorded in treasury stock at cost.

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Tax Receivable Agreement

In connection with the Business Combination, we entered into the Tax Receivable Agreement (“TRA”). The TRA generally provides for the payment by us to the Open Lending LLC unitholders and Blocker’s sole shareholder (the “TRA holders”), as applicable, of 85% of the net cash savings, if any, in U.S. federal, state and local income tax that we actually realize (or are deemed to realize in certain circumstances) in periods after the Closing as a result of: (i) certain tax attributes of Blocker and/or Open Lending, LLC that existed prior to the Business Combination and were attributable to the Blocker; (ii) certain increases in the tax basis of Open Lending, LLC’s assets resulting from the Transactions; (iii) imputed interest deemed to be paid by us as a result of payments we make under the TRA; and (iv) certain increases in tax basis resulting from payments we make under the TRA. We retain the benefit of the remaining 15% of these cash savings.

We entered into Amendment No. 1 (the “Amendment”) to the TRA effective April 9, 2021. The Amendment provides that in lieu of early termination payments, the TRA Holders will instead be entitled to payments equal to 40% of all Tax Benefit Payments (all definitions used here in and otherwise not defined here in shall have the meanings set forth in the Amendment) other than any Actual Interest Amounts that would be required to be paid by the us under the TRA, using certain valuation. The Amendment provides us with the right to terminate and settle all present and future obligations under the TRA with a single payment by us to the TRA Holders of $36.9 million (the “Early Termination Right”). Absent the Amendment and the exercise of the Early Termination Right, we anticipated making TRA payments totaling $92.4 million, undiscounted, over the life of the TRA.

On April 12, 2021, an independent committee of disinterested members of the Board of Directors approved our decision to exercise the Early Termination Right. During the year ended December 31, 2021, we paid $36.9 million to terminate and settle the TRA liability and recognized a gain of $55.4 million, which is included in gain on extinguishment of tax receivable agreement on our consolidated statements of operations and comprehensive income (loss).

Third Insurance Carrier Partner

On June 24, 2021, we signed a producer agreement with American National Lloyds Insurance Company and ANPAC Louisiana Insurance Company, collectively referred to as American National. American National is an additional provider of credit default insurance policies for LPP, from which we earn profit share revenue and claims administration fees.

COVID-19

The COVID-19 pandemic continues to create uncertainty regarding the U.S. and global economies and our operating results, financial condition and cash flows. The extent of the impact of the COVID-19 pandemic on our operational and financial performance depends on certain developments, including the duration and continued spread of variants of COVID-19; the impact on our revenues, which are generated with automobile lenders and insurance company partners and driven by consumer demand for automobiles and automotive loans; any impacts related to the slowdown in the supply chain for automobiles; extended closures of businesses, the effectiveness of the vaccine distribution program and the vaccines themselves; unemployment levels and the overall impact on our customer behavior, all of which are uncertain and cannot be predicted. We are diligently working to ensure that we can continue to operate with minimal disruption, mitigate the impact of the pandemic on our employees’ health and safety, and address potential business interruptions on ourselves and our customers. We believe that the COVID-19 pandemic, the mitigation efforts and the resulting economic impact have had, and may continue to have, an overall adverse effect on our business, results of operations and financial condition. We saw a reduction in loan applications and certified loans throughout the majority of 2020. As consumers and lenders have adjusted to the pandemic, application and certification levels have increased in 2021. Lenders’ forbearance programs, government stimulus packages, extended unemployment benefits and other government assistance have resulted in a reduction in expected defaults since the onset of the pandemic. As these programs end, defaults may increase. The potential increase in defaults may impact our revenues and subsequent recovery as the automotive finance industry and overall economy recover. We continue to closely monitor the current macro environment, particularly monetary and fiscal policies.

Key Factors Affecting Operating Results

Our future operating results and cash flows are dependent upon a number of opportunities, challenges and other factors, including the growth in the number of financial institutions and transaction volume, competition, profit share assumptions and industry trends and general economic conditions.

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Key factors affecting our operating results include the following:

Growth in the Number of Financial Institutions

The growth trend in active automotive lenders using LPP is a critical variable directly affecting revenue and financial results. It influences the number of loans funded on LPP and, therefore, the fees that we earn and the cost of the services that we provide. Growth in our active automotive lender relationships will depend on our ability to retain existing automotive lenders, add new automotive lenders and expand to new goods and services specific to our industry (“verticals”).

Competition

We face competition to acquire and maintain automotive lenders as customers, as well as competition to facilitate the funding of near-prime and non-prime auto loans. For LPP, which combines lending enablement, risk analytics, near-prime and non-prime auto loan performance data, real-time loan decisioning, risk-based pricing and auto loan default insurance, we do not believe there are any direct competitors. The emergence of direct competitors, providing risk, analytics and loss mitigation, which are core elements of our business, could materially impact our ability to acquire and maintain automotive lenders customers. The near-prime and non-prime lending market is highly fragmented and competitive. We face competition from a diverse landscape of consumer lenders, including traditional banks and credit unions, as well as alternative technology-enabled lenders. The emergence of other insurers, in competition with our insurers, could materially impact our business.

Profit Share Assumptions

We rely on assumptions to calculate the value of profit share revenue, which is our share of insurance partners’ underwriting profit. To the extent these assumptions change, our profit share revenue will be adjusted. For example, positive change in estimates associated with historical vintages generate an increase in our contract asset, additional revenues and future expected cash flows, while negative change in estimates generate a decrease in our contract asset, a reduction in revenues and future expected cash flows. Please refer to “Critical Accounting Policies and Estimates” for more information on these assumptions.

Industry Trends and General Economic Conditions

Our results of operations have in the past been fairly resilient to economic downturns but in the future may be impacted by the relative strength of the overall economy and its effect on unemployment, consumer spending and consumer demand for automotive products. As general economic conditions improve or deteriorate, the amount of disposable income consumers have tends to fluctuate, which in turn impacts consumer spending levels and the willingness of consumers to take out loans to finance purchases. Specific economic factors such as interest rate levels, changes in monetary and related policies, market volatility, supply chain disruptions, consumer confidence, the impact of the pandemic and, particularly, the unemployment rate also influence consumer spending and borrowing patterns.

Concentration

Our two largest insurance partners accounted for 41% and 22% and 40% and 19% of our total revenue during the years ended December 31, 2021 and 2020, respectively. Termination or disruption of these relationships could materially and adversely impact our revenue.

Basis of Presentation

We conduct business through one operating segment and we operate in one geographic region, the United States. See Note 2—Summary of Significant Accounting and Reporting Policies of the accompanying consolidated financial statements for more information.

Components of Results of Operations

Total Revenues

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

Program fees. Program fees are paid by automotive lenders for use of our LPP and analytics solutions and automated issuance of credit default insurance with third-party insurance providers. These fees are based on a percentage of each certified loan’s

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

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

Claims administration service fees. Claims administration service fees are paid to us by third-party insurers for credit default insurance claims adjudication services performed by our subsidiary IAS on its insured servicing portfolio. The administration fee is equal to 3% of the monthly insurance earned premium for as long as the loan remains outstanding.

Cost of Services and Operating Expenses

Cost of services. Cost of services primarily consists of fees paid to third party partners for lead-generation efforts, compensation and benefits expenses relating to employees engaged in lenders’ services and claims administration activities, fees paid for actuarial services related to the development of the monthly premium program and fees for integration with loan origination systems of automotive lenders. We generally expect cost of services to increase in absolute dollars as the total number of certified loans continues to grow; however, we expect the cost of services to remain relatively constant in the near to immediate term as a percentage of our program fee revenue.

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

Selling and marketing expenses. Selling and marketing expenses consist primarily of compensation and benefits of employees engaged in selling and marketing activities. We generally expect selling and marketing expenses to increase in absolute dollars as the total number of certified loans continues to grow in the long term; however, we expect selling and marketing expenses to remain relatively constant in the near to intermediate term as a percentage of program fee revenue.

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

Other Income (Expense)

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

Gain on extinguishment of tax receivable agreement. Gain on extinguishment of tax receivable agreement is related to the early termination and settlement of the TRA to the TRA holders.

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

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Results of Operations

The following table sets forth our results of operations for the years ended December 31, 2021 and 2020:

Key Performance Measures

The following table sets forth key performance measures for the years ended December 31, 2021 and 2020:

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Comparison of Year Ended December 31, 2021 and 2020

Revenue

Total revenue increased by $106.8 million, or 98%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020, driven by an increase in anticipated profit share, program fees and claims administration and other service fee revenues on new originations and the change in estimated future revenues on historical vintages. As the loan default rate, default severity and prepayment rate continued to improve during the year ended December 31, 2021, our anticipated profit share on historical business increased.

Profit share revenue increased by $72.8 million, or 121%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020. During 2021, we recorded $102.3 million in anticipated profit share, associated with 171,697 new certified loans, for an average of $596 per new certified loan, as compared to $62.0 million in anticipated profit share, associated with 94,226 new certified loans, for an average of $658 per new certified loan during the year ended December 31, 2020. In addition, during 2021, we recorded $30.9 million in estimated future profit share on business written in historic periods, as compared to a decrease of $1.6 million in estimated future profit share on historical vintages, during 2020.

Program fees revenue increased by $31.6 million, or 72%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase was driven by an 82% increase in certified loan volumes as compared to the prior year.

Revenue from claims administration and other service fees which primarily represents 3% of our insurance partners’ annual earned premium, increased by $2.3 million, or 51%, for the year ended December 31, 2021 as compared to 2020 due to a 50% increase in total earned premiums and a 82% increase in new loan certifications.

Cost of Services, Gross Profit and Gross Margin

Gross profit increased by $97.9 million, or 99%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020, driven by an increase in anticipated profit share, program fees, and claims administration and other service fees revenues on new originations and change in estimated future revenues based on historical vintages as discussed above.

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Operating Expenses, Operating Income and Operating Margin

General and administrative expenses decreased by $2.2 million, or 7%, for the year ended December 31, 2021 when compared to the year ended December 31, 2020. The year ended December 31, 2020 includes $9.1 million in transaction bonuses awarded to key employees and directors of Open Lending, LLC and $2.2 million of non-cash charges incurred in connection with the accelerated vesting of share-based awards, which were incurred during 2020, as a result of the Business Combination. Excluding the impact of these one-time charges associated with the Business Combination in the prior year, we experienced a year over year increase of $9.1 million in general and administrative expenses in 2021, which is primarily attributable to $3.1 million in employee compensation and benefits, including share-based compensation, $3.0 million in professional and consulting fees associated with continuing efforts to enhance internal controls, financial reporting and compliance functions, $1.6 million in insurance expense and $0.7 million in software and data expenses.

Selling and marketing expenses increased by $4.2 million, or 53%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to an increase in employee compensation and commissions costs, driven by both increased headcounts in sales and account management as well as increased sales.

Research and development expenses increased by $2.4 million, or 122%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020 due to an increase in headcount costs.

Operating income for the year ended December 31, 2021, increased by $93.6 million, or 165%, as compared to the year ended December 31, 2020, driven by increases in program fees and anticipated profit share from new originations and estimated future underwriting profits on historic business.

Contingent Consideration

During the year ended December 31, 2020, we recorded $131.9 million in non-cash charges for the change in the fair value of contingent consideration from June 10, 2020 through the settling of the contingent consideration.

Interest Expense

Interest expense decreased $5.7 million or 49% for the year ended December 31, 2021, as compared to the year ended December 31, 2020, as a result of lower borrowing costs and lower outstanding debt balance during 2021.

Other Expense

Other expense decreased by $4.3 million or 97% for the year ended December 31, 2021, as compared to the year ended December 31, 2020. During the year ended December 31, 2020, we recognized a non-cash charge related to the change in the measurement of our TRA liability as a result of changes in our blended state tax rate.

Income Taxes

During the years ended December 31, 2021 and 2020, we recognized income tax expense of $45.1 million and $6.6 million, respectively. The effective tax rate for the year ended December 31, 2021 was 23.6%, as compared to an effective tax rate of (7.2)% for the year ended December 31, 2020. The effective tax rate for December 31, 2020 was primarily impacted by the

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change in fair value of contingent consideration that resulted from the Business Combination that was consummated on June 10, 2020. The Company’s contingent consideration was settled in July and August of 2020.

Liquidity and Capital Resources

Cash Flow and Liquidity Analysis

We assess liquidity primarily in terms of our ability to generate cash to fund operating and investing activities. A significant portion of our cash from operating activities is derived from our profit share arrangements with our insurance partners, which are subject to judgments and assumptions and is, therefore, subject to variability. We believe that our existing cash resources and revolving credit facility will provide sufficient liquidity to fund our near-term working capital needs. We regularly evaluate alternatives for managing our capital structure and liquidity profile in consideration of expected cash flows, growth and operating capital requirements and capital market conditions. Refer to “Critical Accounting Policies and Estimates” and “Risk Factors” for a full description of the related estimates, assumptions, and judgments.

Based on our assessment of the underlying provisions and circumstances of our contractual obligations, other than the risks that we and other similarly situated companies face with respect to the condition of the capital markets (as described in “Risk Factors”), there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur that would have a material adverse effect on our consolidated results of operations, financial condition, or liquidity.

The following table provides a summary of cash flow data:

Cash Flows from Operating Activities

Our cash flows provided by operating activities reflect net income adjusted for certain non-cash items and changes in operating assets and liabilities.

The following table summarizes the non-cash adjustments in the operating activities in the statement of cash flows:

Net cash from operating activities increased by $70.5 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase was primarily attributable to increased cash inflows from program fees and higher profit share payments from our insurance carriers, primarily as a result of increased certified loan volume and our carriers releasing reserves established due to uncertainty related to the COVID-19 pandemic last year and the continued improved performance of our portfolio.

For the year ended December 31, 2020, net cash provided by operating activities was primarily attributable to income excluding the impact of fair value adjustment of contingent consideration as well as increased payments collected from customers on account receivables.

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Cash Flows from Investing Activities

For the years ended December 31, 2021 and 2020, net cash used in investing activities was $2.0 million and $1.2 million, respectively. For the year ended December 31, 2021, the investments primarily related to computer software developed for internal use. For the year ended December 31, 2020, the investments primarily consisted of purchases of furniture and equipment.

Cash Flows from Financing Activities.

Our cash flows used in and provided by financing activities primarily consist of payments of debt and deferred financing costs, member distributions, early termination and settlement of the TRA, share repurchases, proceeds from debt, proceeds from stock warrant exercise transactions and equity recapitalization transactions.

For the year ended December 31, 2021, net cash used in financing activities was $77.8 million. The cash used primarily consisted of $36.9 million in early termination and settlement of the TRA, $20.0 million related to our repurchase of 612,745 shares of our common stock held in treasury stock and debt principal payments of $169.2 million, primarily related to the payment in full of the Term Loan due 2027. In addition, we paid down our revolving facility by $25.0 million. The cash inflow includes $175.0 million in proceeds associated with our New Credit Agreement entered into March 19, 2021, which refinanced our existing debt, less $1.7 million in deferred financing costs associated with this facility.

For the year ended December 31, 2020, net cash provided by financing activities was $70.8 million. The cash inflow consisted of $170.0 million in proceeds associated with the Credit Agreement entered into March 1, 2020 less $10.1 million in deferred financing costs and $105.3 million in proceeds received in connection with stock warrant exercise transactions. The cash used primarily consisted of a $135.6 million distribution to Open Lending, LLC’s unitholders, $37.5 million related to our repurchase of 1,395,089 shares of our common stock held in treasury stock on December 14, 2020, $14.9 million in connection with our recapitalization, net of transaction costs, and $6.5 million of debt principal repayments.

Debt

As of December 31, 2021, we had outstanding amounts of $122.7 million under the Term Loan due in 2026 and $25.0 million under the Revolving Facility under the New Credit Agreement that we entered into on March 19, 2021, proceeds from which were used primarily to pay the Term Loan due 2027 in full and provide cash for general corporate purposes.

Non-GAAP Financial Measures

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure used by management to evaluate its operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources. Accordingly, we believe these measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors. In addition, they provide useful measures for period-to-period comparisons of our business, as they remove the effect of certain non-cash items and certain variable charges. Adjusted EBITDA is defined as GAAP net income (loss) excluding interest expense, income taxes, depreciation and amortization expense, share-based compensation expense, gain on extinguishment of tax receivable agreement, loss on extinguishment of debt, change in fair value of contingent consideration, change in measurement - tax receivable agreement and transaction bonuses. Adjusted EBITDA margin is defined as Adjusted EBITDA expressed as a percentage of total revenue.

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The following table presents a reconciliation of GAAP net income (loss) to Adjusted EBITDA for each of the periods indicated:

For the year ended December 31, 2021, Adjusted EBITDA increased by $85.5 million, or 123%, as compared to year ended December 31, 2020. The increase in Adjusted EBITDA during the year ended December 31, 2021 reflects our revenue growth, partially offset by an increase in the cost of sales and operating expenses during the current year. Our current year margin was also affected by an increase in general and administrative expenses as we implement the internal control and compliance procedures required of public companies.

Critical Accounting Policies and Estimates

In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, income (loss) from operations and net income (loss), as well as on the value of certain assets and liabilities on our consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions.

The consolidated financial statements have been prepared in accordance with GAAP. To prepare these financial statements, we make estimates, assumption, and judgments that affect what we report as our assets and liabilities, what we disclose as contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the periods presented.

In accordance with our policies, we regularly evaluate our estimates, assumptions, and judgments, including, but not limited to, those concerning revenue recognition, depreciation and amortization, contingencies, share-based compensation, and income taxes, and base our estimates, assumptions, and judgments on historical experience and on factors we believe reasonable under the circumstances. The results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. If our assumptions or conditions change, the actual results we report may differ from these estimates. We believe the following critical accounting policies affect the more significant estimates, assumptions, and judgments we use to prepare these consolidated financial statements. See Note 2—Summary of Significant Accounting and Reporting Policies in the notes accompanying our consolidated financial statements for a summary of our significant accounting policies, and discussion of recent accounting pronouncements.

Profit Share Revenue Recognition

We recognize revenue in accordance with Financial Accounting Standards Board, Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. Application of ASC 606 requires us to make judgments and estimates related to the classification, measurement and recognition of revenue. Our revenue primarily consists of profit share, program fees

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derived from contracts with lending institutions and claims administration service fees from contracts with insurance carriers, and is recognized when the contractual performance obligation is satisfied.

The primary judgment relating to the recognition of revenue is the estimation of our profit share with our insurance partners, which relies on market rate assumptions and our proprietary database, which has been accumulated over the last 20 years. To determine the profit share revenue, we use forecasts of loan-level earned premium and insurance claim payments. These forecasts are driven by the projection of loan defaults, prepayments and severity rates. These assumptions are based on our observations of the historical behavior for loans with similar risk characteristics. The assumptions also take consideration of forecast adjustments under various macroeconomic conditions and the current mix of the underlying portfolio of our insurance partners. To the extent these assumptions change, our profit share revenue will be adjusted.

For profit share revenue recognition purposes, particularly to measure the profit share variable consideration, we update our forecast of loan default and prepayment assumptions on a quarterly basis. The loan default rate also incorporates multiple macro-economic scenarios with conservatism embedded in a stressed scenario to ensure a representation of an economic recession.

We back-test the major estimate assumptions to ensure the accuracy of the revenue recognition model. We also benchmark back-testing results of our forecasted default rates against those reported by auto lenders. We update our profit-share forecasting model on an annual basis, resulting in a forecasted prepayment rate consistent with actual prepayment rates.

The impact on profit share revenue for the year ended December 31, 2021 resulting from our sensitivity analysis is summarized below:

Income Taxes

Prior to closing of the Business Combination, Open Lending, LLC, the sole owner of Lenders Protection, LLC and Open Lending Services, Inc., was treated as a partnership for income tax purposes. Therefore, no provision had historically been made for income tax purposes prior to the closing.

Subsequent to closing, Open Lending, LLC became a disregarded entity, wholly owned by us through its wholly owned subsidiaries. As of the close of the Business Combination, we are subject to income tax on a consolidated basis.

Our effective tax rate is based on income at statutory tax rates, adjusted for non-taxable and non-deductible items and tax credits. Management’s best estimate of future events and their impact is included in our effective tax rate. Certain changes or future events, such as changes in tax legislation, could have an impact on our estimates and effective tax rate. Audit periods remain open for review until the statute of limitations has passed.

The calculation of income taxes involves estimating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, we are required to develop estimates of the anticipated timing of the reversal of existing deferred tax liabilities, as well as estimates of future taxable income in some instances. Judgment is inherent in this process and differences between the estimated and actual amounts could result in a material impact on our consolidated financial statements.

We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine whether the weight of available evidence indicates that the tax position has met the threshold for recognition. Therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Although we believe we have no material uncertain tax positions as of December 31, 2021, 2020 or 2019, no assurance can be given that the final outcome of these matters will align with the positions reflected within these financial statements.

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Share-Based Compensation Awards

We measure and recognize compensation expense for all share-based awards made to employees and non-employee directors based on estimated fair values on the date of grant. The compensation expense is recognized on a straight-line basis over the requisite service or performance period. Performance-based restricted units (“PSUs”) are evaluated on a quarterly basis for probability of meeting performance metrics and any adjustments to share-based compensation expense are then made in the quarter of evaluation. Forfeitures are recognized as occurred. To determine the fair value of the share-based awards, we use the closing price of our common stock publicly traded on Nasdaq on the date of grant for time-based and performance-based restricted stock awards, and we utilize the Black-Scholes option pricing model to value stock options, which involves inputs for the share value of Open Lending, expected share volatility, expected term of the awards, risk-free interest rate and expected dividend. The expected volatility was based on the average of implied and observed historical volatility of comparable companies as we do not have enough history as a public company

This determination of fair value is affected by assumptions regarding a number of highly complex and subjective variables. Changes in the subjective assumptions can materially affect the estimate of their fair value. See Note 8—Share-Based Compensation of the accompanying consolidated financial statements for more information.

Recent Accounting Pronouncements

See Note 2—Summary of Significant Accounting and Reporting Policies to the accompanying consolidated financial statements for our discussion about new accounting pronouncements adopted and those pending.

Contractual Obligations

As of December 31, 2021, our estimated future obligations include both current and long term obligations. For our debt as noted in Note 5—Debt, we have a current obligation of $3.1 million and a long-term obligation of $144.6 million. Under our operating lease as noted in Note 11—Commitments and Contingencies, we have a current obligation of $0.9 million and a long-term obligation of $5.8 million.