Open Lending (LPRO) 10-Q2022 Q3 Quarterly report

Nebula Acquisition Corporation (“Nebula” or “Predecessor”), was originally incorporated in Delaware on October 2, 2017 as a special purpose acquisition company for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. On June 10, 2020 (the “Closing Date”), Nebula consummated a business combination pursuant to that certain Business Combination Agreement by and among Nebula, Open Lending, LLC, BRP Hold 11, Inc. (the “Blocker”), the Blocker’s sole stockholder, Nebula Parent Corp., NBLA Merger Sub LLC, NBLA Merger Sub Corp., and Shareholder Representative Services LLC, as the security holder representative (the “Business Combination”).

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

The Company has evaluated how it is organized and managed and has identified only one operating segment. All of the Company’s operations and assets are in the U.S., and all of its revenues are attributable to U.S. customers.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and include the accounts of Open Lending and all its subsidiaries that are directly or indirectly owned or controlled by the Company. All intercompany transactions and balances have been eliminated upon consolidation. Certain prior year amounts have been reclassified to conform to the Company’s current presentation. Such reclassifications had no effect on the Company’s previously reported net income, earnings per share, cash flows or accumulated deficit.

Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted from these unaudited condensed consolidated financial statements, as permitted by the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). The Company believes the disclosures made in these unaudited condensed consolidated financial statements are adequate to make the information herein not misleading. The Company recommends that these unaudited condensed consolidated financial statements be read in conjunction with its audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (“Annual Report”).

The interim data contained within these unaudited condensed consolidated financial statements includes all adjustments that are of a normal recurring nature, in the opinion of the Company’s management, necessary for a fair statement of the results for the interim periods presented. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the Company’s operating results for the entire fiscal year ending December 31, 2022.

The Company’s two largest insurance carrier partners accounted for 36% and 12% of the Company’s total revenue during the three months ended September 30, 2022 and its three largest insurance carrier partners accounted for 37%, 11% and 11% of total revenue during the nine months ended September 30, 2022. The Company’s two largest insurance carriers accounted for 38% and 24% of the Company’s total revenue during the three months ended September 30, 2021 and accounted for 41% and 24% for the nine months ended September 30, 2021. In the event that one or more of the Company’s significant insurance carriers terminates their relationship with the Company, it could have a material and adverse effect on the Company’s business and, in turn, its revenue. Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, restricted cash, accounts receivable and contract assets, net to the extent of the amounts recorded on the balance sheets.

As of September 30, 2022, the Company had no customers that individually accounted for 10% of the Company’s net accounts receivable. As of December 31, 2021, the Company had two customers that each represented 10% of the Company’s net accounts receivable.

The Company has no material accounts receivable or contract assets, net balances that are past due and has not written off any material balance in its portfolio for the periods presented. The allowance for expected credit losses on accounts receivable and contract assets receivable was less than $0.1 million as of September 30, 2022 and December 31, 2021.

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates, and those differences may be material. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively.

The most significant items subject to such estimates and assumptions include, but are not limited to, profit share revenue recognition and the corresponding impact on contract assets, the recognition of the valuation of share-based compensation arrangements, and assessing the realizability of deferred tax assets. These estimates, although based on actual historical trend and modeling, may potentially show significant variances over time.

Changes in the Company’s contract assets primarily result from the timing difference between the satisfaction of its performance obligation and the customer’s payment. The Company fulfills its obligation under a contract with a customer by transferring services in exchange for consideration from the customer. The Company recognizes contract assets when it transfers services to a customer, recognizes profit share revenue, program fee revenue and claims administration services revenue (“TPA fees”) for amounts not yet billed and the right to consideration is conditional on something other than the passage of time. Accounts receivable are recorded when the customer has been billed or the right to consideration is unconditional.

For performance obligations satisfied in previous periods, the Company evaluates and updates its profit share revenue forecast on a quarterly basis and adjusts contract assets accordingly. During the three and nine months ended September 30, 2022, contract asset adjustments attributable to profit share revenue forecast were $1.7 million and $7.1 million, respectively, as compared to contract asset adjustments of $7.5 million and $24.4 million, during the three and nine months ended September 30, 2021, respectively.

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

As of September 30, 2022 and December 31, 2021, the portion of the contract assets’ balance estimated to be received within one year consisted of $65.6 million and $70.5 million, respectively, and the portion estimated to be received beyond one year consisted of $34.4 million and $42.4 million, respectively.

The fulfillment costs associated with the Company’s contracts with customers do not meet the criteria for capitalization and therefore are expensed as incurred.

On March 11, 2020, the Company entered into a credit agreement with UBS A.G., as the administrative agent, and the lenders from time to time party thereto (the “Prior Credit Agreement”). Pursuant to the Prior 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%) and maturing in March 2027.

On March 19, 2021, the Company entered into a credit agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) as the administrative agent, 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 “March 2021 Revolving Credit Facility”), collectively, the “March 2021 Credit Agreement”.

On September 9, 2022, the Company entered into a first amendment to the March 2021 Credit Agreement with Wells Fargo, as the administrative agent, and the financial institutions party thereto, as the lenders (the “First Amendment” and, together with the March 2021 Credit Agreement, the “Credit Agreement”). The First Amendment provided the Company 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 under the March 2021 Revolving Credit Facility to $150.0 million (the “New Revolving Credit Facility”), both maturing on September 9, 2027. In addition, the First Amendment, among other things, (i) replaced LIBOR with the Secured Overnight Financing Rate (“SOFR”) as the interest rate benchmark, (ii) decreased the unused fees and the interest rate margins applicable to the New Revolving Credit Facility, (iii) results in lower interest rate margins applicable to the New Term Loan due 2027 compared to those applicable to the Term Loan due 2026 that have been repaid, (iv) provides financial covenant flexibility by extending the date at which the net leverage ratio covenant steps-down from 3.5 to 1.0 to 3.0 to 1.0 to September 30, 2024, and (v) extends the date at which the required term loan amortization payments increase from 2.5% per annum to 5.0% per annum from June 30, 2023 to December 31, 2024.

The Company used proceeds from the New Term Loan due 2027 to pay off all outstanding amounts under the March 2021 Credit Agreement and pay transaction costs related to the First Amendment. The remaining proceeds will be used for working capital and other general corporate purposes.

The obligations of the Company under the New Term Loan due 2027 and the New Revolving Facility are guaranteed by all of the Company’s U.S. subsidiaries and are secured by substantially all of the assets of the Company and its U.S. subsidiaries, subject to customary exceptions.

Interest under the New Term Loan due 2027 and the New Revolving Credit Facility are, at the option of the Company, either at an Alternate Base rate (“ABR”) plus a spread ranging from 0.625% to 1.375%, or term SOFR plus 0.10% (“Adjusted SOFR”) plus a spread ranging from 1.625% to 2.375%. With respect to the ABR loans, interest will be payable at the end of each calendar quarter. With respect to the Adjusted SOFR loans, interest will be payable at the end of the selected interest period (at least quarterly). Additionally, there is a commitment fee payable at the end of each quarter at a rate per annum ranging from 0.150% to 0.225% based on the average daily unused portion of the New Revolving Credit Facility and other customary letter of credit fees. Pursuant to the Credit Agreement, the interest rate spreads and commitment fees increase or decrease in increments as the Company’s Funded Secured Debt/EBITDA ratio increases or decreases.

As of September 30, 2022, the New Term Loan due 2027 and the New Revolving Credit Facility were both subject to an Adjusted SOFR rate of 2.78% plus a spread of 1.63% per annum. Commitment fees were accrued at 0.15% under the New Revolving Credit Facility’s unused commitment balance of $150.0 million as of September 30, 2022.

As of September 30, 2022, the effective interest rate on the Company’s outstanding borrowings was 4.82%.

In connection with the March 2021 Credit Agreement, the Company incurred aggregate deferred financing costs of $1.7 million, of which (i) $1.2 million was allocated to the Term Loan due 2026 and capitalized as a contra-liability against the principal balance of the loan, and (ii) $0.5 million was allocated to the March 2021 Revolving Credit Facility and is included within other non-current assets on the condensed consolidated balance sheets. These deferred financing costs are amortized as interest expense using the effective interest method over the term of the Credit Agreement, as amended. Unamortized deferred financing costs related to the Term Loan due 2026 and the March 2021 Revolving Credit Facility were $0.8 million and $0.3 million, respectively, as of September 30, 2022.

In connection with the Credit Agreement, the Company also incurred deferred financing costs of $1.0 million attributable to the New Term Loan due 2027, which were capitalized as a contra-liability against the principal balance of the loans and are amortized as interest expense using the effective interest method over the term of the loan. Related unamortized deferred financing costs were $1.0 million as of September 30, 2022.

The Credit Agreement contains a maximum total net leverage ratio financial covenant and a minimum fixed charge coverage ratio financial covenant, which are tested quarterly. The maximum total net leverage ratio is 3.5 to 1.0 for any fiscal quarter ending on or prior to June 30, 2024 and then decreases to 3.0 to 1.0 for any fiscal quarter ending after June 30, 2024. The minimum fixed charge coverage ratio is 1.25 to 1.0. As of September 30, 2022, the Company was in compliance with all required covenants under the Credit Agreement.

Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed based on the weighted average number of common shares outstanding plus the effect of potentially dilutive common shares outstanding during the period using the applicable methods. The potentially dilutive common shares during the three and nine months ended September 30, 2022 and 2021 were time-based restricted stock units and did not include unvested stock options and performance-based restricted stock units containing unmet performance conditions. The potentially dilutive common shares are included in the calculation of diluted net income per share only when their effect is dilutive.

The following table sets forth the computation of basic and diluted net income per share attributable to common stockholders for the three and nine months ended September 30, 2022 and 2021:

Fair value is the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants. In determining fair value measurement, the Company uses a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable. The three levels of inputs used to establish fair value are the following:

In situations where there is limited, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances, including expected cash flows and appropriately risk-adjusted discount rates, available observable and unobservable inputs.

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

The carrying amount of the Company’s debt approximates its fair value due to its variable interest rate that is tied to the current Adjusted SOFR plus an applicable spread. The Company’s accounting policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of any level for the periods ended September 30, 2022 and December 31, 2021.

The Company has no long-lived assets that are measured at fair value on a recurring basis. 

As of September 30, 2022, the Company has assessed whether it is more likely than not that its deferred tax assets will be realized. In making this determination, the Company considers all available positive and negative evidence and makes certain assumptions. The Company considers, among other things, the reversal of its deferred tax liabilities, the overall business environment, its historical earnings and losses, current industry trends and its outlook for future years. The Company believes it is more-likely-than-not that all deferred tax assets will be realized and has not recorded a valuation allowance as of September 30, 2022.

The Company has also evaluated the aggregate exposure for uncertain tax positions for all open tax years and concluded that the Company and its Predecessor have no material uncertain tax positions as of September 30, 2022 or for any open tax years. When applicable, tax penalties and interest are recognized within general and administrative expenses in the unaudited condensed consolidated statements of operations. The Company recorded no penalties or interest related to uncertain tax positions as of September 30, 2022 or for any open tax years.

We are a leading provider of lending enablement and risk analytics to credit unions, regional banks and the captive finance companies of automakers. Our clients, collectively referred to herein as automotive lenders, make automotive consumer loans to underserved near-prime and non-prime borrowers by harnessing our risk-based pricing models, powered by our proprietary data and real-time underwriting of automotive loan default insurance coverage from insurers. Since our inception in 2000, we have facilitated approximately $17.2 billion in automotive loans, accumulating over 20 years of proprietary data and developing over two million unique risk profiles.

We specialize in risk-based pricing and modeling and provide automated decision-technology for automotive lenders throughout the U.S. We believe that we address the financing needs of near-prime and non-prime borrowers, or borrowers with a credit bureau score between 560 and 699, who are underserved in the automotive finance industry. Traditional lenders focus on prime borrowers, where an efficient market has developed with interest rate competition that benefits borrowers. Independent finance companies focus on sub-prime borrowers. Borrowers who 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 who 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 our market opportunity is significant. The near-prime and non-prime automotive loan origination market is currently estimated at $270 billion annually, and we are currently serving less than 2% of this market, providing a significant growth opportunity. In addition, our market opportunity related to the refinancing of near-prime and non-prime automotive loans is estimated at $40 billion annually.

We facilitated 42,186 and 130,661 certified loans during the three and nine months ended September 30, 2022, respectively, as compared to 49,332 and 129,058 certified loans during the same periods in 2021, respectively.

Total revenue was $50.7 million and $152.8 million for the three and nine months ended September 30, 2022, respectively, as compared to $58.9 million and $164.0 million, respectively, during the same periods in 2021.

Operating income was $27.8 million and $92.8 million for the three and nine months ended September 30, 2022, respectively, as compared to $40.7 million and $115.1 million, respectively, during the same periods in 2021.

Net income was $24.5 million and $70.8 million for the three and nine months ended September 30, 2022, respectively, as compared to net income of $29.4 million and $118.2 million, respectively, for the same periods in 2021.

Historically, we have defined “active lenders” as lenders who certify at least one loan during the preceding 12 months. As of September 30, 2022 and 2021, we had 430 and 394 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.

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 the presentation of such metrics is useful to our investors and counterparties because such metrics are used to measure and model the performance of companies such as ours, with recurring revenue streams.

We refer to “certified loans” as the number of automotive 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.

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.

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

We define “earned premium” as the total insurance premium earned by insurers in a given period. Earned premiums were $76.3 million and $214.5 million, respectively, for the three and nine months ended September 30, 2022 and $58.7 million and $158.9 million for the same periods in 2021, respectively.

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:

The growth trend in active automotive lenders using LPP is a critical factor directly affecting our revenue and financial results. It influences the number of loans funded on LPP and, therefore, 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 automotive lenders and add new automotive lenders.

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

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 (“IRA”) that 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. We are evaluating the IRA and its requirements, as well as any potential impact on our business.

Our two largest insurance carrier partners accounted for 36% and 12% of our total revenue during the three months ended September 30, 2022, and our three largest insurance carrier partners accounted for 37%, 11% and 11% during the nine months ended September 30, 2022. Our two largest insurance carriers accounted for 38% and 24% of our total revenue during the three months ended September 30, 2021, and accounted for 41% and 24% for the nine months ended September 30, 2021. Termination or disruption of these relationships could materially and adversely impact our revenue.

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

Total revenue decreased by $8.2 million, or 14%, during the three months ended September 30, 2022, as compared to the same period in 2021, primarily driven by an $8.9 million decrease in profit share revenue discussed below, which was partially offset by increased program fee and claims administration fee revenues of $0.2 million and $0.5 million, respectively, as compared to the same period in 2021.

Total revenue decreased by $11.3 million, or 7%, during the nine months ended September 30, 2022, as compared to the same period in 2021, primarily driven by an $18.0 million decrease in profit share revenue, which was partially offset by increased program fee and claims administration fee revenues of $5.2 million and $1.6 million, respectively, as compared to the same period in 2021.

Profit share revenue decreased by $8.9 million and $18.0 million, or 25% and 18%, during the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021. During the three months ended September 30, 2022, we recorded $24.9 million in anticipated profit share associated with 42,186 certified loans for an average of $589 per loan as compared to $27.9 million in anticipated profit share associated with 49,332 certified loans for an average of $566 per loan during the three months ended September 30, 2021. During the nine months ended September 30, 2022, we recorded $76.9 million in anticipated profit share associated with 130,661 certified loans for an average of $588 per loan as compared to $77.6 million in anticipated profit share associated with 129,058 certified loans for an average of $601 per loan during the nine months ended September 30, 2021.

In addition, during the three and nine months ended September 30, 2022, we recorded $1.7 million and $7.1 million, respectively, in estimated future revenue related to business in historic vintages primarily as a result of lower severity of losses, as compared to $7.5 million and $24.4 million in estimated future revenue related to business in historic vintages during the three and nine months ended September 30, 2021, respectively.

Program fees revenue increased $0.2 million and $5.2 million or 1% and 9%, for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021. The increase in program fee revenue for the three months ended September 30, 2022 was driven by higher unit economics per certified loan, offset by a 14% decrease in certified loan volume, as compared to the prior year period. The increase in program fee revenue for the nine months ended September 30, 2022 was driven by higher unit economics per certified loan and a 1% increase in certified loan volumes, as compared to the prior year period.

Cost of services decreased $1.2 million, or 19%, during the three months ended September 30, 2022, as compared to the same period in the prior year, primarily due to one-time costs of $1.4 million associated with customer implementations incurred during the three months ended September 30, 2021, partially offset by higher employee compensation and benefit costs of $0.2 million associated with the growth of our implementation and claims administration operations. Cost of services increased $1.2 million, or 9% during the nine months ended September 30, 2022, as compared to the same period in the prior year, primarily due to increased fees of $1.1 million paid to third party partners for lead-generation efforts, higher employee compensation and benefit costs of $0.9 million associated with the growth of our implementation and claims administration operations, and increased system integration fees of $0.4 million, partially offset by one-time costs associated with customer implementation efforts of $1.4 million incurred during the nine months ended September 30, 2021.

Gross profit decreased by $7.1 million, or 13%, during the three months ended September 30, 2022, as compared to the same period in 2021, primarily driven by a decrease in anticipated profit share on historic vintages, as discussed above, partially offset by increases in both program fees and claims administration service fees. Gross profit decreased by $12.4 million, or 8%, during the nine months ended September 30, 2022, as compared to the same period in 2021, primarily driven by a decrease in anticipated profit share on historic vintages offset by increases in both program fees and claims administration service fees, as discussed above.

General and administrative expenses increased by $2.1 million, or 30%, during the three months ended September 30, 2022 as compared to the same period last year, primarily driven by increased professional fees of $1.6 million and higher corporate employee compensation and benefit costs of $0.3 million. General and administrative expenses increased by $1.0 million, or 4%, during the nine months ended September 30, 2022, as compared to the same period last year, primarily driven by higher corporate employee compensation and benefit costs of $0.9 million.

Selling and marketing expenses increased $2.7 million, or 81%, during the three months ended September 30, 2022, as compared to the same period last year, primarily driven by increases in employee compensation and benefit costs of $2.1 million associated with our investment in our sales, account management and marketing operations, as well as increases in travel and marketing costs of $0.5 million associated with increased levels of business activity. Selling and marketing expenses increased $5.0 million, or 58%, during the nine months ended September 30, 2022, as compared to the prior year period, primarily due to increases in employee compensation and benefit costs of $3.2 million, as well as increases in expenses related to travel, marketing and business development of $1.5 million associated with increased levels of business activity.

Research and development expenses increased $1.1 million, or 86%, and $3.7 million, or 142%, during the three and nine months ended September 30, 2022, respectively, as compared to the same periods in the prior year, primarily due to increases in employee compensation and benefit costs and other services associated with our investment in research and development technology.

Operating income decreased by $12.9 million, or 32%, for the three months ended September 30, 2022, as compared to the prior year period, 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.

Operating income decreased by $22.2 million, or 19%, for the nine months ended September 30, 2022, as compared to the prior year period, primarily driven by decreased estimated profit share on historic vintages, as well as increases in cost of services and operating expenses, offset by increases in program fees and claims administration service fees.

During the three and nine months ended September 30, 2022, interest expense was $1.6 million and $3.5 million, respectively, as compared to $1.0 million and $5.4 million during the three and nine months ended September 30, 2021, respectively. Interest expense decreased $1.8 million or 34% for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, primarily as a result of lower borrowing costs in 2022 compared to the prior year.

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” in our Annual Report), 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 our cash flow data:

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 provided by operating activities for the nine months ended September 30, 2022 is primarily attributable to operating income increased by the net change in contract assets, other assets and liabilities and reduced by income taxes paid. The increase in net cash provided by operating activities of $16.6 million for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, was primarily attributable to increased cash collections of $25.0 million related to profit share and program fees revenue, partially offset by increased income tax paid of $8.1 million during the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021.

For the nine months ended September 30, 2022 and 2021, net cash used in investing activities was $0.6 million and $1.8 million, respectively. For the nine months ended September 30, 2022 and 2021, the investments primarily related to computer software developed for internal use.

Our cash flows used in and provided by financing activities primarily consist of principal payments of debt, deferred financing costs and proceeds from debt.

For the nine months ended September 30, 2022, net cash provided by financing activities was $1.3 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 $122.7 million, primarily related to payment in full of the Term Loan due 2026. In addition, we paid off all amounts outstanding under the March 2021 Revolving Credit Facility totaling $25.0 million.

For the nine months ended September 30, 2021, net cash used in financing activities was $77.0 million. The cash used primarily consisted of $36.9 million in early termination and settlement of the tax receivable agreement with our Predecessor, $20.0 million related to our repurchase of 612,745 shares of our common stock held in treasury stock and debt principal payments of $168.4 million, primarily related to the payment in full of the Term Loan due 2027 in March 2021. In addition, we paid down the March 2021 Revolving Credit Facility by $25.0 million. The cash inflow relates to $175.0 million in proceeds associated with the March 2021 Credit Agreement, which refinanced our existing debt as of that date, less $1.7 million in deferred financing costs associated with this facility.

As of September 30, 2022, we had no amounts outstanding under our New Revolving Credit Facility and $150.0 million related to our New Term Loan due 2027, the proceeds of which were used primarily to pay off outstanding amounts under the March 2021 Credit Agreement and pay transaction costs related to the First Amendment. We will use the remaining proceeds for working capital and other general corporate purposes.

Any decision to declare and pay dividends in the future will be made at the sole discretion of our Board of Directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors our Board of Directors may deem relevant. In addition, our ability to pay dividends is limited by covenants in the agreements governing our existing indebtedness and may be limited by the agreements governing other indebtedness which we or our subsidiaries may incur in the future.

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, share-based compensation expense, gain on extinguishment of tax receivable agreement and loss on extinguishment of debt. Adjusted EBITDA margin is defined as Adjusted EBITDA expressed as a percentage of total revenue.

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