Open Lending(LPRO) - 2021 Q4 - Annual Report

PART I Cautionary Note Regarding Forward-Looking Statements This section disclaims that forward-looking statements are subject to risks and uncertainties, with no obligation to update them - Forward-looking statements cover financial performance, strategy, operations, expansion, economic impact, loan volume, costs, litigation, regulatory changes, and the effects of the COVID-19 pandemic[13][15] - Statements are based on information and estimates available at the time of the report and are not guarantees of future financial performance[14] - Readers are cautioned not to place undue reliance on these statements, as actual results may differ materially due to known and unknown risks and uncertainties[15][16] Item 1. Business Open Lending provides loan analytics and automated decision technology for near-prime and non-prime auto loans, also administering insurance claims - Open Lending provides loan analytics, risk-based pricing, risk modeling, and automated decision technology for automotive lenders in the U.S., facilitating near-prime and non-prime auto loans[19][23] - The company also operates as a third-party administrator for insurance claims and premium adjustments on these loans[19] - Since its inception in 2000, Open Lending has facilitated over $13.5 billion in automotive loans and serves 396 active automotive lenders[23] - LPP, the flagship product, underwrites default insurance for near-prime and non-prime borrowers (credit scores 560-699) using proprietary data and risk-based pricing models, providing real-time credit risk assessment and customized interest rates within five seconds[24][25][27][29] - The business model is B2B2C, enabling lenders to expand their lending guidelines and increase loan volumes, while offering borrowers potentially lower interest rates, lower monthly payments, and reduced down payments[30][53][54][55] Revenue Streams and Average Revenue per Loan (2021) | Revenue Stream | Description | Average per Loan (2021) | | :--------------- | :---------- | :------------------------ | | Program Fees | Paid by lenders for LPP use, recognized upfront. | ~$440 | | Claims Administration Fees | Paid by insurers for claims adjudication (3% of monthly earned premium). | Included in total | | Profit Share | Participation in insurers' underwriting profit (72% of aggregate monthly profit). | Included in total | | Total Revenue per Loan | | ~$1,260 | - The near-prime and non-prime automotive loan market represents an annual $250 billion opportunity, with a $12.4 billion annual revenue opportunity for Open Lending, which currently serves less than 2% of this market[35][36] - The company partners with three insurance carriers, who are required to maintain an 'A-' Financial Strength Rating by A.M. Best[48] - Open Lending operates in a heavily regulated industry, subject to U.S. federal, state, and local consumer protection laws (e.g., TILA, FTC Act, ECOA, FCRA, GLBA) and state insurance regulations, requiring various licenses[59][61][62][64] - As of December 31, 2021, the company had 132 employees, primarily in Austin, Texas, fostering a mission-driven culture with a focus on employee growth and well-being[66][67][68] Item 1A. Risk Factors This section outlines significant business, regulatory, and common stock risks, including dependence on partners, economic impacts, and cybersecurity - The company's results and growth depend heavily on its ability to retain existing and attract new automotive lenders; a significant portion of program fee revenue is concentrated with its top ten customers[73][78][79] - Reliance on only three major insurance carriers to underwrite loans poses a material risk if one or more terminate agreements[73][81] - Financial condition and operations are adversely affected by the COVID-19 pandemic and the global semiconductor chip supply shortage, leading to reduced vehicle sales and demand for LPP[73][82][83][146][147] - Rapid growth places significant demands on operational, administrative, and financial resources, requiring continuous development and adaptation of systems[73][88][89] - Privacy concerns, cyber-attacks, or security breaches relating to LPP could result in economic loss, reputational damage, and legal penalties due to the handling of sensitive consumer information[73][92][93][105][108] - Changes in market interest rates could negatively impact consumer spending, borrowing, loan volume, and increase defaults, thereby affecting revenue[73][94] - The company's projections and underwriting models are subject to significant risks and uncertainties; inaccuracies or errors could harm its reputation and relationships with partners[73][95][113][117] - Operating in a heavily regulated industry, the company faces risks from evolving federal and state consumer protection laws (e.g., UDAAP), licensing requirements, and potential regulatory investigations or enforcement actions[74][148][151][165][171][172] - As a public company, Open Lending faces increased expenses and administrative burdens, and its management has limited experience in operating a public company[75][173][175] - Effective December 31, 2021, the company lost its 'emerging growth company' status, subjecting it to additional disclosure and governance requirements, including auditor attestation for internal controls[77][176][177] - Risks related to common stock include the potential for an inactive trading market, volatility in stock price, dilution from future equity issuances, and the absence of current plans to pay cash dividends[76][182][184][186][190] Item 1B. Unresolved Staff Comments There are no unresolved staff comments from the SEC as of the date of this report - No unresolved staff comments[196] Item 2. Properties Open Lending leases its corporate office in Austin, Texas, and believes current facilities are sufficient until lease expiration - The company leases its office space located at 1501 South MoPac Expressway, Austin, TX 78746[197] - The current office space is considered sufficient to meet the company's needs until the expiration of its lease[197] Item 3. Legal Proceedings Open Lending is not a party to any material legal proceedings, and future claims are not anticipated to have a material adverse impact - As of the date of this Annual Report, Open Lending was not a party to any material legal proceedings[198] - Future legal matters and claims arising in the ordinary course of business are not anticipated to have a material adverse impact on financial position, results of operations, or cash flows[198] Item 4. Mine Safety Disclosures There are no mine safety disclosures to report for Open Lending Corporation - No mine safety disclosures[199] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Open Lending's common stock trades on Nasdaq, with no current cash dividend plans, and includes details on a Q4 2021 share repurchase and performance graph - Open Lending's common stock is traded on the Nasdaq under the symbol 'LPRO'[202] - As of February 24, 2022, there were 28 registered stockholders of record, with a significantly greater actual number of beneficial owners[202] - The company has no current plans to pay cash dividends on its common stock; future dividend declarations are at the sole discretion of the Board of Directors[203] Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :--------------------- | :--------------------- | :--------------------------- | | 11/1/2021-11/30/2021 | 7,592 | $33.94 | - The shares repurchased were primarily to satisfy employee tax withholding obligations related to vested share-based awards[205] - A performance graph compares the cumulative total stockholder return of the company's common stock against the S&P 500 Index and a selected Peer Group from June 10, 2020, to December 31, 2021[207] Item 6. [Reserved] This item is not applicable and contains no content - This item is not applicable and contains no content[327] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Open Lending's financial condition and results for 2021 and 2020, highlighting significant growth in certified loans, revenue, and Adjusted EBITDA - Open Lending is a leading provider of lending enablement and risk analytics for near-prime and non-prime automotive loans, serving 396 active lenders and having facilitated over $13.5 billion in loans since 2000[211] - The company targets the underserved near-prime and non-prime borrower market (credit scores 560-699), which represents an annual $250 billion loan market and a $12.4 billion annual revenue opportunity[212][215] Key Financial and Operational Highlights (2021 vs. 2020) | Metric | 2021 | 2020 | % Change | | :--------------------------------- | :--------- | :--------- | :--------- | | Certified Loans | 171,697 | 94,226 | 82% | | Total Revenue (in thousands) | $215,655 | $108,892 | 98% | | Operating Income (in thousands) | $150,289 | $56,717 | 165% | | Net Income (Loss) (in thousands) | $146,082 | $(97,564) | 250% | | Adjusted EBITDA (in thousands) | $154,990 | $69,526 | 123% | | Value of Insured Loans Facilitated (in thousands) | $4,331,508 | $2,126,327 | 104% | | Number of Contracts Signed with Lenders | 71 | 55 | 29% | - Revenue is generated from program fees (averaging $440 per loan in 2021), profit share from insurance partners, and claims administration service fees (3% of monthly earned premium)[34][245][246][247][248] - Recent developments include debt refinancing, a public offering, a share repurchase, and the early termination of the Tax Receivable Agreement (TRA) for a $36.9 million payment, resulting in a $55.4 million gain[224][225][226][230][231][234][235] - The COVID-19 pandemic continues to create uncertainty, impacting loan applications and certified loans, though levels increased in 2021 after a reduction in 2020, with long-term impact on defaults remaining uncertain[237] - Key factors affecting operating results include growth in financial institutions, competition, profit share assumptions (based on loan defaults, prepayments, and severity rates), industry trends, general economic conditions, and concentration of revenue with its two largest insurance partners (41% of total revenue in 2021)[239][240][241][242][243][289] Cash Flow Summary (in thousands) | Metric | 2021 | 2020 | | :--------------------------------------- | :--------- | :--------- | | Net cash provided by operating activities | $95,156 | $24,640 | | Net cash used in investing activities | $(1,987) | $(1,196) | | Net cash (used in) provided by financing activities | $(77,808) | $70,806 | - Net cash from operating activities increased by $70.5 million in 2021, primarily due to increased program fees and higher profit share payments[274] - Financing activities in 2021 included $175.0 million in proceeds from the New Credit Agreement, offset by $169.2 million in debt principal payments, $25.0 million to pay down the revolving facility, $36.9 million for TRA settlement, and $20.0 million for share repurchases[278] Contractual Obligations (as of Dec 31, 2021, in thousands) | Obligation Type | Current | Long-Term | Total | | :--------------- | :------ | :-------- | :---- | | Debt | $3,125 | $144,535 | $147,660 | | Operating Lease | $869 | $5,832 | $6,701 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk Open Lending is exposed to market risks from economic conditions, consumer behavior, and interest rate fluctuations, with significant concentration risk from its top insurance partners - The company is exposed to market risks from general economic conditions, consumer attitudes toward vehicle ownership, interest rate levels, monetary policies, market volatility, consumer confidence, and unemployment rates[301][302] - A significant concentration risk exists as the two largest insurance partners account for a substantial portion of profit share and claims administration service fee revenue; disruption of these relationships could materially impact revenue[303] - The company's outstanding debt, including the Term Loan due 2026 ($122.7 million) and Revolving Facility ($25.0 million) as of December 31, 2021, bears variable interest rates tied to ABR or LIBOR plus a spread, exposing it to interest rate risk[304] Item 8. Financial Statements and Supplementary Data This item indicates that the consolidated financial statements and supplementary data are included in the Annual Report, starting on page F-1 - The consolidated financial statements and supplementary data are included in this Annual Report beginning on page F-1 (page 61 in the document)[305] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with the company's accountants on accounting and financial disclosure matters - No changes in and disagreements with accountants on accounting and financial disclosure[306] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management, with CEO and CFO participation, evaluated disclosure controls and procedures as of December 31, 2021, and concluded they were effective at the reasonable assurance level[307] - Management assessed the effectiveness of internal control over financial reporting as of December 31, 2021, based on COSO criteria, and concluded it was effective[309] - Ernst & Young LLP, the independent registered public accounting firm, issued an unqualified attestation report on the company's internal control over financial reporting[310] - There were no material changes in internal control over financial reporting during the quarter ended December 31, 2021[311] Item 9B. Other Information There is no other information required to be disclosed under this item - No other information to disclose[312] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections There are no disclosures regarding foreign jurisdictions that prevent inspections - No disclosures regarding foreign jurisdictions that prevent inspections[313] Part III Item 10. Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from specific sections of the company's 2022 annual meeting proxy statement - Information is incorporated by reference from the 'Election of Directors,' 'Delinquent Section 16(a) Reports,' and 'Board Matters' sections of the 2022 Proxy Statement[315] Item 11. Executive Compensation Information for this item is incorporated by reference from specific sections of the company's 2022 annual meeting proxy statement - Information is incorporated by reference from the 'Election of Directors,' 'Delinquent Section 16(a) Reports,' and 'Board Matters' sections of the 2022 Proxy Statement[316] Item 12. Security Ownership of Certain Beneficial Owner and Management and Related Stockholder Matters Information for this item is incorporated by reference from specific sections of the company's 2022 annual meeting proxy statement - Information is incorporated by reference from the 'Securities Authorized for Issuance under Equity Compensation Plans' and 'Voting Securities and Principal Stockholders' sections of the 2022 Proxy Statement[317] Item 13. Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from specific sections of the company's 2022 annual meeting proxy statement - Information is incorporated by reference from the 'Certain Relationships and Related Party Transactions' and 'Board Matters' sections of the 2022 Proxy Statement[318] Item 14. Principal Accountant Fees and Services Information for this item is incorporated by reference from specific sections of the company's 2022 annual meeting proxy statement - Information is incorporated by reference from the 'Proposal to Ratify the Selection of Ernst & Young as our Independent Registered Public Accounting Firm' section of the 2022 Proxy Statement[319] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists documents filed as part of the Annual Report, including consolidated financial statements and a comprehensive list of exhibits - The consolidated financial statements are filed as part of this report[321] - All financial statement schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto[321] - A comprehensive list of exhibits, including business combination agreements, credit agreements, stock option plans, and various certifications, are filed or incorporated by reference[322][323][324] Item 16. Form 10-K Summary This item is not applicable and contains no content - This item is not applicable and contains no content[327] SIGNATURES Signatures The Annual Report on Form 10-K was duly signed by Open Lending Corporation's authorized officers and directors on February 28, 2022 - The report was signed by Charles D. Jehl (Chief Financial Officer), John J. Flynn (Chairman & Chief Executive Officer), Ross M. Jessup (President, Chief Operating Officer), and other directors[331][332] - The signing date for the report was February 28, 2022[331][332] Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on Open Lending's financial statements and internal control, identifying profit share revenue recognition as a critical audit matter - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the periods ended December 31, 2021 and 2020, stating they present fairly the financial position and results of operations in conformity with U.S. GAAP[336] - An unqualified opinion was also expressed on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[337] - The critical audit matter identified was 'Profit Share Revenue Recognition' due to the significant management judgment required in forecasting loan defaults, prepayments, and severity rates[341] - Audit procedures for profit share revenue included evaluating methodology, testing completeness and accuracy of historical data, and involving subject matter experts to assess assumptions against industry trends and market data[343] Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting Ernst & Young LLP issued an unqualified opinion on Open Lending's internal control over financial reporting as of December 31, 2021, affirming its effectiveness - Ernst & Young LLP audited Open Lending Corporation's internal control over financial reporting as of December 31, 2021[347] - The firm expressed an unqualified opinion, concluding that the company maintained effective internal control over financial reporting based on the COSO criteria[347] Consolidated Balance Sheets The consolidated balance sheets show increased total assets and stockholders' equity in 2021, primarily due to decreased total liabilities Consolidated Balance Sheet Summary (in thousands) | Metric | December 31, 2021 | December 31, 2020 | | :-------------------------- | :------------------ | :------------------ | | Cash and cash equivalents | $116,454 | $101,513 | | Current contract assets, net | $70,542 | $50,386 | | Total current assets | $202,794 | $162,777 | | Total assets | $318,825 | $294,009 | | Total current liabilities | $12,065 | $17,008 | | Long-term debt, net | $143,135 | $152,859 | | Tax receivable agreement liability | $0 | $92,369 | | Total liabilities | $159,843 | $267,387 | | Total stockholders' equity | $158,982 | $26,622 | - Total assets increased by $24.8 million from $294.0 million in 2020 to $318.8 million in 2021[356] - Total liabilities decreased significantly by $107.5 million, from $267.4 million in 2020 to $159.8 million in 2021, largely due to the settlement of the tax receivable agreement liability[356] - Total stockholders' equity increased substantially by $132.4 million, from $26.6 million in 2020 to $159.0 million in 2021[356] Consolidated Statements of Operations and Comprehensive Income (Loss) The consolidated statements of operations show significant revenue growth and a substantial net income of $146.1 million in 2021, recovering from a 2020 net loss Consolidated Statements of Operations Summary (in thousands) | Metric | 2021 | 2020 | 2019 | | :---------------------------------------- | :--------- | :--------- | :--------- | | Profit share | $133,215 | $60,392 | $53,038 | | Program fees | $75,630 | $43,995 | $36,667 | | Claims administration and other service fees | $6,810 | $4,505 | $3,142 | | Total Revenue | $215,655 | $108,892 | $92,847 | | Cost of services | $18,621 | $9,786 | $7,806 | | Gross profit | $197,034 | $99,106 | $85,041 | | Operating income | $150,289 | $56,717 | $62,615 | | Income (loss) before income taxes | $191,168 | $(90,991) | $62,514 | | Income tax expense (benefit) | $45,086 | $6,573 | $(30) | | Net income (loss) | $146,082 | $(97,564) | $62,544 | | Basic EPS | $1.16 | $(1.09) | $(2.97) | | Diluted EPS | $1.16 | $(1.09) | $(2.97) | - Total revenue increased by 98% from $108.9 million in 2020 to $215.7 million in 2021, driven by a 121% increase in profit share and a 72% increase in program fees[359] - Net income significantly improved from a loss of $(97.6) million in 2020 to a profit of $146.1 million in 2021, partly due to a $55.4 million gain on extinguishment of the tax receivable agreement[359] - Operating income increased by 165% from $56.7 million in 2020 to $150.3 million in 2021[359] Consolidated Statements of Changes in Stockholders' Equity (Deficit) The consolidated statements of changes in stockholders' equity detail equity evolution for 2021, 2020, and 2019, highlighting impacts from the Business Combination Total Stockholders' Equity (Deficit) (in thousands) | Date | Amount | | :--------------- | :--------- | | December 31, 2021 | $158,982 | | December 31, 2020 | $26,622 | | December 31, 2019 | $(234,779) | - Key changes in 2020 included a $242.5 million recapitalization, $419.8 million from issuance of earn-out shares, $105.3 million from stock warrant exercises, and a $(37.5) million share repurchase[362] - In 2021, net income of $146.1 million and $3.8 million in share-based compensation contributed positively to equity, while a $(20.0) million share repurchase reduced it[362] Consolidated Statements of Cash Flows The consolidated statements of cash flows show a significant increase in operating cash flow in 2021, with financing activities shifting to cash usage due to debt repayments Consolidated Statements of Cash Flows Summary (in thousands) | Metric | 2021 | 2020 | 2019 | | :--------------------------------------- | :--------- | :--------- | :--------- | | Net cash provided by operating activities | $95,156 | $24,640 | $41,762 | | Net cash used in investing activities | $(1,987) | $(1,196) | $(99) | | Net cash (used in) provided by financing activities | $(77,808) | $70,806 | $(44,901) | | Cash and cash equivalents and restricted cash (end of year) | $119,509 | $104,148 | $9,898 | - Net cash provided by operating activities increased by $70.5 million in 2021, primarily due to increased cash inflows from program fees and higher profit share payments from insurance carriers[274][365] - Financing activities in 2021 used $77.8 million, primarily for $169.2 million in debt principal payments (Term Loan due 2027), $25.0 million on the revolving facility, $20.0 million for share repurchases, and $36.9 million for the early termination of the TRA[278][365] - These cash outflows were partially offset by $125.0 million in proceeds from the Term Loan due 2026 and $50.0 million from the Revolving Facility[278][365] Notes to Consolidated Financial Statements These notes detail Open Lending's accounting policies, estimates, and financial statement items, covering the Business Combination, COVID-19 impact, revenue, debt, equity, and income taxes - The Business Combination on June 10, 2020, was accounted for as a reverse recapitalization, with Open Lending, LLC deemed the accounting acquirer, and prior period shares retroactively restated[372][374][432] - The COVID-19 pandemic continues to create economic uncertainty, impacting revenues and potentially increasing loan defaults as government assistance programs end[375] - Open Lending lost its 'emerging growth company' status as of December 31, 2021, leading to the adoption of ASU 2016-13 (CECL) on January 1, 2021, with a cumulative adjustment of $0.1 million to retained earnings[376][429] - Profit share revenue recognition involves significant management judgment based on forecasts of loan defaults, prepayments, and severity rates, which are updated quarterly and incorporate macroeconomic conditions[289][290][403][404] - The company's debt structure includes a $125.0 million Term Loan due 2026 and a $50.0 million Revolving Credit Facility, both bearing variable interest rates and secured by company assets[445][446] - The Tax Receivable Agreement (TRA) was amended and terminated early in April 2021 for a $36.9 million payment, resulting in a $55.4 million gain on extinguishment[537][538] - Contingent consideration from the Business Combination, involving additional common stock shares based on market price milestones, was classified as a Level 3 fair value liability and fully settled in July and August 2020[411][412][457] - Total share-based compensation expense was $3.8 million in 2021, $2.8 million in 2020, and $2.0 million in 2019, allocated across general and administrative, selling and marketing, research and development, and cost of services[491] - The company reported net income of $146.1 million in 2021 (EPS $1.16) compared to a net loss of $(97.6) million in 2020 (EPS $(1.09))[359][505] - As of December 31, 2021, net deferred tax assets were $65.5 million, with no valuation allowance recorded as all deferred tax assets are expected to be realized[530][531]