Open Lending (LPRO) 10-Q2024 Q3 Quarterly report

Open Lending Corporation (either individually or together with its subsidiaries, as the context requires, the “Company”), headquartered in Austin, Texas, provides loan analytics, risk-based loan pricing, risk modeling and automated decision technology for automotive lenders throughout the United States of America (the “U.S.”), which enables each lending institution to book near-prime and non-prime automotive loans, coupled with real-time underwriting of loan default insurance, out of their existing business flow. The Company also operates as a third-party administrator that adjudicates insurance claims and premium adjustments on automotive loans.

Unless the context otherwise requires, “we,” “us,” “our,” “Open Lending,” and the “Company” refers to Open Lending Corporation, the combined company and its subsidiaries.

The Company has evaluated how it is organized and managed and has identified 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 footnote 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 Securities and Exchange Commission (“SEC”) rules and regulations. 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, 2023 (the “Annual Report”).

The interim data 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, 2024 are not necessarily indicative of the Company’s operating results for the entire fiscal year ending December 31, 2024.

The Company’s largest insurance carrier partner accounted for 35% of the Company’s total revenue during the three and nine months ended September 30, 2024. The Company’s largest insurance carrier partners accounted for 29% and 10% of the Company's total revenue during the three months ended September 30, 2023 and 32% and 11% during the nine months ended September 30, 2023.

Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, restricted cash, accounts receivable and contract assets to the extent of the amounts recorded on the balance sheets.

Cash and cash equivalents are deposited in commercial analysis accounts, money market funds and U.S. Treasury securities at financial institutions with high credit standing. Restricted cash relates to funds held by the Company on behalf of the insurance partners, designated for the use of insurance claim payments. Restricted cash is deposited in commercial analysis accounts at one financial institution. At times, such deposits may be in excess of the Federal Deposit Insurance Corporation insurance limits of $250,000 per institution. The Company has not experienced any losses on its deposits of cash and cash equivalents and management believes the Company is not exposed to significant risks on such accounts.

The Company’s accounts receivable and contract assets are derived from revenue earned from customers. The Company maintains an allowance for expected credit losses, which represents an estimate based primarily on market implied lifetime probabilities of default and loss severities for assets with similar risk characteristics. As these inputs are derived from market observations, they inherently include forward-looking expectations about macro-economic conditions. The allowance is evaluated quarterly by the Company for adequacy by taking into consideration factors such as reasonableness of the market implied loss statistics, historical lifetime loss data and credit quality of the customer base. Provisions for the allowance for expected credit losses attributable to bad debt are recorded as general and administrative expenses. Account balances deemed uncollectible are written off, net of actual recoveries. If circumstances related to specific customers change, the Company’s estimate of the recoverability of its contract assets could be further adjusted. The Company does not have any material accounts receivable or contract assets receivable balances that are past due and has not written off any balances in its portfolio for the periods presented. The allowance for expected credit losses on accounts receivable and contract assets receivable, in the aggregate, was less than $0.1 million at September 30, 2024 and December 31, 2023.

At September 30, 2024 and December 31, 2023, the Company had one customer that represented at least 10% of the Company’s accounts receivable, net.

The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the unaudited 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 and assessing the realizability of deferred tax assets. The Company bases its estimates on historical trends and relevant assumptions that it believes to be reasonable under the circumstances. Accordingly, actual results could be materially different from those estimates.

In connection with profit share revenue recognition and the estimation of contract assets, the Company uses a forecast model to estimate variable consideration based on undiscounted expected future profit share to be received from the 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 performance of the active loan portfolio, 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.

The Company continually assesses the default and prepayment assumptions of the forecast model against reported performance and lender delinquency data. The forecast model is updated to consider the actual prepayment rate, default, and severity experience with macroeconomic conditions.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which improves the disclosures about a public entity's reportable segments through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and should be applied retrospectively to all prior periods presented

in the financial statements. Early adoption is permitted. The Company believes this ASU will have no impact on its consolidated financial statements, but will result in additional disclosures.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which enhances the transparency and decision usefulness of income tax disclosures. The ASU requires additional disclosure related to rate reconciliation, income taxes paid, and other disclosures to improve the effectiveness of income tax disclosures. The ASU is effective for annual periods beginning after December 15, 2024, and applied on a prospective basis. Early adoption and retrospective application is permitted. The Company believes this ASU will have no impact on its consolidated financial statements, but may result in additional disclosures.

Although there may be new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or may adopt, as applicable, the Company believes none of these accounting pronouncements has materially impacted or will materially impact the Company’s consolidated financial position or results of operations.

Changes in the Company’s contract assets primarily result from the timing difference between the satisfaction of its performance obligation and receipt of 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 revenue 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 related to profit share revenue that were 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, 2024, contract asset adjustments attributable to profit share revenue forecast revisions resulted in decreases of $7.0 million and $14.8 million, respectively, as compared to decreases of $8.1 million and $8.5 million, respectively, during the three and nine months ended September 30, 2023.

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 September 9, 2022, the Company entered into a First Amendment to its existing Credit Agreement (the “First Amendment”) with Wells Fargo Bank, N.A., as the administrative agent, and the financial institutions party thereto, as the lenders. The First Amendment provided the Company senior secured credit facilities in an aggregate principal amount of $300 million, which (i) established a term loan due 2027 with a principal amount of $150 million (the “Term Loan due 2027”), and (ii) increased the borrowing capacity on the existing revolving credit facility to $150 million (the “Revolving Credit Facility”), both scheduled to mature on September 9, 2027 (collectively, the “Credit Agreement”).

The obligations of the Company under the Credit Agreement 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.

Borrowings under the Credit Agreement bear interest at a rate equal to either (i) an Alternate Base rate (“ABR”) or (ii) the term Secured Overnight Financing Rate (“SOFR”) plus 0.10% (“Adjusted SOFR”) plus a spread that is based upon the Company’s total net leverage ratio. The spread ranges from 0.625% to 1.375% per annum for ABR loans and 1.625% to 2.375% per annum for Adjusted SOFR loans. 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 an unused commitment fee payable at the end of each quarter at a rate per annum ranging from 0.15% to 0.225% based on the average daily unused portion of the Revolving Credit Facility and other customary letter of credit fees. Pursuant to the Credit Agreement, the interest rate spread and commitment fees increase or decrease in increments as the Company’s Funded Secured Debt/EBITDA ratio increases or decreases.

As of September 30, 2024, the Credit Agreement was subject to an Adjusted SOFR rate of 5.348% plus a spread of 2.375% per annum. Commitment fees were accrued at 0.225% under the Revolving Credit Facility’s unused commitment balance of $150 million as of September 30, 2024. As of September 30, 2024, the effective interest rate on the Company’s outstanding borrowings was 7.968%.

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 3.0:1 and the

minimum fixed charge coverage ratio is 1.25:1. As of September 30, 2024, the Company was in compliance with all required covenants under the Credit Agreement.

During the three months ended September 30, 2024 and 2023, the Company recognized income tax expense of $0.7 million and $1.5 million, respectively, resulting in effective tax rates of 32.4% and 33.8%, respectively. During the nine months ended September 30, 2024 and 2023, the Company recognized income tax expense of $4.6 million and $9.9 million, respectively, resulting in effective tax rates of 32.6% and 26.9%, respectively. The Company’s income tax expense for the three and nine months ended September 30, 2024 and 2023 differs from amounts computed by applying the U.S. federal statutory tax rate of 21% primarily due to state income tax expenses, and the officer’s compensation limitation under Section 162(m). The decrease in effective tax rates for the three and nine months ended September 30, 2024 compared to the same periods in 2023 is primarily due to decreased income before income taxes.

As of September 30, 2024, the Company has assessed whether it is more likely than not that the Company’s 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 all deferred tax assets will be realized and has not recorded any valuation allowance as of September 30, 2024.

As of September 30, 2024, the Company has a receivable of $3.3 million related to a state income tax refund claim filed for a prior tax year. The liability for unrecognized tax benefits includes $3.8 million of tax expense associated with these refund claims and tax uncertainties in various state jurisdictions due to the complexity of applying evolving state tax laws and uncertainties with respect to sustaining the Company’s refund claims. The Company believes it is not reasonably possible that the unrecognized tax benefits will significantly change during the next twelve months.

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, 2024 and 2023 include unvested and unexercised stock options, unvested time-based restricted stock units and unvested performance-based restricted stock units whose performance conditions have been satisfied. The potentially dilutive common shares during the same periods did not include performance-based restricted stock units if the performance conditions of these awards have not been satisfied. 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, 2024 and 2023:

The following potentially dilutive outstanding securities as of September 30, 2024 and 2023 were excluded from the computation of diluted net income per share because their effect would have been anti-dilutive for the periods presented, or issuance of such shares is contingent upon the satisfaction of certain conditions that were not satisfied by the end of the periods:

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 arriving at a 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 little, 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.

Certain assets are measured at fair value on a nonrecurring basis. These assets, including property and equipment and operating lease right-of-use assets, are subject to fair value adjustments whenever events or circumstances indicate the carrying value of the assets may not be recoverable and are subsequently written down to fair value when impaired. During the three and nine months ended September 30, 2024 and 2023, the Company had no impairment charges related to its property and equipment or operating lease right-of-use assets.

The following table provides the fair value of financial assets that are not measured at fair value:

The carrying amount of the Company’s debt approximates its fair value due to its variable interest rate. The fair value was determined using the Adjusted SOFR as of September 30, 2024 and December 31, 2023 plus an applicable spread, a Level 2 classification in the fair value hierarchy.

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, 2024 and December 31, 2023.

All forward-looking statements are based on information and estimates available to us at the time of this Quarterly Report and are not guarantees of future financial performance. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law.

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report and our Annual Report. We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report. You should not rely upon forward-looking statements as predictions of future events.

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

$24.3 billion in automotive loans, accumulated more than 20 years of proprietary data and developed over two million unique risk profiles. We currently serve 406 active lenders.

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

Our flagship product, LPP, is a cloud-based automotive lending 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 Fair Credit Reporting Act-compliant alternative consumer data to more effectively assess risk and determine the appropriate insurance premium for any given loan application.

LPP is powered by technology that delivers speed and scalability in providing interest rate decisioning to automotive lenders. It supports the full transaction lifecycle, including credit application, underwriting, real-time insurance approval, settlement, servicing, invoicing of insurance premiums and fees and advance data analytics of the automotive lender’s portfolio under the program. Through electronic system integration, our software technology connects us to parties in our ecosystem.

A key element of LPP is the unique database that drives risk decisioning using data accumulated for more than 20 years. When a loan is insured at origination, all attributes of the transaction are stored in our database. Through the claims management process, we ultimately obtain loan life performance data on each insured loan. Having granular origination and performance data allows our data scientists and actuaries to constantly evolve and refine risk models, based on actual experience and third-party information sources.

We believe the automotive industry is still seeking solutions to address the near-prime and non-prime borrower market. The near-prime and non-prime automotive loan origination market is a large, underserved sector, estimated at $270 billion annually. We currently serve approximately 1% 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 27,435 and 84,587 certified loans during the three and nine months ended September 30, 2024, as compared to 29,959 and 96,721 certified loans during the three and nine months ended September 30, 2023.

Total revenue was $23.5 million and $80.9 million for the three and nine months ended September 30, 2024, as compared to $26.0 million and $102.5 million during the three and nine months ended September 30, 2023.

Operating income was $1.9 million and $13.2 million for the three and nine months ended September 30, 2024, as compared to $4.5 million and $37.4 million in the three and nine months ended September 30, 2023.

Net income was $1.4 million and $9.4 million for the three and nine months ended September 30, 2024, as compared to $3.0 million and $26.9 million for the three and nine months ended September 30, 2023.

Adjusted EBITDA was $7.8 million and $30.1 million for the three and nine months ended September 30, 2024, as compared to $10.3 million and $52.3 million during the three and nine months ended September 30, 2023.

The table below summarizes the dollar value of insured loans facilitated and the number of new contracts we signed with automotive lenders for the three and nine months ended September 30, 2024 and 2023.

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

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.

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 certified loans.

We define “earned premium” as the total insurance premium earned by insurers in a given period. Earned premiums were $83.7 million and $253.5 million for the three and nine months ended September 30, 2024, respectively, as compared to $85.6 million and $249.1 million, for the three and nine months ended September 30, 2023, 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 revenue and financial results as it influences the number of loans funded on LPP. Growth in our active automotive lender relationships will depend on our ability to retain existing automotive lenders and add new ones.

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

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, rising interest rate levels, 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.

The Company’s largest insurance partner accounted for 35% of the Company’s total revenue during the three and nine months ended September 30, 2024. The Company’s largest insurance partners accounted for 29% and 10% of the Company's total revenue during the three months ended September 30, 2023 and 32% and 11% during the nine months ended September 30, 2023.

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.

The following table sets forth key performance measures for the three and nine months ended September 30, 2024 and 2023:

Total revenue decreased by $2.5 million, or 10%, for the three months ended September 30, 2024 as compared to the same period in 2023, driven by a $1.2 million decrease in profit share revenue and a $1.3 million decrease in program fees.

Total revenue decreased by $21.6 million, or 21%, for the nine months ended September 30, 2024, as compared to the same period in 2023, driven by a $14.4 million decrease in profit share revenue and a $7.3 million decrease in program fees, which was partially offset by increased claims administration and other service fee revenues of $0.1 million.

Program fees revenue decreased by $1.3 million, or 8%, during the three months ended September 30, 2024 as compared to the same period in 2023 driven by an 8% decrease in certified loan volume.

Program fees revenue decreased by $7.3 million, or 14%, for the nine months ended September 30, 2024 as compared to the same period in 2023. The decrease in program fees revenue was driven by a 13% decrease in certified loan volume and a 3% decrease in unit economics per certified loan.

Profit share revenue decreased by $1.2 million, or 15%, during the three months ended September 30, 2024, as compared to the same period in 2023. Profit share revenue associated with new certified loan originations decreased $2.3 million, or 14%, primarily due to an 8% decrease in certified loans and a 7% decrease in unit economics during the three months ended September 30, 2024, as compared to the same period in 2023. Profit share revenue associated with change in estimate increased $1.1 million, or 14%, during those same periods.

During the three months ended September 30, 2024, we recorded $13.8 million in anticipated profit share associated with 27,435 new certified loans for an average of $502 per loan as compared to $16.1 million in anticipated profit share associated with 29,959 certified loans for an average of $537 per loan during the three months ended September 30, 2023. In addition, during the three months ended September 30, 2024, we recorded a reduction of $7.0 million in profit share revenue related to business in historic vintages. Of the $7.0 million, $4.0 million is primarily due to higher than anticipated loan defaults, partially offset by lower than anticipated severity of losses. The incremental $3.0 million reduction in profit share revenue represents an estimated, non-recurring liability for future claim payments and previous profit share receipts. During the three months ended September 30, 2023, we recorded a decrease of $8.1 million in profit share revenue related to business in historic vintages primarily due to higher than anticipated prepayments and loan defaults, partially offset by lower than anticipated severity of losses.

Profit share revenue decreased by $14.4 million, or 32%, during the nine months ended September 30, 2024, as compared to the same period in 2023. Profit share revenue associated with new certified loan originations decreased $8.1 million, or 15%, primarily due to a 13% decrease in certified loans and a 3% decrease in unit economics during the nine months ended September 30, 2024, as compared to the same period in 2023. Profit share revenue associated with change in estimate decreased $6.2 million, or 73%, during those same periods.

During the nine months ended September 30, 2024, we recorded $44.8 million in anticipated profit share associated with 84,587 new certified loans for an average of $530 per loan as compared to $53.0 million in anticipated profit

share associated with 96,721 certified loans for an average of $547 per loan during the nine months ended September 30, 2023. In addition, during the nine months ended September 30, 2024, we recorded a reduction of $14.8 million in profit share revenue related to business in historic vintages. Of the $14.8 million, $11.8 million is primarily due to higher than anticipated loan defaults, partially offset by lower than anticipated severity of losses. The incremental $3.0 million reduction in profit share revenue represents an estimated, non-recurring liability for future claim payments and previous profit share receipts. During the nine months ended September 30, 2023, we recorded a reduction of $8.5 million in profit share revenue related to business in historic vintages primarily due to higher than anticipated prepayments and loan defaults, partially offset by lower than anticipated severity of losses.

Revenue from claims administration and other service fees decreased by $0.1 million, or 3%, for the three months ended September 30, 2024 as compared to the same period in the prior year, due to a 2% decrease in total earned premiums during the three months ended September 30, 2024 as compared to the same period in the prior year.

Revenue from claims administration and other service fees increased $0.1 million, or 2%, for the nine months ended September 30, 2024 as compared to the same period in the prior year, due to a 2% increase in total earned premiums during the nine months ended September 30, 2024 as compared to the same period in the prior year.

Cost of services increased $0.8 million, or 14%, during the three months ended September 30, 2024, as compared to the same period in 2023. Cost of services increased $0.7 million, or 4%, during the nine months ended September 30, 2024, as compared to the same period in 2023. For the three and nine months ended September 30, 2024, as compared to the same periods in 2023, the change is primarily due to increased employee compensation and benefits of $0.4 million and $0.7 million, respectively, and increased fees paid to data service providers of $0.3 million and $0.8 million, respectively. For the nine months ended September 30, 2024, these increased costs were partially offset by a $1.3 million decrease in partner commissions, driven by lower loan certifications in 2024 versus 2023.

General and administrative expenses decreased by $0.3 million, or 3%, during the three months ended September 30, 2024 as compared to the same period in 2023 primarily driven by a decrease in employee compensation and benefit costs due to a decrease in the bonus accrual. General and administrative expenses increased by $2.3 million, or 7%, during the nine months ended September 30, 2024, as compared to the same period last year primarily driven by higher employee compensation and benefit costs of $3.5 million partially offset by decreased business taxes of $0.8 million due to non-recurring events in 2023.

Selling and marketing expenses increased by $0.4 million and $0.1 million, or 9% and 1%, during the three and nine months ended September 30, 2024 as compared to the same periods in 2023, primarily driven by higher employee compensation and benefit costs. For the nine months ended September 30, 2024, these increased costs were partially offset by a $0.3 million decrease in direct marketing expenses.

Research and development expenses decreased $0.7 million, or 42% during the three months ended September 30, 2024, as compared to the same period in 2023. Research and development expenses decreased by $0.5 million, or 12%, during the nine months ended September 30, 2024, as compared to the same period in 2023, primarily due to increased focus on product support and the development of internal use software.

Operating income for the three and nine months ended September 30, 2024 decreased by $2.7 million and $24.2 million, or 59% and 65%, respectively, as compared to the prior year periods, primarily driven by decreases in total revenues as well as changes in operating expenses, as discussed above.

Interest expense increased $0.2 million, or 6%, for the three months ended September 30, 2024, as compared to the same period in 2023. Interest expense increased $0.6 million, or 8%, for the nine months ended September 30, 2024, as compared to the same period in 2023. For both periods, interest expense increased as a result of higher borrowing costs during 2024.

During the three and nine months ended September 30, 2024, interest income increased $0.4 million and $2.0 million, respectively, compared to the same periods in 2023, primarily due to an increase in interest earned on U.S. Treasury Securities and Money Market accounts.

During the three months ended September 30, 2024 and 2023, we recognized income tax expense of $0.7 million and $1.5 million, respectively, with effective tax rates of 32.4% and 33.8%, respectively. During the nine months ended September 30, 2024 and 2023, we recognized income tax expense of $4.6 million and $9.9 million, respectively, with effective tax rates of 32.6% and 26.9%, respectively.

Income tax expense decreased $0.8 million and $5.3 million, or 55% and 54%, respectively, during the three and nine months ended September 30, 2024 as compared to the three and nine months ended September 30, 2023, primarily as a result of the decrease in income before income taxes.

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 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 unaudited Condensed Statement of Cash Flows:

Net cash provided by operating activities decreased by $44.9 million for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. The decrease was primarily attributable to decreased cash collections of $58.8 million related to reduced profit share, program fees and claims administration service fee revenues, and $2.0 million increase in interest expense payments. The decrease in cash was offset by a $9.8 million reduction in income tax payments, $2.0 million increase in interest income received, $1.8 million decrease in cash payments related to cost of services and operating expenses and $2.3 million reduction in working capital during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023.

For the nine months ended September 30, 2024 and 2023, net cash used in investing activities was $2.7 million and $1.6 million, respectively. For the nine months ended September 30, 2024 and 2023, the investments were primarily related to internal use software development costs.

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

For the nine months ended September 30, 2024, net cash used in financing activities was $3.9 million which includes a $2.8 million principal payment on our Term Loan due 2027 and $1.1 million for shares withheld for payroll taxes associated with the vesting of restricted stock awards.

For the nine months ended September 30, 2023, net cash used in financing activities was $34.4 million and is primarily related to the repurchase of 4,296,927 shares of our common stock held in treasury stock for a total of $31.3 million, excluding excise tax, as well as $2.8 million principal payment on our Term Loan due 2027.

As of September 30, 2024, we had no amounts outstanding under the Revolving Credit Facility and $141.5 million outstanding under our Term Loan due 2027.

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, results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends is limited by covenants in our existing indebtedness and may be limited by the agreements governing other indebtedness that we or our subsidiaries may incur in the future.

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 excluding interest expense, income taxes, depreciation and amortization expense of property and equipment and share-based compensation expense. 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 each of the periods indicated: