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MEDIAALPHA, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes included in "Financial Statements and Supplementary Data." Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements involving significant risks and uncertainties. As a result of many factors, such as those set forth in "Risk Factors," our actual results may differ materially from the results described in, or implied by, these forward-looking statements.
Management overview
Our mission is to help insurance carriers and distributors target and acquire
customers more efficiently and at greater scale through technology and data
science. Our technology platform brings leading insurance carriers and
high-intent consumers together through a real-time, transparent, and
results-driven ecosystem. We believe we are the largest online customer
acquisition channel in our core verticals of property & casualty ("P&C")
insurance, health insurance, and life insurance, supporting $953.1 million in
Transaction Value across our platform from these verticals in the year ended
December 31, 2021 .
We have multi-faceted relationships with top-tier insurance carriers and
distributors. A buyer or a demand partner within our ecosystem is generally an
insurance carrier or distributor seeking to reach high-intent insurance
consumers. A seller or a supply partner is typically an insurance carrier
looking to maximize the value of non-converting or low LTV consumers, or an
insurance-focused research destination or other financial website looking to
monetize the high-intent users on their websites. During the year ended December
31, 2021 , an average of 31.3 million consumers shopped for insurance products
through the websites of our diversified group of supply partners and our
proprietary websites each month, driving an average of over 8.2 million Consumer
Referrals on our platform each month.
We generate revenue by earning a fee for each Consumer Referral sold on our
platform. A transaction becomes payable upon a qualifying consumer action, such
as a click, call or lead, and is not contingent on the sale of a product to the
consumer.
We believe in the disruptive power of transparency. Traditionally, insurance
customer acquisition platforms operated in a black box. We recognized that a
consumer may be valued differently by one insurer versus another; therefore,
insurers should be able to determine pricing granularly based on the value that
a particular customer segment is expected to bring to their business. As a
result, we developed a technology platform that powers an ecosystem where buyers
and sellers can transact with full transparency, control, and confidence,
aligning the interests of the parties participating on our platform.
We believe our technology is a key differentiator and a powerful driver of our
performance. We maintain deep, custom integrations with partners representing
the majority of our Transaction Value, which enable automated, data-driven
processes that optimize our partners' customer acquisition spend and revenue.
Through our platform, our insurance carrier partners can target and price across
over 35 separate consumer attributes to manage customized acquisition
strategies.
Key factors affecting our business
Revenue
We believe that our future performance will depend on many factors, including those described below and in the section titled Part I, Item 1A "Risk factors" included in this Annual Report on Form 10-K.
Secular trends in the insurance industry
Our technology platform was created to serve and grow with our core insurance
end markets. We believe secular trends in the insurance industry are critical
driver of our revenue and will continue to provide strong tailwinds for our
business. More insurance consumers are shopping online and direct-to-consumer
marketing, which fuels our revenue, is the fastest growing insurance
distribution channel. In addition, insurance customer acquisition spending is
growing. As mass-market customer acquisition spend is becoming more costly,
insurance carriers and distributors are increasingly focusing on optimizing
customer acquisition spend, which is at the core of the service we deliver on
our platform. As long as these secular trends
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persist, we expect digital insurance customer acquisition spending to continue to grow over time, and we believe we are well-positioned to benefit from this growth. Transaction Value Transaction Value fromOpen Marketplace transactions is a direct driver of our revenue, while Transaction Value fromPrivate Marketplace transactions is an indirect driver of our revenue (see "Key business and operating metrics" below). Transaction Value on our platform grew to$1.0 billion for the year endedDecember 31, 2021 from$815.7 million for the year endedDecember 31, 2020 . We have developed multi-faceted, deeply integrated partnerships with insurance carriers and distributors, who are often both buyers and sellers on our platform. We believe the versatility and breadth of our offerings, coupled with our focus on high-quality products, provide significant value to insurance carriers and distributors, resulting in strong retention rates. As a result, many insurance carriers and distributors use our platform as their central hub for broadly managing digital customer acquisition and monetization. For the year endedDecember 31, 2021 , 96.9% of total Transaction Value executed on our platform came from demand partner relationships from 2020.
Our demand and supply partners
Our success depends on our ability to retain and grow the number of demand and supply partners on our platform. The aggregate number of demand and supply partners active on our platform increased to 1,923 for the year endedDecember 31, 2021 from 1,460 for the year endedDecember 31, 2020 , and from 1,200 for the year endedDecember 31, 2019 , driven by increased engagement in our P&C and Health verticals. We retain and attract demand partners by finding high-quality sources of Consumer Referrals to make available to our demand partners. We seek to develop, acquire and retain relationships with high-quality supply partners by developing flexible platforms to enable our supply partners to maximize their revenue, manage their demand side relationships in scalable and flexible ways and focus on long-term sustainable economics with respect to revenue share. Our relationships with our partners are deep and long standing and involve the top-tier insurance carriers in the industry. In terms of buyers, during the year endedDecember 31, 2021 , 15 of the top 20 largest auto insurance carriers by customer acquisition spend were on our platform.
Consumer Referrals
Our results depend in large part on the number of Consumer Referrals purchased on our platform. The aggregate number of consumer clicks, calls and leads purchased by insurance buyers on our platform grew to 98.3 million for the year endedDecember 31, 2021 from 79.4 million for the year endedDecember 31, 2020 . We seek to increase the number and scale of our supply relationships and drive consumers to our proprietary properties through a variety of paid traffic acquisition sources. We are investing in diversifying our paid media sources to extend beyond search engine marketing, which historically represented the bulk of our paid media spend, into other online media sources, including native, social, and display advertising.
Seasonality
Our results are subject to fluctuations as a result of seasonality. In particular, our property & casualty insurance vertical is typically characterized by seasonal strength in our quarters endingMarch 31 due to a greater supply of Consumer Referrals and higher customer acquisition budgets during the start of the year, and to seasonal weakness in our quarters endingDecember 31 due to a lower supply of Consumer Referrals available on a cost-effective basis and lower customer acquisition budgets from some buyers during those quarters. Our health insurance vertical is typically characterized by seasonal strength in our quarters endingDecember 31 due to open enrollment periods for health insurance and annual enrollment for Medicare during those quarters, with a material increase in consumer search volume for health products and a related increase in buyer customer acquisition budgets. Other factors affecting our partners' businesses include macro factors such as credit availability in the market, the strength of the economy and employment levels. Cyclicality Our results are also subject to fluctuations as a result of business cycles experienced by companies in the insurance industry. These cycles in the auto insurance industry, are characterized by periods of "soft" market conditions, when carriers are focused on lowering rates, increasing capacity, and building market share, and "hard" market conditions, when carriers tend to raise prices and prioritize profitability over growth. As our demand partners in these industries go through these market cycles, they often increase their customer acquisition spending during soft markets and reduce it during hard markets, causing their relative demand for Consumer Referrals from our platform to increase and decrease accordingly. We believe that the auto 53
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insurance industry is currently in a "hard" market due to higher than expected underwriting losses, and that many P&C insurance carriers are reducing their customer acquisition spending until they can increase their premium rates, the timing of which is difficult to predict.
Regulations
Our revenue and earnings may fluctuate from time to time as a result of federal, state, international and industry-based laws, directives and regulations and developing standards with respect to the enforcement of those regulations. Our business is affected directly because we operate websites, conduct telemarketing and email marketing and collect, process, store, share, disclose, transfer and use consumer information and other data. Our business is affected indirectly as our clients adjust their operations as a result of regulatory changes and enforcement activity within their industries. For example, theCalifornia Consumer Privacy Act ("CCPA"), became effective onJanuary 1, 2020 , and a number of other states, includingColorado andVirginia , have enacted or are considering similar laws, all of which may affect our business. While it is unclear how this new legislation may be modified or how certain provisions will be interpreted, the effects of this legislation are potentially significant, and may require us to modify our data processing practices and policies and incur substantial compliance-related costs and expenses. For a description of laws and regulations to which we are generally subject, see Item 1 "Business" and Item 1A "Risk Factors." COVID-19 While the COVID-19 pandemic has changed the physical working environment of the substantial majority of our workforce to working from home, it has otherwise caused only minor disruptions to our business operations with a limited impact on our operating results thus far. Our Travel vertical is largely driven by consumer spending on airfare, hotels, rentals and other travel products. As a result of COVID-19, we have experienced a dramatic decline in revenue from the Travel vertical and expect this trend to continue for the foreseeable future. For the years endedDecember 31, 2021 , 2020, and 2019, revenue from the Travel vertical comprised approximately 2.0%, 2.1%, and 11.1%, respectively, of our total revenue. While we have sought to maintain our commercial relationships in the Travel vertical and remain positioned to capitalize on transactions in the Travel vertical when travel activity resumes, we do not expect that revenue from the Travel vertical will match our historical results or have any material impact on our overall revenue or profitability for the foreseeable future. In addition, during the second half of 2021, supply chain disruptions and cost increases caused by the pandemic contributed to higher-than-expected property and casualty insurance claims costs, which has led many carriers to reduce their customer acquisition spending to preserve their profitability. These reductions continue to impact revenue from our P&C vertical, and the duration and extent of this impact are difficult to estimate beyond the first quarter of 2022.
Recent developments
OnFebruary 24, 2022 , we entered into an agreement to acquire substantially all of the assets ofCustomer Helper Team, LLC ("CHT"), a provider of customer generation and acquisition services for Medicare insurance, automobile insurance, health insurance, life insurance, debt settlement, and credit repair companies. We believe the acquisition is a good strategic fit with our long term objectives and will increase our presence on various social media and short form video platforms. The purchase price for the acquisition will be approximately$50 million in cash at closing plus up to an additional$20 million of contingent cash consideration based on CHT's achievement of revenue and profitability targets over the next two years. We expect the transaction to close byMarch 11, 2022 (subject to the satisfaction of customary closing conditions). We expect to fund the purchase price from a combination of cash in hand and borrowings under our 2021 Revolving Credit Facility.
Key components of our results of operations
Revenue
We operate primarily in the P&C insurance, health insurance and life insurance
verticals and generate revenue through the purchase and sale of Consumer
Referrals.
The price and amount of Consumer Referrals purchased and sold on our platform vary based on a number of market conditions and consumer attributes, including (i) geographic location of consumers, (ii) demographic attributes of consumers, (iii) the source of Consumer Referrals and quality of conversion by source, (iv) buyer bids and (v) buyer demand and budget.
In our
Referrals that are sold to our demand partners. In these arrangements, we have
separate agreements with demand partners and suppliers. Suppliers are not a
party to the contractual arrangements with our demand partners, nor are the
suppliers the beneficiaries of our demand partner
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agreements. We earn fees from our demand partners and separately pay (i) a revenue share to suppliers and (ii) a fee to internet search companies to drive consumers to our proprietary websites. We are the principal in theOpen Marketplace transactions. As a result, the fees paid by demand partners are recognized as revenue and the fees paid to suppliers are included in cost of revenue. With respect to ourPrivate Marketplace transactions, buyers and suppliers contract with one another directly and leverage our platform to facilitate transparent, real-time transactions utilizing the reporting and analytical tools available to them from use of our platform. We charge a platform fee on the Consumer Referrals transacted. We act as an agent in thePrivate Marketplace transactions and recognize revenue for the platform fee received. There are no separate payments made by us to suppliers in ourPrivate Marketplace . We recognize revenue derived from Consumer Referrals when we transfer these Consumer Referrals to our buyers in an amount that reflects the consideration to which we are entitled. We recognize revenue pursuant to the framework contained in Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), as issued by theFinancial Accounting Standards Board ("FASB"): (i) identify the contract with a client; (ii) identify the performance obligations in the contract, including whether they are distinct in the context of the contract; (iii) determine the transaction price, including the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when we satisfy the performance obligations. Generally, our contracts with buyers specify a period of time covered and a budget governing spend limits. While contracts can specify a term, most of our contracts can be terminated at any time without penalty upon 30- or 60-days' notice. As a result, the transaction price for the delivery of each Consumer Referral is determined and recorded in real time and no estimation of variable consideration or future consideration is required. We satisfy our performance obligations as services are provided. We do not promise to provide any other significant goods or services to our partners after delivery and generally do not offer a right of return.
Costs and operating expenses
Costs and operating expenses consist primarily of cost of revenue, sales and
marketing expenses, product expenses and general and administrative expenses.
Cost of revenue
Our cost of revenue is comprised primarily of revenue share payments to suppliers and traffic acquisition costs paid to top tier search engines, as well as telephony infrastructure costs, internet and hosting, merchant fees, salaries and related expenses, equity-based compensation, and other expenses.
Sales and marketing
Sales and marketing expenses consist primarily of an allocation of personnel expenses for employees engaged in demand side and supply side business development, marketing and media acquisition activities, and include salaries, wages and benefits, including non-cash equity-based compensation. Sales and marketing expenses also include costs related to attracting partners to our platform, including marketing and promotions, tradeshows and related travel and entertainment expenses. Sales and marketing expenses also include an allocated portion of rent and facilities expenses and depreciation and amortization expense.
Product development
Product development expenses consist primarily of an allocation of personnel
expenses for employees engaged in technology, engineering and product
development and include salaries, wages and benefits, including non-cash
equity-based compensation. Product development expenses also include an
allocated portion of rent and facilities expenses and depreciation and
amortization expense.
General and administrative
General and administrative expenses consist primarily of an allocation of
personnel expenses for executive, finance, legal, human resources, and business
analytics employees, and include salaries, wages and benefits, including
non-cash equity-based compensation. General and administrative expenses also
include professional services and an allocated portion of rent and facilities
expenses and depreciation expense.
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Other expense, net
Other expense, net consist primarily of expenses not incurred by us in our ordinary course of business and that are not included in any of the captions above. Other expense, net for the year endedDecember 31, 2021 consisted primarily of charges related to a reduction in our tax indemnification receivable due to the expiration of statute of limitations, changes in our liability related to the Tax Receivables Agreement ("TRA"), amounts payable toWhite Mountains for settlement of federal and state tax returns for periods prior to the Reorganization Transaction related to 2020 federal and state tax returns filed during the three months endedDecember 31, 2021 , offset in part by benefits from employee retention credits. The reduction related to the TRA and the settlement federal and state tax returns also resulted in a benefit of the same amount which has been recorded within income tax (benefit).
Interest expense
Interest expense consists primarily of interest expense associated with
outstanding borrowings under our loan and security agreements and the
amortization of deferred financing costs associated with these arrangements. See
"-Liquidity and capital resources-Financing activities" below.
Provision for income taxes
MediaAlpha, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from QLH based uponMediaAlpha, Inc.'s economic interest held in QLH. QLH is treated as a pass-through partnership for income tax reporting purposes and is not subject to federal income tax. Instead, QLH's taxable income or loss is passed through to its members, includingMediaAlpha, Inc. Prior to the Reorganization Transactions and IPO, the Company was not subject to corporate income taxation. As such, income tax expense (benefit) recorded during 2020 reflected the expected tax expense on the net earnings subsequent to the Reorganization Transactions and IPO related toMediaAlpha, Inc.'s economic interest in QLH.
Net income (loss) attributable to QLH prior to Reorganization Transactions
Net income (loss) incurred prior to the Reorganization Transactions is attributed to QLH. Net income attributable to QLH prior to the Reorganization Transactions was$19.2 million for the periodJanuary 1, 2020 toOctober 27, 2020 and$17.8 million for the year endedDecember 31, 2019 .
Net income (loss) attributable to Non-controlling interest
Net income (loss) is attributed to non-controlling interests in accordance with QLH's limited liability company agreement. We allocate the share of net income (loss) incurred subsequent to the Reorganization Transactions to the non-controlling interest holders pro-rata to their holdings. The non-controlling interests balance represents the Class B-1 units held at QLH. Net loss attributable to non-controlling interests was$3.2 million and$4.2 million for the years endedDecember 31, 2021 and 2020, respectively, and$0 for the year endedDecember 31, 2019 . 56
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Results of operations
The following table sets forth our operating results in absolute dollars and as a percentage of revenue for the years endedDecember 31, 2021 , 2020 and 2019: Year Ended December 31, 2021 2020 2019 (in thousands) Revenue$ 645,274 100.0 %$ 584,814 100.0 %$ 408,005 100.0 % Costs and operating expenses Cost of revenue 543,750 84.3 % 499,434 85.4 % 342,909 84.0 % Sales and marketing 22,823 3.5 % 20,483 3.5 % 13,822 3.4 % Product development 15,195 2.4 % 12,449 2.1 % 7,042 1.7 % General and administrative 61,357 9.5 % 32,913 5.6 % 19,391 4.8 % Total costs and operating expenses 643,125 99.7 % 565,279 96.7 % 383,164 93.9 % Income from operations 2,149 0.3 % 19,535 3.3 % 24,841 6.1 % Other expense, net 3,841 0.6 % 2,302 0.4 % - - % Interest expense 7,830 1.2 % 7,938 1.4 % 7,021 1.7 % Total other expense, net 11,671 1.8 % 10,240 1.8 % 7,021 1.7 % (Loss) income before income taxes (9,522) (1.5) % 9,295 1.6 % 17,820 4.4 % Income tax (benefit) (1,047) (0.2) % (1,267) (0.2) % - - % Net (loss) income$ (8,475) (1.3) %$ 10,562 1.8 %$ 17,820 4.4 % Net income attributable to QLH prior to Reorganization Transactions - - % 19,166 3.3 % 17,820 4.4 % Net (loss) attributable to non-controlling interest (3,200) (0.5) % (4,238) (0.7) % - - % Net (loss) attributable to MediaAlpha, Inc.$ (5,275) (0.8) %$ (4,366) (0.7) % $ - - % Net (loss) per share of Class A common stock -Basic$ (0.14) $ (0.14) - -Diluted$ (0.19) $ (0.14) - Weighted average shares of Class A common stock outstanding -Basic 37,280,533 32,134,170 - -Diluted 61,255,925 32,134,170 - 57
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Revenue
The following table presents our revenue, disaggregated by vertical, for the
years ended
changes between the periods:
Year ended Year ended Year ended
December 31, December 31, December 31,
(in thousands) 2021 $ % 2020 $ % 2019
Property & casualty
insurance $ 417,715 20,005 5.0 % $ 397,710 178,243 81.2 % $ 219,467
Percentage of
revenue 64.7 % 68.0 % 53.8 %
Health insurance 176,459 36,663 26.2 % 139,796 35,535 34.1 % 104,261
Percentage of
revenue 27.3 % 23.9 % 25.6 %
Life insurance 28,586 (1,727) (5.7) % 30,313 (2,699) (8.2) % 33,012
Percentage of
revenue 4.4 % 5.2 % 8.1 %
Other 22,514 5,519 32.5 % 16,995 (34,270) (66.8) % 51,265
Percentage of
revenue 3.5 % 2.9 % 12.6 %
Revenue $ 645,274 60,460 10.3 % $ 584,814 176,809 43.3 % $ 408,005
2021 compared with 2020
The increase in P&C insurance revenue for the year ended December 31, 2021 ,
compared with the year ended December 31, 2020 , was due to an increase in spend
from auto and home insurance carriers, driven by favorable carrier profitability
and the growing trend of P&C insurance carriers allocating customer acquisition
budgets to the DTC channel, during the first half of 2021. However, the auto
insurance industry began to experience a cyclical downturn in the second half of
2021, with many P&C carriers experiencing lower than expected underwriting
profitability, leading them to reduce marketing budget allocations to our
channel. We are currently unable to predict the duration of this cyclical
downturn in the auto insurance industry or its impact on our P&C insurance
vertical revenue or profitability beyond the first quarter of 2022.
The increase in health insurance revenue for the year ended December 31, 2021 ,
compared with the year ended December 31, 2020 , was driven by increased customer
acquisition budget allocation from Health and Medicare insurance carriers, which
led our supply partners and our proprietary properties to drive more consumers
through their websites, and increased supply from our proprietary properties as
we increased the volume of media spend to satisfy the increased demand.
The decrease in life insurance revenue for the year ended December 31, 2021 ,
compared with the year ended December 31, 2020 , was driven by certain carriers
and supply partners shifting their transactions with each other from our Open
Marketplace to our Private Marketplace due to lower platform fees for our
Private Marketplace , which transact on a net revenue basis.
The increase in other revenue for the year ended December 31, 2021 , compared
with the year ended December 31, 2020 , was driven primarily by increases in our
Consumer Finance and Education verticals, due to strength in the mortgage and
higher education markets, respectively.
2020 compared with 2019
The increase in P&C insurance revenue for the year endedDecember 31, 2020 , compared with the year endedDecember 31, 2019 , was due to an increase in spend from auto and home insurance carriers, driven by improving carrier profitability and the growing trend of property & casualty insurance carriers allocating customer acquisition budgets to the DTC channel, which led to our supply partners and our proprietary properties to drive more consumers through their websites. These dynamics led to a year over year increase in supply from both new and existing supply partners. The increase in health insurance revenue for the year endedDecember 31, 2020 , compared with the year endedDecember 31, 2019 , was driven by increased customer acquisition budget allocation from Health and Medicare insurance 58
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carriers, which in turn allowed our supply partners to drive more consumers
through their websites, and increased supply from our proprietary properties as
we increased the volume of media spend to satisfy the increased demand.
The decrease in life insurance revenue for the year ended
compared with the year ended
allocations from carriers and brokers, as they reduced their customer
acquisition spending due to COVID-19 mortality concerns.
The decrease in other revenue for the year endedDecember 31, 2020 , compared with the year endedDecember 31, 2019 , was driven primarily by a decrease in Travel comparison shopping due to safety concerns related to COVID-19.
Cost of revenue
The following table presents our cost of revenue for the years endedDecember 31, 2021 , 2020 and 2019 and the dollar and percentage changes between the periods: Year ended Year ended Year ended December 31, December 31, December 31, (in thousands) 2021 $ % 2020 $ % 2019 Cost of revenue$ 543,750 44,316 8.9 %$ 499,434 156,525 45.6 %$ 342,909 As a percentage of total revenue 84.3 % 85.4 % 84.0 % 2021 compared with 2020 The increase in cost of revenue for the year endedDecember 31, 2021 , compared with the year endedDecember 31, 2020 , was driven primarily by the increase in revenue and corresponding increase in revenue share payments to suppliers and media costs as supply partners increased volumes during the year endedDecember 31, 2021 . Cost of revenue as a percentage of revenue reduced slightly due to increase in revenue from carriers on ourPrivate Marketplace , which transacts on net revenue basis.
2020 compared with 2019
The increase in cost of revenue for the year endedDecember 31, 2020 , compared with the year endedDecember 31, 2019 , was driven primarily by the increase in revenue and corresponding increase in revenue share payments to suppliers of$132.4 million as supply partners increased volume. Additionally, there was an increase of$21.3 million in media costs as we increased paid media acquisition to drive more consumers to our proprietary websites to meet buyer demand and increased equity-based compensation of$2.6 million .
As we experience growth in revenue, we expect the relationship between our costs
and revenue to remain in line with our historical results.
Sales and marketing
The following table presents our sales and marketing expenses for the years endedDecember 31, 2021 , 2020 and 2019 and the dollar and percentage changes between the periods: Year ended Year ended Year ended (in thousands) December 31, 2021 $
% December 31, 2020 $ % December 31, 2019 Sales and marketing$ 22,823 2,340 11.4%$ 20,483 6,661 48.2 %$ 13,822 As a percentage of total revenue 3.5 % 3.5 % 3.4 % 59
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2021 compared with 2020
The increase in sales and marketing expenses for the year endedDecember 31, 2021 , compared with the year endedDecember 31, 2020 , was driven primarily by an increase in equity-based compensation expense of$1.2 million and an increase in other personnel-related costs of$1.1 million driven by increased headcount to support current and future business growth.
2020 compared with 2019
The increase in sales and marketing expenses for the year endedDecember 31, 2020 , compared with the year endedDecember 31, 2019 , was due primarily to an increase in equity-based compensation expense of$5.2 million , and an increase in personnel-related costs of$2.0 million driven by increased headcount to support current and future business growth and one-time bonuses paid in connection with the IPO. These costs were offset in part by a decrease in amortization expense of$0.2 million , as certain intangible assets were fully amortized. Product development The following table presents our product development expenses for the years endedDecember 31, 2021 , 2020 and 2019, and the dollar and percentage changes between the periods: Year ended Year ended Year ended (in thousands) December 31, 2021 $
% December 31, 2020 $ % December 31, 2019 Product development$ 15,195 2,746 22.1%$ 12,449 5,407 76.8 %$ 7,042 As a percentage of total revenue 2.4 % 2.1 % 1.7 % 2021 compared with 2020 The increase in product development expenses for the year endedDecember 31, 2021 , compared with the year endedDecember 31, 2020 , was driven primarily by an increase in equity-based compensation of$1.7 million and an increase in personnel-related costs of$0.8 million , as we continued to hire engineering and product development talent to further enhance our technology.
2020 compared with 2019
The increase in product development expenses for the year endedDecember 31, 2020 , compared with the year endedDecember 31, 2019 , was due primarily to an increase in equity-based compensation of$4.2 million , and an increase in personnel-related costs of$2.6 million driven by the addition of engineering and product development talent to further enhance our technology and one-time bonuses paid in connection with the IPO, offset in part by a decrease in amortization expense of$1.5 million as certain intangible assets were fully amortized. General and administrative
The following table presents our general and administrative expenses for the
years ended
changes between the periods:
Year ended Year ended Year ended
(in thousands) December 31, 2021 $ % December 31, 2020 $ % December 31, 2019
General and
administrative $ 61,357 28,444 86.4% $ 32,913 13,522 69.7 % $ 19,391
As a percentage
of total revenue 9.5 % 5.6 % 4.8 %
2021 compared with 2020
The increase in general and administrative expenses for the year ended
December 31, 2021 , compared with the year ended December 31, 2020 , was driven
primarily by higher equity-based compensation expense of $18.4 million and
higher costs related to our operation as a publicly-reporting company for a full
year, including higher directors and officers insurance premiums of $4.7 million
and higher professional fees of $2.4 million related primarily to the Secondary
Offering and other
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registration statements, SOX implementation costs, and higher accounting fees, offset in part by legal fees incurred during the prior year period related to our Reorganization Transaction and IPO that did not recur in the current year.
2020 compared with 2019
The increase in general and administrative expenses for the year endedDecember 31, 2020 , compared with the year endedDecember 31, 2019 , was due primarily to an increase in equity-based compensation expense of$10.0 million , an increase in other expenses of$1.8 million driven by professional fees incurred in connection with the IPO, and an increase in personnel-related costs of$1.7 million , driven by our hiring of additional leadership talent to support our growth and one-time bonuses paid in connection with the IPO.
Equity-based compensation
The following table presents our equity-based compensation expense that was
included in costs and operating expenses for the years ended
2020 and 2019 and the dollar and percentage changes between the periods:
Year ended Year ended Year ended
December 31, December 31, December 31,
(in thousands) 2021 $ % 2020 $ % 2019
Cost of revenue $ 1,665 (1,144) (40.7)% $ 2,809 2,628 1451.9% $ 181
Sales and marketing 7,724 1,180 18.0% 6,544 5,160 372.8% 1,384
Product development 6,440 1,718 36.4% 4,722 4,190 787.6% 532
General and
administrative 29,884 18,423 160.7% 11,461 9,964 665.6% 1,497
Total $ 45,713 20,177 79.0% $ 25,536 21,942 610.5% $ 3,594
2021 compared with 2020
The increase in equity-based compensation expense for the year ended
December 31, 2021 , compared with the year ended December 31, 2020 , was driven by
inclusion of full year of expense during the year ended December 31, 2021
related to restricted stock units granted at the IPO under the 2020 Omnibus
Incentive Plan, as well as by expense related to additional restricted stock
units granted during the year, as compared to period subsequent to the IPO for
the year ended December 31, 2020 . Equity-based compensation expense included in
cost of revenue was lower for the year ended December 31, 2021 , due primarily to
forfeitures.
2020 compared with 2019
The increase in equity-based compensation expense for the year ended
December 31, 2020 , compared with the year ended December 31, 2019 , was driven
primarily by grants of stock awards to Senior Executives and Legacy Profit
Interest Holders and grants of restricted stock units under the 2020 Omnibus
Incentive plan.
Amortization
The following table presents our amortization of intangible asset expense that
was included in costs and operating expenses for the years ended December 31,
2021 , 2020 and 2019, and the dollar and percentage changes between the periods:
Year ended Year ended Year ended
December 31, December 31, December 31,
(in thousands) 2021 $ % 2020 $ % 2019
Cost of revenue $ - - -% $ - (510) (100.0)% $ 510
Sales and marketing 2,984 (217) (6.8)% 3,201 (200) (5.9)% 3,401
Product development - - -% - (1,470) (100.0)% 1,470
Total $ 2,984 (217) (6.8)% $ 3,201 (2,180) (40.5)% $ 5,381
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2021 compared with 2020
There were no material changes in amortization expense for the year ended
2020 compared with 2019
The decrease in amortization expense for the year ended
compared with the year ended
intangible assets that were fully amortized in 2019.
Other expense, net
The following table presents our other expenses for the years ended
2021
Year ended Year ended Year ended December 31,
(in thousands) December 31, 2021 $ % December 31, 2020 $ %
2019 Other expense, net$ 3,841 1,539 66.9 %$ 2,302 2,302 100.0 % $ - As a percentage of total revenue 0.6 % 0.4 % 0.0 % For the year endedDecember 31, 2021 , other expense, net consisted primarily of charges related to a reduction in our tax indemnification receivable of$1.2 million due to the expiration of statutes of limitations and to$2.1 million reimbursable toWhite Mountains for settlement of federal and state tax returns for period prior to the Reorganization Transaction related to 2020 federal and state tax returns filed during the three months endedDecember 31, 2021 , both of which have an offsetting benefit recorded within income tax (benefit). These amounts were offset in part by a benefit of$1.3 million as a result of our receipt of employee retention credits under the provisions of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") . For the year endedDecember 31, 2020 , other expense, net represented loss on extinguishment recognized in connection with the termination of the 2019 Credit Facilities. There were no other expense, net in 2019.
Interest expense
The following table presents our interest expense for the years endedDecember 31, 2021 , 2020 and 2019, and the dollar and percentage changes between the periods: Year ended Year ended Year ended (in thousands) December 31, 2021 $
% December 31, 2020 $ %
December 31, 2019 Interest expense, net$ 7,830 (108) (1.4) %$ 7,938 917 13.1 %$ 7,021 As a percentage of total revenue 1.2 % 1.4 % 1.7 % 2021 compared with 2020 The decrease in interest expense for the year endedDecember 31, 2021 , compared with the year endedDecember 31, 2020 , was driven primarily by lower interest rates on our debt facilities, from the refinancing of our 2020 Credit Facilities onJuly 29, 2021 . 2020 compared with 2019 The increase in interest expense for the year endedDecember 31, 2020 , compared with the year endedDecember 31, 2019 , was driven by higher outstanding balances under the 2020 credit facility, compared with the 2019 credit facility. 62
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Income tax (benefit)
The following table presents our income tax expense for the years endedDecember 31, 2021 , 2020 and 2019, and the dollar and percentage changes between the periods: Year ended Year ended Year ended December 31, (in thousands) December 31, 2021 $ % December 31, 2020 $ %
2019 Income tax (benefit)$ (1,047) 220 (17.4) %$ (1,267) (1,267) 100.0 % $ - As a percentage of total revenue (0.2) % (0.2) % 0.0 % For the year endedDecember 31, 2021 , we recorded an income tax benefit of$1.0 million resulting from our effective tax rate of 11.0%, which differed from theU.S. federal statutory rate of 21%, due primarily to nondeductible officer's compensation per section 162(m), state income taxes, changes in valuation allowance, and nondeductible transaction costs associated with the Secondary Offering, offset in part by tax benefits associated with equity-based awards, return-to-provision adjustments, and changes in uncertain tax positions. Prior to the Reorganization Transactions, our business was conducted through QLH, which as a limited liability company incurred no income taxes. Subsequent to the Reorganization Transactions,MediaAlpha, Inc. is subject toU.S. federal, state and foreign income taxes with respect to its allocable share of any taxable income or loss of QLH.
Segment information
We operate inthe United States and in a single operating segment. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our chief executive officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. No expense or operating income is evaluated at a segment level. Since we operate in one operating segment and reportable segment, all required financial segment information can be found in the consolidated financial statements.
Key business and operating metrics
In addition to traditional financial metrics, we rely upon certain business and operating metrics that are not presented in accordance with GAAP to estimate the volume of spending on our platform, estimate and recognize revenue, evaluate our business performance and facilitate our operations. Such business and operating metrics should not be considered in isolation from, or as an alternative to, measures presented in accordance with GAAP and should be considered together with other operating and financial performance measures presented in accordance with GAAP. Also, such business and operating metrics may not necessarily be comparable to similarly titled measures presented by other companies.
Adjusted EBITDA
We define "Adjusted EBITDA" as net income excluding interest expense, income tax
benefit (expense), depreciation expense on property and equipment, amortization
of intangible assets, as well as equity-based compensation expense and certain
other adjustments as listed in the table below. Adjusted EBITDA is a non-GAAP
financial measure that we present to supplement the financial information we
present on a GAAP basis. We monitor and present Adjusted EBITDA because it is a
key measure used by our management to understand and evaluate our operating
performance, to establish budgets and to develop operational goals for managing
our business. We believe that Adjusted EBITDA helps identify underlying trends
in our business that could otherwise be masked by the effect of the expenses
that we exclude in the calculations of Adjusted EBITDA. Accordingly, we believe
that Adjusted EBITDA provides useful information to investors and others in
understanding and evaluating our operating results, enhancing the overall
understanding of our past performance and future prospects. In addition,
presenting Adjusted EBITDA provides investors with a metric to evaluate the
capital efficiency of our business.
Adjusted EBITDA is not presented in accordance with GAAP and should not be
considered in isolation of, or as an alternative to, measures presented in
accordance with GAAP. There are a number of limitations related to the use of
Adjusted EBITDA rather than net income, which is the most directly comparable
financial measure calculated and presented in accordance with GAAP. These
limitations include the fact that Adjusted EBITDA excludes interest expense on
debt, income tax benefit (expense), equity-based compensation expense,
depreciation and amortization, and certain other adjustments that we
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consider useful information to investors and others in understanding and evaluating our operating results. In addition, other companies may use other measures to evaluate their performance, including different definitions of "Adjusted EBITDA," which could reduce the usefulness of our Adjusted EBITDA as a tool for comparison. The following table reconciles Adjusted EBITDA with net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, for the years endedDecember 31, 2021 , 2020 and 2019. Year Ended December 31, (in thousands) 2021 2020 2019 Net (loss) income$ (8,475) $ 10,562 $ 17,820 Equity-based compensation expense 45,713 25,536 3,594 Interest expense 7,830 7,938 7,021 Income tax (benefit) (1,047) (1,267) - Depreciation expense on property and equipment 369 289 272 Amortization of intangible assets 2,984 3,201 5,381 Transaction expenses(1) 4,128 11,511 8,831 Employee-related costs(2) 674 - - SOX implementation costs(3) 1,168 - - Settlement costs(4) 859 - - Changes in TRA related liability(5) 911 - - Reduction in Tax Indemnification Receivable(6) 1,360 304 - Non-cash compensation(7) 880 - - Employee retention credits(8) (1,303) - -
Settlement of federal and state income tax refunds(9) 2,116
- - Adjusted EBITDA$ 58,167 $ 58,074 $ 42,919 (1)Transaction expenses consist of$4.1 million of expenses incurred by us for the year endedDecember 31, 2021 for legal and accounting fees and other costs in connection with the Secondary Offering and other registration statements, and the refinancing of our 2020 Credit Facilities. For the year endedDecember 31, 2020 , transaction expenses consist of$5.9 million in legal, and other consulting fees,$3.6 million in transaction bonus related to the Reorganization Transaction and IPO, and$2.0 million in loss on extinguishment of debt related to the termination of 2019 Credit Facilities. For the year endedDecember 31, 2019 , transaction expenses consist of$7.2 million in legal, investment banking and other consulting fees and$1.6 million in transaction bonuses related to a transaction with Insignia inFebruary 2019 .
(2)Employee-related costs include
the year ended
connection with the hiring of certain executive officers to support our
operation as a publicly-reporting company.
(3)SOX implementation costs consist of$1.2 million of expenses incurred by us for the year endedDecember 31, 2021 for third-party consultants to assist us with the development, implementation, and documentation of new and enhanced internal controls and processes for compliance with SOX Section 404(b).
(4)Settlement costs consist of
year ended
General's Office of the State of Washington
(5)Changes in TRA related liability consist of$0.9 million of expense for the year endedDecember 31, 2021 due to a change in the estimated future state tax benefits, and other changes in the estimate, resulting in reduction of the TRA liability created in connection with the Reorganization Transactions. (6)Reduction in Tax Indemnification Receivable consists of$1.4 million and$0.3 million of expenses incurred by us for the year endedDecember 31, 2021 and 2020, respectively, related to a reduction in the tax indemnification receivable recorded in connection with the Reorganization Transactions. The reduction also resulted in a benefit of the same amount which has been recorded within income tax (benefit). (7)Non-cash compensation consists of$0.9 million of expenses incurred by us for the year endedDecember 31, 2021 for payment of annual bonuses to certain of our executive officers in the form of grants of restricted stock units, rather than in cash. (8)Employee retention credits consist of$1.3 million of benefit for the year endedDecember 31, 2021 as a result of our receipt of employee retention credits under the provisions of the CARES Act. (9)Settlement of federal and state tax refunds consist of$2.1 million of expense incurred by us for the year endedDecember 31, 2021 related to reimbursement toWhite Mountains for federal and state tax refunds for the period prior to the Reorganization Transaction related to 2020 federal and state tax returns. The settlement also resulted in a benefit of the same amount which has been recorded within income tax (benefit). 64
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Contribution and Contribution Margin
We define "Contribution" as revenue less revenue share payments and online advertising costs, or, as reported in our consolidated statement of operations, revenue less cost of revenue (i.e., gross profit), as adjusted to exclude the following items from cost of revenue: equity-based compensation; salaries, wages, and related costs; internet and hosting; amortization; depreciation; other services; and merchant-related fees. We define "Contribution Margin" as Contribution expressed as a percentage of revenue for the same period. Contribution and Contribution Margin are non-GAAP financial measures that we present to supplement the financial information we present on a GAAP basis. We use Contribution and Contribution Margin to measure the return on our relationships with our supply partners (excluding certain fixed costs), the financial return on and efficacy of our online advertising costs to drive consumers to our proprietary websites, and our operating leverage. We do not use Contribution and Contribution Margin as measures of overall profitability. We present Contribution and Contribution Margin because they are used by our management and board of directors to manage our operating performance, including evaluating our operational performance against budget and assessing our overall operating efficiency and operating leverage. For example, if Contribution increases and our headcount costs and other operating expenses remain steady, our Adjusted EBITDA and operating leverage increase. If Contribution Margin decreases, we may choose to re-evaluate and re-negotiate our revenue share agreements with our supply partners, to make optimization and pricing changes with respect to our bids for keywords from primary traffic acquisition sources, or to change our overall cost structure with respect to headcount, fixed costs and other costs. Other companies may calculate Contribution and Contribution Margin differently than we do. Contribution and Contribution Margin have their limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results presented in accordance with GAAP. The following table reconciles Contribution with gross profit, the most directly comparable financial measure calculated and presented in accordance with GAAP, for years endedDecember 31, 2021 , 2020 and 2019. Year Ended December 31, (in thousands) 2021 2020 2019 Revenue$ 645,274 $ 584,814 $ 408,005 Less cost of revenue (543,750) (499,434) (342,909) Gross profit$ 101,524 $ 85,380 $ 65,096 Adjusted to exclude the following (as related to cost of revenue): Equity-based compensation 1,665 2,809 181 Salaries, wages, and related 2,004 2,188 1,471 Internet and hosting 419 438 520 Amortization - - 511 Depreciation 29 24 22 Other expenses 451 284 263 Other services 1,213 902 778 Merchant-related fees 309 585 452 Contribution$ 107,614 $ 92,610 $ 69,294 Gross Margin 15.7 % 14.6 % 16.0 % Contribution Margin 16.7 % 15.8 % 17.0 % Transaction Value We define "Transaction Value" as the total gross dollars transacted by our partners on our platform. Transaction Value is a driver of revenue, with differing revenue recognition based on the economic relationship we have with our partners. Our partners use our platform to transact via Open andPrivate Marketplace transactions. In ourOpen Marketplace model, Transaction Value is equal to revenue recognized and revenue share payments to our supply partners represent costs of revenue. In ourPrivate Marketplace model, revenue recognized represents a platform fee billed to the demand partner or supply partner based on an agreed-upon percentage of the Transaction Value for the Consumer Referrals transacted, and accordingly there are no associated costs of revenue. We utilize Transaction Value to assess revenue and to assess the overall level of transaction activity through our platform. We believe it is useful to investors to assess the overall level of activity on our platform and to better understand the sources of our revenue across our different transaction models and verticals. 65
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The following table presents Transaction Value by platform model for the years
ended
Year Ended December
31,
(in thousands) 2021 2020
2019
Open Marketplace transactions$ 627,705 $ 573,242 $ 399,945 Percentage of total Transaction Value 61.6 % 70.3 % 71.4 % Private Marketplace transactions$ 391,265 242,470
160,181
Percentage of total Transaction Value 38.4 % 29.7 % 28.6 % Total Transaction Value$ 1,018,970 $ 815,712 $ 560,126
The following table presents Transaction Value by vertical for the years ended
Year Ended December 31,
2021 2020 2019
(in thousands)
Property & Casualty insurance $ 655,591 $ 549,916 $ 322,817
Percentage of total Transaction Value 64.3 % 67.4 % 57.6 %
Health insurance 245,221 175,539
122,320
Percentage of total Transaction Value 24.1 % 21.5 % 21.8 % Life insurance 52,302 42,206
34,884
Percentage of total Transaction Value 5.1 % 5.2 % 6.2 % Other 65,856 48,051
80,105
Percentage of total Transaction Value 6.5 % 5.9 % 14.3 % Total Transaction Value$ 1,018,970 $ 815,712 $ 560,126 Consumer Referrals We define "Consumer Referral" as any consumer click, call or lead purchased by a buyer on our platform. Click revenue is recognized on a pay-per-click basis and revenue is earned and recognized when a consumer clicks on a listed buyer's advertisement that is presented subsequent to the consumer's search (e.g., auto insurance quote search or health insurance quote search). Call revenue is earned and recognized when a consumer transfers to a buyer and remains engaged for a requisite duration of time, as specified by each buyer. Lead revenue is recognized when we deliver data leads to buyers. Data leads are generated either through insurance carriers, insurance-focused research destination websites or other financial websites that make the data leads available for purchase through our platform, or when consumers complete a full quote request on our proprietary websites. Delivery occurs at the time of lead transfer. The data we generate from each Consumer Referral feeds into our analytics model to generate conversion probabilities for each unique consumer, enabling discovery of predicted return and cost per sale across the platform and helping us to improve our platform technology. We monitor the number of Consumer Referrals on our platform in order to measure Transaction Value, revenue and overall business performance across our verticals and platform models. For the year endedDecember 31, 2021 , Transaction Value generated from clicks, calls and leads was 79.3%, 9.5%, and 11.3%, respectively. For the year endedDecember 31, 2020 , Transaction Value generated from clicks, calls and leads was 79.9%, 8.1%, and 12.0%, respectively.
Number of demand and supply partners
The aggregate number of demand and supply partners on our platform determines in part the level of Consumer Referral demand and supply on our platform. We use the number of demand and supply partners on our platform to evaluate our current business performance and future business prospects.
Liquidity and capital resources
Overview
Our primary source of liquidity are our cash flows generated from operations. Our principal uses of cash include to fund operations, interest payments and mandatory principal payments on our long-term debt.
The Secondary Offering did not generate any proceeds for the Company.
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As of
totaled
We believe that our current sources of liquidity, which include cash flow generated from operations, cash and funds available under the 2021 Credit Facilities, will be sufficient to meet our projected operating and debt service requirements for at least the next 12 months. To the extent that our current liquidity is insufficient to fund future activities, we may need to raise additional funds. Our business is seasonal and cyclical in nature and these trends could impact the cash flows generated from operations requiring us to raise additional funds in the short term. OnFebruary 24, 2022 , we entered into an agreement to acquire substantially all of the assets ofCustomer Helper Team, LLC ("CHT"), and expect to fund the purchase price from a combination of cash in hand and borrowings under our 2021 Revolving Credit Facility. We may also engage in additional merger and acquisition or other activities that could require us to draw on our existing credit facilities or may need to raise additional funds. In the future, we may attempt to raise additional capital through the sale of equity securities or through debt financing arrangements. If we raise additional funds by issuing equity securities, the ownership of our existing stockholders will be diluted. The incurrence of additional debt financing would result in debt service obligations, and any future instruments governing such debt could provide for operating and financing covenants that could restrict our operations.
Our material cash requirements include our long-term debt, operating lease
obligations, and liabilities under the tax receivables agreement.
Cash Flows
The following table presents a summary of our cash flows for the years endedDecember 31, 2021 , 2020, and 2019, and the dollar and percentage changes between the periods: Year ended Year ended Year ended December 31, December 31, December 31, (in thousands) 2021 $ % 2020 $ % 2019 Net cash provided by operating activities$ 28,621 (22,789) (44.3) %$ 51,410 29,267 132.2 %$ 22,143 Net cash used in investing activities$ (650) 9,646 (93.7) %$ (10,296) (10,002) 3,402.0 %$ (294) Net cash used in financing activities$ (961) 26,627 (96.5) %$ (27,588) (10,105)
57.8 %$ (17,483) Operating activities Net cash provided by operating activities primarily consists of net (loss) income, adjusted for certain (i) non-cash items including equity-based compensation expense, amortization of intangible assets, and deferred debt issuance costs, and (ii) changes in operating assets and liabilities (accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and deferred rent). Collection of accounts receivable depends upon the timing of our receipt of payments. We aim to align our separate payment obligations to supply partners and traffic acquisition sources for our proprietary websites with the timing of our receipt of separate payments from our demand partners. With respect to supply partners who are also demand partners, we maintain separate agreements for selling and buying and, in the majority of cases, such partners do not have a right of offset with respect to their buy-side payments, nor do we have a right of offset with respect to sell-side payments to such partners. The majority of our accounts receivables are less than 60 days old. If we were to experience a delay in receiving a payment from a buyer within a quarter, our operating cash flows for that quarter could be adversely impacted. Cash flows provided by operating activities were$28.6 million for the year endedDecember 31, 2021 , compared with$51.4 million for the year endedDecember 31, 2020 . The decrease was due primarily to the timing of our payables as we incurred higher expenses during the fourth quarter of 2020 driven primarily by growth in our business and expenses incurred in connection with the IPO, offset in part by a decrease in our receivables due to improved collection and lower revenue during the fourth quarter of 2021 compared with the same period in 2020.
Cash flows provided by operating activities were
ended
related to
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equity-based compensation expense and lower working capital usage driven
primarily by an increase in our accounts payable due to growth in our business
and expenses incurred in connection with the IPO, offset in part by higher
receivables.
Investing activities
Our investing activities consist primarily of purchases of property and
equipment, acquisitions of intangible assets and investments.
Cash flows used in investing activities were$0.7 million for the year endedDecember 31, 2021 , compared with$10.3 million for the year endedDecember 31, 2020 . The decrease was due primarily to a cost method investment made during the year endedDecember 31, 2020 that did not recur in 2021. Cash flows used in investing activities were$10.3 million for the year endedDecember 31, 2020 , compared with$0.3 million for the year endedDecember 31, 2019 . The increase was due to a cost method investment made during the year endedDecember 31, 2020 .
Financing activities
Our financing activities consist primarily of proceeds from and repayments on our term debt facilities and revolving line of credit, payments of debt issue costs, transactions related to our common stock, and, prior to the IPO, member contributions and distributions of QLH. Cash flows used in financing activities were$1.0 million for the year endedDecember 31, 2021 , compared with$27.6 million for the year endedDecember 31, 2020 . The decrease in net cash used was due primarily to higher distributions of$131.1 million to the members of QLH during the year endedDecember 31, 2020 , including dividend distributions made in connection with the refinancing of our 2019 Credit Facilities during the year endedDecember 31, 2020 and our 2020 Credit Facilities during the year endedDecember 31, 2021 . Cash flows used in financing activities were$27.6 million for the year endedDecember 31, 2020 , compared with$17.5 million for the year endedDecember 31, 2019 . The increase was due primarily to distributions to the members of QLH, repayment of term debt related to the extinguishment of our 2019 Credit Facilities and partial prepayment of our 2020 Credit Facilities, and payments to Legacy Profit Interest Holders and Senior Executives in exchange for Class B-1 units of QLH. The increase was offset in part by proceeds from the 2020 Credit Facilities and net proceeds from our issuance and sale of Class A common stock in connection with the IPO.
Senior secured credit facilities
2021 Credit Facilities.
OnJuly 29, 2021 , we entered into an amendment (the "First Amendment") to the 2020 Credit Agreement (as amended by the First Amendment, the "Amended Credit Agreement"). The Amended Credit Agreement provides for a new senior secured term loan facility in an aggregate principal amount of$190.0 million (the "2021 Term Loan Facility"), the proceeds of which were used to refinance all of the$186.4 million of the existing 2020 Term Loan Facility outstanding and the unpaid interest thereof as of the date of the First Amendment, to pay fees related to these transactions, and to provide cash for general corporate purposes, and a new senior secured revolving credit facility with commitments in an aggregate amount of$50.0 million (the "2021 Revolving Credit Facility and, together with the 2021 Term Loan Facility, the "2021 Credit Facilities"), which replaced the 2020 Revolving Credit Facility. Our obligations under the 2021 Credit Facilities are guaranteed by QLH and secured by substantially all assets ofQLH and QuoteLab, LLC . Borrowings under the Amended Credit Agreement bear interest at a rate equal to, at our option, the London Interbank Offered Rate plus an applicable margin, with a floor of 0.00%, or a base rate plus an applicable margin. The applicable margins will be based on our consolidated total net leverage ratio as calculated under the terms of the Amended Credit Agreement (the "Leverage Ratio") for the prior fiscal quarter and range from 2.00% to 2.75% with respect to theLondon Interbank Offered Rate and from 1.00% to 1.75% with respect to the base rate. Loans under the 2021 Credit Facilities will mature onJuly 29, 2026 . Loans under the 2021 Term Loan Facility will amortize quarterly, beginning with the first business day afterDecember 31, 2021 and ending withJune 30, 2026 , by an amount equal to 1.25% of the aggregate outstanding principal amount of the term loans initially made. 68
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As ofDecember 31, 2021 , we had$186.8 million of outstanding borrowings, net of deferred debt issuance costs of$3.2 million , under the 2021 Term Loan Facility and no borrowings under the 2021 Revolving Credit Facility. We expect to borrow under the 2021 Revolving Credit Facility in the quarter endingMarch 31, 2022 to pay a portion of the purchase price for our acquisition of CHT.
Contractual and Other Obligations
Our material cash requirements include the following contractual and other
obligations.
Tax Receivables Agreement
Our purchases (through Intermediate Holdco) of Class B-1 units from certain
unitholders in connection with the IPO, as well as exchanges of Class B-1 units
subsequent to the IPO (together with an equal number of shares of our Class B
common stock) for shares of our Class A common stock (or, at our election, cash
of an equivalent value) ("Exchange"), and the Pre-IPO Leveraged Distribution and
other actual or deemed distributions by QLH to its members pursuant to the
Exchange Agreement (See Part II, Item 8 "Financial Statements and
Supplementary Data - Note 1 to the Consolidated Financial Statements -
Organization and Background" of this Annual Report on Form 10-K) have resulted
and are expected to continue to result in increases in our allocable tax basis
in the assets of QLH. These increases in tax basis are expected to increase (for
tax purposes) depreciation and amortization deductions allocable to us and,
therefore, reduce the amount of tax that we otherwise would be required to pay
in the future. This increase in tax basis may also decrease gain (or increase
loss) on future dispositions of certain assets to the extent tax basis is
allocated to those assets.
In connection with the IPO, we entered into the Tax Receivables Agreement
("TRA") with Insignia, the Senior Executives, and White Mountains related to the
tax basis step-up of the assets of QLH and certain net operating losses of
Intermediate Holdco. The agreement requires us to pay Insignia and the Senior
Executives 85% of the cash savings, if any, in U.S. federal, state and local
income tax we realize (or are deemed to realize) as a result of (i) any
increases in tax basis of assets of QLH resulting from any Exchange, and (ii)
certain other tax benefits related to making our payments under the TRA. The TRA
also requires us to pay White Mountains 85% of the amount of the cash savings,
if any, in U.S. federal, state and local income tax that we realize (or are
deemed to realize) as a result of the utilization of the net operating losses of
Intermediate Holdco attributable to periods prior to the IPO and the deduction
of any imputed interest attributable to our payment obligations under the TRA.
In addition to tax expenses, we will also make payments under the TRA, which we
expect to be significant. We account for the income tax effects and
corresponding TRA effects resulting from any Exchange by recognizing an increase
in our deferred tax assets, based on enacted tax rates at the date of the
Exchange. Further, we evaluate the likelihood that we will realize the benefit
represented by the deferred tax asset and, to the extent that we estimate that
it is more likely than not that we will not realize the benefit, we will reduce
the carrying amount of the deferred tax asset with a valuation allowance. The
amounts to be recorded for both the deferred tax assets and the liability for
our obligations under the TRA are estimated at the time of any purchase or
exchange as a reduction to stockholders' equity, and the effects of changes in
any of our estimates after this date will be included in net income (loss).
Similarly, the effect of subsequent changes in the enacted tax rates will be
included in net income (loss). Judgement is required in assessing the future tax
consequences of events that have been recognized in our consolidated financial
statements. A change in our assessment of such consequences, such as realization
of deferred tax assets, changes in blended tax rates, changes in tax laws or
interpretations thereof could materially impact our results.
Recent accounting pronouncements
For a discussion of new accounting pronouncements recently adopted and not yet adopted, See Part II, Item 8 "Financial Statements and Supplementary Data - Note 2 to the Consolidated Financial Statements - Summary of significant accounting policies" of this Annual Report on Form 10-K.
Critical accounting estimates
We prepare our consolidated financial statements in accordance with GAAP, and in
doing so, we have to make estimates, assumptions and judgments affecting the
reported amounts of assets, liabilities, revenues and expenses, as well as the
related disclosure of contingent assets and liabilities. We base our estimates,
assumptions and judgments on historical experience and on various other factors
we believe to be reasonable under the circumstances. Different assumptions and
judgments would change the estimates used in the preparation of our condensed
consolidated financial statements, which, in
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turn, could change our results from those reported. We evaluate our critical
accounting estimates, assumptions and judgments on an ongoing basis.
An accounting policy is considered to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the effect of the estimates and assumptions on financial condition or operating performance. The accounting policies we believe to reflect our more significant estimates, judgments and assumptions that are most critical to understanding and evaluating our reported financial results are: business combination, goodwill and intangible assets, impairment of long-lived assets, equity-based compensation, income taxes, and liabilities related to the tax receivables agreement. Also, See Part II, Item 8 "Financial Statements and Supplementary Data - Note 2 to the Consolidated Financial Statements - Summary of significant accounting policies" of this Annual Report on Form 10-K.
Business combinations
We account for business combinations in accordance with ASC 805, which requires, among other things, the acquiring entity in a business combination to recognize the fair value of all the assets acquired and liabilities assumed; the recognition of acquisition-related costs in the consolidated results of operations; the recognition of restructuring costs in the consolidated results of operations for which the acquirer becomes obligated after the acquisition date; and contingent purchase consideration to be recognized at their fair values on the acquisition date with subsequent adjustments recognized in the consolidated results of operations. The excess of the purchase price over the fair value of the identified assets and liabilities is recorded as goodwill. Operating results of the acquired entity are reflected in our consolidated financial statements from date of acquisition. We perform valuations of assets acquired and liabilities assumed for an acquisition and allocate the purchase price to its respective net tangible and intangible assets. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenue, costs, and cash flows, discount rates and selection of comparable companies and comparable transactions. For material acquisitions, we engage the assistance of valuation specialists in concluding on fair value measurements of certain assets acquired or liabilities assumed in a business combination. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.
Impairment of
Goodwill is calculated as the excess of the purchase consideration paid in a business combination over the fair value of the assets acquired less liabilities assumed.Goodwill is not amortized, but rather is evaluated for impairment on an annual basis, or whenever indications of potential impairment exist. In the absence of any indications of potential impairment, the evaluation of goodwill is performed during the fourth quarter of each year. For the purposes of goodwill impairment testing, the Company has one reporting unit.Goodwill impairment is the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. When testing goodwill for impairment, we first perform a qualitative assessment to determine whether it is necessary to perform a goodwill impairment test. We are required to perform a goodwill impairment test only if we conclude that it is more likely than not that the reporting unit's fair value is less than the carrying value of its assets. Should this be the case, the next step is to identify whether a potential impairment exists by comparing the estimated fair value of the reporting unit with the carrying value, including goodwill. If the estimated fair value of the reporting unit exceeds the carrying value, goodwill is not considered to be impaired and no additional steps are necessary. If, however, the fair value of the reporting unit is less than its carrying value, then the amount of the impairment loss is the amount by which the reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
For the years ended
recognized for goodwill.
Impairment of long-lived assets
Long-lived assets such as property and equipment and intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset group may not be recoverable. Factors that
we consider in deciding when to perform an impairment review include significant
underperformance of our business in relation to expectations, significant
negative industry or economic trends and significant changes or planned changes
in the use of our assets. An impairment loss is recognized on long-lived assets
in the consolidated statement of operations when indicators of
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impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of the assets. In such cases, the carrying value of these assets are adjusted to their estimated fair values and assets held for sale are adjusted to their estimated fair values less selling expenses.
For the years ended
recognized for long-lived assets.
Equity-based compensation
Prior to the IPO, certain of our employees (including the Founders) were granted Class B units, directly or indirectly, in QLH for services in connection with our operations and were considered to fall within the scope of equity-based compensation. We use a contingent claims analysis framework that relies on a Black-Scholes option-pricing model to determine the fair value of the QLH Class B units. As of each valuation date of QLH Class B units, the contingent claims analysis framework relies on the fair value of the total equity of QLH; management's expected term to an exit event such as an event leading to a sale or an initial public offering of QLH; an estimate of equity volatility applicable to units of QLH commensurate to the term from the valuation to an exit date; a dividend yield and a risk-free rate as of each valuation date; and a calculated breakpoint that is akin to a strike price, above which the QLH Class B units contractually share in the proceeds to QLH upon an exit event. Fair value of total equity for QLH is established using both a market multiples approach and a discounted cash flow method; as well as a price established from certain equity transactions with third-party investors. Compensation expense of those awards is recognized, over the requisite service period, which is generally the vesting period of the respective award. Forfeitures are accounted for as they occur. Upon IPO because all of the QLH Class B profits interests were either (1) settled or (2) cancelled and replaced upon the IPO, there are no QLH Class B units outstanding as ofDecember 31, 2021 .
Income Taxes
We are subject to
our allocable share of any taxable income or loss of QLH, as well as any
stand-alone income or loss we generate. Significant judgment is required in
determining our provision or benefit for income taxes and in evaluating
uncertain tax positions.
We account for income taxes under the asset and liability method, which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events included in our consolidated financial statements.
Under this method, we determine deferred tax assets and liabilities on the basis
of the differences between the consolidated financial statements and tax bases
of assets and liabilities by using enacted tax rates in effect for the year in
which the differences are expected to reverse. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized on our consolidated
statement of operations in the period in which the enactment date occurs.
We record valuation allowances against our deferred tax assets when they are
more likely than not to be realized. In making such a determination, we consider
all available positive and negative evidence, including future reversals of
existing taxable temporary differences, projected future taxable income, tax
planning strategies and recent results of operations.
We recognize tax benefits from uncertain tax positions only if it is more likely
than not the tax position will be sustained on examination by the taxing
authorities based on the technical merits of the position. The tax benefits
recognized from such positions are measured based on the largest benefit having
a greater than 50% likelihood of being realized.
Liabilities related to the tax receivables agreement
As described in Part II, Item 8 "Financial Statements and Supplementary Data -
Note 1 to the Consolidated Financial Statements - Organization and Background"
of this Annual Report on Form 10-K, we are a party to the Tax Receivables
Agreement ("TRA"), under which we are contractually committed to pay the
non-controlling interest holders in QLH 85% of the amount of any tax benefits
that we actually realize, or in some cases are deemed to realize as a result of
certain transactions. Amounts payable under the TRA are contingent upon, among
other things, (i) the generation of future taxable income, to support
realization and (ii) the tax laws and rates, including state apportionment,
applicable at the time of each Exchange.
We recognize obligations under the TRA after concluding that it is probable that
we would have sufficient future taxable income to utilize the related tax
benefits. The projection of future taxable income involves judgment and actual
taxable income may differ from our estimates, which could impact the timing of
payments under the TRA. The TRA liability is calculated by (i) determining the
tax attributes subject to the TRA, (ii) applying a blended tax rate to the tax
attributes, and (iii) calculating the iterative impact. The blended tax rate
consists of the U.S. federal statutory corporate income tax rate and an assumed
combined state and local income tax rate driven by future estimated
apportionment factors and statutory corporate
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income tax rates applicable to each state. To the extent our estimate of future state apportionment changes and/or there are changes in tax law, this could significantly impact the amount required to be paid under the TRA. If we determine in the future that we will not be able to fully utilize all or part of the related tax benefits, we would reduce the portion of the liability related to the tax benefits not expected to be utilized and record the offsetting benefit on our consolidated statements of operations. A 100 basis point decrease/increase in the blended tax rate used would decrease/increase the TRA liability recorded atDecember 31, 2021 by approximately$3.6 million . We involve a third party specialist to calculate the liability under the TRA using a complex model. Additionally, we recognize the amount of TRA Payments expected to be paid within the next 12 months and classify this amount as current and included within accrued expense on our Consolidated Balance Sheets. This determination is based on our estimate of taxable income for the next fiscal year. The Company may elect to completely terminate the TRA early only with the written approval of each of a majority of its independent directors, although it has no plans to do so at this time. In such event, the Company would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the TRA.
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