Open Lending(LPRO) - 2023 Q4 - Annual Report

Part I Business Open Lending provides a lending enablement and risk analytics platform (LPP) to automotive lenders, facilitating near-prime and non-prime loans with risk-based pricing and default insurance - The company's core product, the Lenders Protection Platform (LPP), enables automotive lenders to serve near-prime and non-prime borrowers through risk-based pricing and default insurance underwriting[18][19][21] - Revenue is derived from program fees (averaging $527 per loan in 2023), claims administration fees (3% of earned premium), and a 72% share of insurance underwriting profit from carrier partners[25][26] - The company partners with insurance carriers for auto loan default insurance, with a new agreement signed with Core Specialty on February 15, 2024, following the expiration of the CNA agreement[31][32][33] - The company operates in a heavily regulated industry, subject to numerous federal and state consumer protection laws including the Truth-in-Lending Act, FCRA, GLBA, and the Dodd-Frank Act[54][55][56] - As of December 31, 2023, the company had 210 employees, primarily located in Austin, Texas[61] Risk Factors The company faces significant risks across business operations, regulatory compliance, and stock ownership, including lender dependence, revenue concentration, economic sensitivity, and regulatory complexities Risks Related to Our Business Key business risks include revenue concentration with top lenders and insurance carriers, sensitivity to macroeconomic conditions, and operational vulnerabilities like security breaches and model errors - A significant percentage of program fee revenue is concentrated with the top ten automotive lenders, posing a risk if one or more are lost[81] - The company relies on a small number of insurance carriers, and the loss of key partners without replacement could materially harm the business, as seen with the CNA agreement expiration[84][85][86] - Rising market interest rates have adversely impacted consumer borrowing, potentially leading to lower loan volume and higher delinquencies and defaults[87][88] - The business is heavily concentrated in the U.S. automobile consumer lending industry, making it susceptible to market fluctuations[118] Risks Related to Our Regulatory Environment Operating in a highly regulated industry, the company faces risks from complex and evolving federal and state consumer protection, lending, and insurance laws, including potential licensing violations and UDAAP enforcement - The business is subject to extensive and changing federal, state, and local laws, with non-compliance potentially leading to lawsuits, governmental actions, and reputational damage[139] - Operating without necessary state or local licenses for consumer finance or insurance activities could result in fines, penalties, and unenforceability of facilitated loans[150] - The Dodd-Frank Act's UDAAP prohibition poses a risk, as the CFPB could deem certain loan features facilitated by the company as unfair, deceptive, or abusive[153] Risks Related to Ownership of Our Common Stock Stockholders face risks including stock price volatility, lack of dividends, concentrated ownership by insiders, and anti-takeover provisions that could deter a change in control - The market price of the company's common stock has been and may continue to be volatile[160] - The company has no current plans to pay cash dividends, limited by covenants in existing debt agreements[168] - Executive officers, directors, and principal stockholders control a significant portion of voting stock, enabling material influence over corporate and management policies[167] - Certain provisions in the certificate of incorporation and bylaws, including a classified board, could hinder or prevent a change in control[171] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - No unresolved staff comments exist[175] Cybersecurity Cybersecurity risk is managed through an ERM process, including automated testing and NIST alignment, with oversight from the Audit Committee, and no material threats identified to date - Cybersecurity risk is managed via an enterprise risk management (ERM) process, utilizing automated scanning, annual NIST evaluations, and bi-annual third-party penetration testing for SOC II compliance[176][177] - The Audit Committee of the Board of Directors provides oversight for cybersecurity risks, receiving regular reports from the CIO and CTO[183][184] - To date, the company is unaware of any cybersecurity threats that have materially affected its business, strategy, or financial condition[182] Properties The company leases its corporate headquarters located in Austin, Texas - The company leases its office space at 1501 South MoPac Expressway, Suite 450, Austin, TX 78746[185] Legal Proceedings As of the filing date, the company is not a party to any material legal proceedings - The company is not currently a party to any material legal proceedings[186] Mine Safety Disclosures This item is not applicable to the company - This disclosure item is not applicable[187] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Open Lending's common stock trades on Nasdaq (LPRO), with no current dividend plans, and a $75.0 million share repurchase program with $19.6 million remaining - The company's common stock is traded on the Nasdaq under the symbol LPRO[189] - There are no current plans to pay cash dividends, limited by covenants in existing debt agreements[190] - A share repurchase program for up to $75.0 million is authorized through March 31, 2024, with $19.6 million available as of December 31, 2023[193][194] Issuer Purchases of Equity Securities | Period | Total number of shares purchased | Average price paid per share (USD) | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions USD) | | :--- | :--- | :--- | :--- | :--- | | 10/1/2023-10/31/2023 | 127,347 | $6.84 | — | $25.6 | | 11/1/2023-11/30/2023 | 527,787 | $6.08 | 519,663 | $22.5 | | 12/1/2023-12/31/2023 | 423,238 | $6.83 | 416,475 | $19.6 | | Total | 1,078,372 | | 936,138 | | Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, financial performance declined significantly with 35% lower revenue and 70% lower operating income, driven by reduced loan volume and profit share adjustments, while liquidity remained solid with cash from operations of $82.7 million Executive Overview The company's financial performance declined in 2023, with certified loans, total revenue, net income, and Adjusted EBITDA all significantly decreasing compared to 2022 Key Financial and Operational Metrics | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Certified Loans | 122,984 | 165,211 | | Value of Insured Loans ($B) | $3.61 | $4.76 | | Total Revenue ($M) | $117.5 | $179.6 | | Operating Income ($M) | $29.1 | $97.6 | | Net Income ($M) | $22.1 | $66.6 | | Adjusted EBITDA ($M) | $50.2 | $105.7 | - The number of active lenders certifying loans increased slightly from 438 at year-end 2022 to 454 at year-end 2023[208] Results of Operations Total revenue decreased 35% to $117.5 million in 2023, driven by lower program fees and a 52% decline in profit share revenue, leading to a 70% drop in operating income Consolidated Statements of Operations Highlights | Line Item | 2023 (in thousands USD) | 2022 (in thousands USD) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $117,460 | $179,594 | (35)% | | Gross Profit | $95,178 | $159,626 | (40)% | | Total Operating Expenses | $66,103 | $62,011 | 7% | | Operating Income | $29,075 | $97,615 | (70)% | | Net Income | $22,070 | $66,620 | (67)% | - The 52% decrease in profit share revenue resulted from lower new loan originations and a $22.8 million negative adjustment for historic vintages due to higher loan default and prepayment rates[238][239] - General and administrative expenses increased by 20% ($7.1 million), primarily due to higher corporate employee compensation and benefit costs[244] Liquidity and Capital Resources Principal liquidity sources are cash from operations and a revolving credit facility; 2023 saw $82.7 million in operating cash flow and $42.3 million used in financing, primarily for share repurchases Cash Flow Summary | Cash Flow Activity (Year Ended Dec 31) | 2023 (in thousands USD) | 2022 (in thousands USD) | | :--- | :--- | :--- | | Net cash provided by operating activities | $82,658 | $107,431 | | Net cash used in investing activities | $(2,178) | $(624) | | Net cash used in financing activities | $(42,330) | $(17,797) | - Net cash used in financing activities totaled $42.3 million in 2023, primarily for the repurchase of 5,233,065 shares of common stock for $37.3 million[257] - As of December 31, 2023, $145.3 million was outstanding under the Term Loan due 2027, with no borrowings on the Revolving Credit Facility[259] Non-GAAP Financial Measures Adjusted EBITDA, a non-GAAP measure, decreased 53% to $50.2 million in 2023, with the margin declining from 59% to 43%, reflecting lower operating income Reconciliation of Net Income to Adjusted EBITDA | Reconciliation to Adjusted EBITDA (Year Ended Dec 31) | 2023 (in thousands USD) | 2022 (in thousands USD) | | :--- | :--- | :--- | | Net income | $22,070 | $66,620 | | Interest expense | 10,661 | 5,832 | | Income tax expense | 6,788 | 26,920 | | Depreciation and amortization | 1,159 | 915 | | Share-based compensation | 9,492 | 5,449 | | Adjusted EBITDA | $50,170 | $105,736 | | Adjusted EBITDA margin | 43% | 59% | Critical Accounting Policies and Estimates Profit share revenue recognition is a critical accounting estimate, relying on a forecast model to project loan performance based on prepayment, default, and loss severity assumptions, which can materially impact reported revenue - Profit share revenue recognition is a primary critical accounting estimate, relying on a forecast model to project loan-level earned premiums and claim payments based on assumptions for prepayment, default, and loss severity[267] Sensitivity Analysis on Profit Share Revenue (as of December 31, 2023) | Assumption | 10% Increase Impact | (10)% Decrease Impact | | :--- | :--- | :--- | | Prepayment rate | (3)% | 3% | | Loan default rate | (7)% | 8% | | Default severity of loss | (7)% | 7% | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks including general economic conditions, concentration risk with its largest insurance partner, and interest rate risk from its variable-rate term loan and investments - The company faces concentration risk, relying on its largest insurance partner for a significant portion of its profit share and claims administration revenue[280] - The company is exposed to interest rate risk as its $145.3 million Term Loan due 2027 has a variable interest rate based on SOFR[281][282] Financial Statements and Supplementary Data This item refers to the consolidated financial statements and supplementary data included later in the report, starting on page F-1 - This item refers to the consolidated financial statements and supplementary data included later in the report[284] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure are reported[285] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes identified during the period - Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period[286] - Based on the COSO 2013 framework, management concluded that internal control over financial reporting was effective as of December 31, 2023[288] - No material changes in internal control over financial reporting were identified during the period[290] Other Information No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the fourth quarter of 2023 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the three months ended December 31, 2023[291] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - This disclosure item is not applicable[292] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[294] Executive Compensation Information for this item is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[295] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[296] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[297] Principal Accountant Fees and Services Information for this item is incorporated by reference from the company's 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[298] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K - This item lists the documents filed as part of the report, including financial statements, schedules, and various exhibits[300][301] Form 10-K Summary The company provides no summary for its Form 10-K - No Form 10-K summary is provided[303]