Open Lending Corp (LPRO) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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:
| Year ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| Certified loans | 110,652 | 122,984 | ||||
| Value of insured loans facilitated (in thousands) | $ | 3,111,753 | $ | 3,614,303 | ||
| Average loan size per certified loan | $ | 28,122 | $ | 29,388 | ||
| Number of contracts signed with automotive lenders | 58 | 44 | ||||
| Number of active lenders at end of period(1) | 441 | 454 |
(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:
| Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | % Change | |||||||
| Certified loans | 110,652 | 122,984 | (10)% | ||||||
| Single-pay | 100,015 | 106,767 | (6)% | ||||||
| Monthly-pay | 10,637 | 16,217 | (34)% | ||||||
| Average program fees (1) | $ | 515 | $ | 527 | (2)% | ||||
| Single-pay | $ | 497 | $ | 492 | 1% | ||||
| Monthly-pay (1) | $ | 720 | $ | 825 | (13)% |
(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
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||
| ($ in thousands) | ||||||||||||||
| Program fees | $ | 57,040 | $ | 64,092 | $ | (7,052) | (11) | % | ||||||
| Profit share | ||||||||||||||
| New certified loan originations | 52,979 | 66,113 | (13,134) | (20) | % | |||||||||
| Change in estimated revenues | (96,102) | (22,812) | (73,290) | 321 | % | |||||||||
| Total profit share | (43,123) | 43,301 | (86,424) | (200) | % | |||||||||
| Claims administration and other service fees | 10,107 | 10,067 | 40 | — | % | |||||||||
| Total revenue | $ | 24,024 | $ | 117,460 | $ | (93,436) | (80) | % |
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
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | ||||||||
| ($ in thousands) | |||||||||||
| Revenue | $ | 24,024 | $ | 117,460 | $ | (93,436) | (80) | % | |||
| Cost of services | 23,855 | 22,282 | 1,573 | 7 | % | ||||||
| Gross profit (loss) | $ | 169 | $ | 95,178 | $ | (95,009) | (100) | % | |||
| Gross margin | 1 | % | 81 | % | (80) | % |
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
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||
| ($ in thousands) | ||||||||||||
| Gross profit (loss) | $ | 169 | $ | 95,178 | $ | (95,009) | (100) | % | ||||
| Operating expenses | ||||||||||||
| General and administrative | 43,867 | 43,043 | 824 | 2 | % | |||||||
| Selling and marketing | 17,218 | 17,485 | (267) | (2) | % | |||||||
| Research and development | 4,462 | 5,575 | (1,113) | (20) | % | |||||||
| Total operating expenses | $ | 65,547 | $ | 66,103 | $ | (556) | (1) | % | ||||
| Operating income (loss) | $ | (65,378) | $ | 29,075 | $ | (94,453) | (325) | % | ||||
| Operating margin | (272) | % | 25 | % | (297) | % |
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
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||
| ($ in thousands) | ||||||||||
| Interest expense | $ | (11,317) | $ | (10,661) | $ | (656) | 6% | |||
| Interest income | $ | 12,090 | $ | 10,335 | $ | 1,755 | 17% |
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
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||
| ($ in thousands) | ||||||||||
| Income (loss) before income taxes | $ | (64,605) | $ | 28,858 | $ | (93,463) | (324)% | |||
| Income tax expense | $ | 70,405 | $ | 6,788 | $ | 63,617 | 937% | |||
| Effective tax rate | (109.0)% | 23.5% |
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:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| (in thousands) | ||||||
| Net cash provided by operating activities | $ | 17,598 | $ | 82,658 | ||
| Net cash used in investing activities | $ | (3,896) | $ | (2,178) | ||
| Net cash used in financing activities | $ | (6,447) | $ | (42,330) |
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:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| ($ in thousands) | ||||||
| Net income (loss) | $ | (135,010) | $ | 22,070 | ||
| Non-cash adjustments | 81,723 | 6,729 | ||||
| Change in contract assets | 14,247 | 46,116 | ||||
| Change in excess profit share receipts | 47,556 | — | ||||
| Change in other assets and liabilities | 9,082 | 7,743 | ||||
| Net cash provided by operating activities | $ | 17,598 | $ | 82,658 |
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 $0.3 million of excise tax paid in October 2024.
Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures used by management to evaluate its operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources. Accordingly, we believe these measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors. These measures further provide useful analysis of period-to-period comparisons of our business, as they exclude the effect of certain non-cash items and certain variable charges. Adjusted EBITDA is defined as GAAP net income (loss) excluding interest expense, income tax expense, depreciation expense of property and equipment, amortization expense of capitalized software development costs and share-based compensation expense. Adjusted EBITDA margin is defined as Adjusted EBITDA expressed as a percentage of total revenue.
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The following table presents a reconciliation of GAAP net income (loss) to Adjusted EBITDA for each of the periods indicated:
| Year Ended December 31, | |||||
|---|---|---|---|---|---|
| 2024 | 2023 | ||||
| ($ in thousands) | |||||
| Net income (loss) | $ | (135,010) | $ | 22,070 | |
| Non-GAAP adjustments: | |||||
| Interest expense | 11,317 | 10,661 | |||
| Income tax expense | 70,405 | 6,788 | |||
| Depreciation and amortization expense | 1,674 | 1,159 | |||
| Share-based compensation | 8,677 | 9,492 | |||
| Total adjustments | 92,073 | 28,100 | |||
| Adjusted EBITDA | $ | (42,937) | $ | 50,170 | |
| Adjusted EBITDA margin | (179) | % | 43 | % |
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:
| Prepayment rate | Loan default rate | Severity of loss | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Assumption change | 10% | (10)% | 10% | (10)% | 10% | (10)% | |||||
| Impact on cumulative revenue(1) | (3)% | 3% | (7)% | 7% | (9)% | 9% |
(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.