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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 together leading insurance carriers and high-intent consumers through a real-time, programmatic, transparent, and results-driven ecosystem. We believe we are the largest online customer acquisition platform in our core verticals of P&C insurance, health insurance, and life insurance, supporting$696 million in Transaction Value across our platform from these verticals in the year endedDecember 31, 2022 . 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 expected LTV consumers, or an insurance-focused research destination or other financial website looking to monetize high-intent users on their websites. During the year endedDecember 31, 2022 , an average of 26.0 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 7.5 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 generally 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
drivers of our revenue and will continue to provide strong tailwinds for our
business over the long term. Customer acquisition spending by insurance carriers
is growing over time, and as more consumers shop for insurance online,
direct-to-consumer marketing, which fuels our revenue, has become the fastest
growing insurance distribution channel. As mass-market customer acquisition
becomes 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
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these secular trends 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 declined to$737.5 million for the year endedDecember 31, 2022 from$1.0 billion for the year endedDecember 31, 2021 , due primarily to a decrease in customer acquisition spending by P&C insurance carriers in response to significant reductions in their underwriting profitability. We have developed multi-faceted, deeply integrated partnerships with insurance carriers and distributors, who may be 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, leading many of them to use our platform as their central hub for broadly managing digital customer acquisition and monetization, resulting in strong retention rates. For the year endedDecember 31, 2022 , 92% of total Transaction Value executed on our platform came from demand partner relationships in existence during 2021.
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, excluding our buyer partners within our agent business, increased to over 1,230 for the year endedDecember 31, 2022 from over 1,200 for the year endedDecember 31, 2021 , driven by increased engagement in our Health vertical. 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 most of the top-tier insurance carriers in the industry. In terms of buyers, during the year endedDecember 31, 2022 , 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 declined to 90.4 million for the year endedDecember 31, 2022 from 98.3 million for the year endedDecember 31, 2021 . We obtain these Consumer Referrals from our diverse network of supply partners as well as from our proprietary properties. 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 has 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 P&C 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 profitable and are focused on increasing capacity and building market share, and "hard" market conditions, when carriers are experiencing lower or even negative underwriting profits and are seeking to increase their premium rates to improve their 50
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profitability. 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 insurance industry is currently in a "hard" market due to underwriting losses driven by higher than expected claims cost inflation, and that many P&C insurance carriers are reducing their customer acquisition spending until they can obtain regulatory approval to 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 has been amended by the California Privacy Rights Act ("CPRA"), which became effectiveJanuary 1, 2023 , and a number of other states, includingColorado ,Connecticut ,Utah , 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. In addition, we are licensed as a health insurance broker in all 50 states and theDistrict of Columbia , making us subject to certain insurance laws and regulations. Our Medicare business is also subject to Federal rules governing the marketing of such policies. For a description of laws and regulations to which we are generally subject, see Item 1 "Business" and
Item 1A "Risk Factors."
In addition, we are impacted by the regulation of the insurance carriers with whom we do business. In most states, insurance carriers are required to obtain approval of their premium rates from the regulatory authority in such states. The timing of such approval process, as well as the willingness of insurance regulators to approve rate increases, can impact the profitability of new policies and the level of customer acquisition spending by carriers in a given period, which in turn can cause fluctuations in our revenue and earnings.
Risk and uncertainties
Since the first quarter of 2020, our operating results have been materially impacted by the COVID-19 pandemic. Although the COVID-19 pandemic has changed the physical working environment of the substantial majority of our workforce to working primarily from home, it has otherwise caused only minor disruptions to our business operations. However, supply chain disruptions and cost increases caused by the COVID-19 pandemic, global inflationary pressures, and geopolitical conditions have contributed to higher-than-expected P&C insurance claims costs, which has led many carriers to continue to reduce their customer acquisition spending until they can obtain regulatory approval to increase their premium rates. These reductions have significantly impacted, and continue to impact, revenue from our P&C insurance vertical, the duration and extent of which are difficult to estimate beyond the first quarter of 2023. In addition, the COVID-19 pandemic has caused reductions in consumer spending on airfare, hotels, rentals and other travel products, which resulted in a dramatic decline in revenue from our Travel vertical, which we expect to continue for the foreseeable future. For the years endedDecember 31, 2022 , 2021, and 2020, revenue from the Travel vertical comprised approximately 3.3%, 2.0%, and 2.1%, respectively, of our total revenue, compared with approximately 11.1% of our total revenue for the year endedDecember 31, 2019 . 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.
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,
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(iii) the source of Consumer Referrals and quality of conversion by source,
(iv) buyer bid levels and (v) buyer demand and budgets.
In ourOpen Marketplace transactions, we have control over the Consumer Referrals that are sold to our demand partners. In these arrangements, we have separate agreements with suppliers and demand partners. Suppliers are not a party to the contractual arrangements with our demand partners, nor are the suppliers the beneficiaries of our demand partner agreements. We generate revenue from the sale of consumer referrals from our demand partners and separately pay (i) a revenue share to suppliers or (ii) a fee to internet search companies to drive consumers to our proprietary websites. We are the principal inOpen Marketplace transactions. As a result, the fees paid by demand partners for Consumer Referrals 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 the supplier a platform fee on the Consumer Referrals transacted. We act as an agent inPrivate Marketplace transactions and recognize revenue for the platform fee received, which is a negotiated percentage of the Transaction Value of such transactions. There are no 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 search engines and social media platforms, as well as telephony infrastructure costs, internet and hosting costs, and merchant fees, and includes salaries, wages, non-cash equity-based compensation, the cost of health and other employee benefits, and other expenses including allocated portion of rent and facilities 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 and marketing, and include salaries, wages, non-cash equity-based compensation, and the cost of health and other employee benefits. 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, non-cash equity-based compensation, and
the cost of health and other employee benefits. Product development expenses
also include an allocated portion of rent and facilities expenses and
depreciation and amortization expense.
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General and administrative
General and administrative expenses consist primarily of an allocation of personnel expenses for executive, finance, legal, people operations, and business analytics employees, and include salaries, wages, non-cash equity-based compensation, and the cost of health and other employee benefits. General and administrative expenses also include professional services, an allocated portion of rent and facilities expenses and depreciation and amortization expense, and any change in fair value of contingent consideration.
Other (income) expense, net
Other (income) expense, net consists 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 (income) expense, net for the year endedDecember 31, 2022 consisted primarily of a gain on reduction of liability pursuant to the Tax Receivables Agreement ("TRA") and an impairment charge related to our cost method investment.
Interest expense
Interest expense consists primarily of interest expense associated with outstanding borrowings under our 2021 Credit Facilities and the amortization of deferred financing costs associated with these arrangements. See "-Liquidity and capital resources-Financing activities" below.
Income tax expense (benefit)
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. , pro-rata to their ownership interest in QLH. Accordingly, as our ownership interest in QLH increases, our share of the taxable income (loss) of QLH also increases. As ofDecember 31, 2022 , our ownership interest in QLH was 69.8%. 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 .
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 a share of the pre-tax income (loss) of the QLH incurred subsequent to the Reorganization Transactions to the non-controlling interest holders pro-rata to their ownership interest in QLH. The non-controlling interests balance represents the Class B-1 units, substantially all of which are held by Insignia and the Senior Executives. Net loss attributable to non-controlling interests was$14.8 million ,$3.2 million , and$4.2 million for the years endedDecember 31, 2022 , 2021, and 2020, respectively. 53
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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 ended
Year Ended December 31,
2022 2021
(in thousands)
Revenue $ 459,072 100.0 % $ 645,274 100.0 %
Costs and operating expenses
Cost of revenue 389,013 84.7 % 543,750 84.3 %
Sales and marketing 28,816 6.3 % 22,823 3.5 %
Product development 21,077 4.6 % 15,195 2.4 %
General and administrative 55,556 12.1 % 61,357 9.5 %
Total costs and operating expenses 494,462 107.7 % 643,125 99.7 %
(Loss) income from operations (35,390) (7.7) % 2,149 0.3 %
Other (income) expense, net (75,094) (16.4) % 3,841 0.6 %
Interest expense 9,245 2.0 % 7,830 1.2 %
Total other (income) expense, net (65,849) (14.3) % 11,671 1.8 %
(Loss) before income taxes 30,459 6.6 % (9,522) (1.5) %
Income tax expense (benefit) 102,905 22.4 % (1,047) (0.2) %
Net (loss) $ (72,446) (15.8) % $ (8,475) (1.3) %
Net (loss) attributable to non-controlling
interest (14,780) (3.2) % (3,200) (0.5) %
Net (loss) attributable to
(12.6) %$ (5,275) (0.8) % Net (loss) per share of Class A common stock -Basic$ (1.37) $ (0.14) -Diluted$ (1.37) $ (0.19) Weighted average shares of Class A common stock outstanding -Basic 41,944,874 37,280,533 -Diluted 41,944,874 61,255,925 Revenue The following table presents our revenue, disaggregated by vertical, for the years endedDecember 31, 2022 and 2021, and the dollar and percentage changes between the periods: Year ended Year ended December 31, December 31, (in thousands) 2022 $ % 2021 Property & casualty insurance$ 224,366 (193,349) (46.3) %$ 417,715 Percentage of revenue 48.9 % 64.7 % Health insurance 187,392 10,933 6.2 % 176,459 Percentage of revenue 40.8 % 27.3 % Life insurance 26,711 (1,875) (6.6) % 28,586 Percentage of revenue 5.8 % 4.4 % Other 20,603 (1,911) (8.5) % 22,514 Percentage of revenue 4.5 % 3.5 % Revenue$ 459,072 (186,202) (28.9) %$ 645,274 54
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The decrease in P&C insurance revenue for the year endedDecember 31, 2022 , compared with the year endedDecember 31, 2021 , was due primarily to a decrease in customer acquisition spending by P&C carriers in response to lower than expected underwriting profitability. In addition, certain carriers and supply partners shifted their transactions with each other from ourOpen Marketplace to ourPrivate Marketplace , resulting in lower revenue due to lower platform fees for ourPrivate Marketplace , which are recognized on a net revenue basis. The auto insurance industry began to experience a cyclical downturn in the second half of 2021, with many P&C insurance carriers experiencing lower than expected underwriting profitability due to higher than expected inflation in automobile claims costs, leading them to reduce their customer acquisition spending on our platform until they can obtain regulatory approval to increase their premium rates. Though we continue to expect P&C insurance revenue to increase over the course of 2023 as more carriers reach rate adequacy and resume competing for market share, we are currently unable to accurately predict the duration of this cyclical downturn or its impact on our revenue from the P&C insurance vertical, or our profitability, beyond the first quarter of 2023. The increase in health insurance revenue for the year endedDecember 31, 2022 , compared with the year endedDecember 31, 2021 , was driven by increased customer acquisition spending by our Medicare insurance carrier partners, which led our supply partners to drive more consumers through their websites, and which also drove increased supply from our proprietary properties as we increased the volume of media spend to satisfy the increased demand. We also generated additional revenue of$7.3 million from this vertical as a result of our acquisition ofCustomer Helper Team, LLC ("CHT") during the year endedDecember 31, 2022 . The decrease in life insurance revenue for the year endedDecember 31, 2022 , compared with the year endedDecember 31, 2021 , was driven by a continued reduction in consumers shopping for life insurance as concerns related to the COVID-19 pandemic eased. The decrease in other revenue for the year endedDecember 31, 2022 , compared with the year endedDecember 31, 2021 , was driven primarily by lower revenue from our consumer finance vertical due to a reduction in mortgage and refinancing activity caused by rising interest rates. In addition, we fully exited the education vertical during the third quarter of 2022. Revenue from the education vertical has not been material to our operations.
Cost of revenue
The following table presents our cost of revenue for the years endedDecember 31, 2022 and 2021 and the dollar and percentage changes between the periods: Year ended Year ended December 31, December 31, (in thousands) 2022 $ % 2021 Cost of revenue$ 389,013 (154,737) (28.5) %$ 543,750 Percentage of revenue 84.7 % 84.3 % The decrease in cost of revenue for the year endedDecember 31, 2022 , compared with the year endedDecember 31, 2021 , was driven primarily by the decrease in revenue and corresponding decreases in revenue share payments to suppliers and media costs as supply partners decreased volumes during the year endedDecember 31, 2022 , offset in part by increased personnel-related costs as well as increased equity-based compensation expense in connection with our acquisition of CHT.
As we experience changes in revenue, we expect the relationship between our
costs and revenue to remain generally in line with our historical results.
Sales and marketing
The following table presents our sales and marketing expenses for the years endedDecember 31, 2022 and 2021 and the dollar and percentage changes between the periods: Year ended Year ended December (in thousands) December 31, 2022 $ % 31, 2021 Sales and marketing$ 28,816 5,993 26.3%$ 22,823 Percentage of revenue 6.3 % 3.5 % The increase in sales and marketing expenses for the year endedDecember 31, 2022 , compared with the year endedDecember 31, 2021 , was driven primarily by an increase in equity-based compensation expense of$2.7 million , an increase in 55
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amortization expense of$2.3 million related to intangible assets arising from our acquisition of CHT, and an increase in other personnel-related costs of$1.1 million related to the employees added in connection with our acquisition of CHT. Product development The following table presents our product development expenses for the years endedDecember 31, 2022 and 2021, and the dollar and percentage changes between the periods: Year ended Year ended December (in thousands) December 31, 2022 $ % 31, 2021 Product development$ 21,077 5,882 38.7%$ 15,195 Percentage of revenue 4.6 % 2.4 % The increase in product development expenses for the year endedDecember 31, 2022 , compared with the year endedDecember 31, 2021 , was driven primarily by an increase in equity-based compensation expense of$3.1 million and an increase in other personnel-related costs of$2.4 million , as we continued to hire engineering and product development talent to further enhance our technology.
General and administrative
The following table presents our general and administrative expenses for the years endedDecember 31, 2022 and 2021, and the dollar and percentage changes between the periods: Year ended Year ended December (in thousands) December 31, 2022 $ % 31, 2021 General and administrative$ 55,556 (5,801) (9.5) %$ 61,357 Percentage of revenue 12.1 % 9.5 % The decrease in general and administrative expenses for the year endedDecember 31, 2022 , compared with the year endedDecember 31, 2021 , was driven primarily by a gain of$7.0 million recorded on remeasurement of the contingent consideration related to CHT as the fair value declined due to lower projected revenue and gross profit targets for CHT, lower legal, professional, and recruiting related fees of$3.7 million driven by higher costs incurred in the year endedDecember 31, 2021 related primarily to the Secondary Offering and other registration statements, SOX implementation costs, and accounting fees, and lower directors and officers insurance premiums of$1.1 million . These reductions in expenses were offset in part by a higher equity-based compensation expense of$5.0 million and by an increase in personnel-related costs of$0.7 million resulting from increased headcount to support our business.
Equity-based compensation
The following table presents our equity-based compensation expense that was
included in costs and operating expenses for the years ended
and 2021 and the dollar and percentage changes between the periods:
Year ended Year ended
December 31, December 31,
(in thousands) 2022 $ % 2021
Cost of revenue $ 3,634 1,969 118.3% $ 1,665
Sales and marketing 10,445 2,721 35.2% 7,724
Product development 9,536 3,096 48.1% 6,440
General and
administrative 34,857 4,973 16.6% 29,884
Total $ 58,472 12,759 27.9% $ 45,713
The increase in equity-based compensation expense for the year ended
December 31, 2022 , compared with the year ended December 31, 2021 , was driven
primarily by expenses related to additional restricted stock units granted to
employees as
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part of the annual incentive process and restricted stock units granted to the
employees added in connection with our acquisition of CHT.
Amortization
The following table presents our amortization of intangible asset expense that was included in costs and operating expenses for the years endedDecember 31, 2022 and 2021, and the dollar and percentage changes between the periods: Year ended Year ended December 31, December 31, (in thousands) 2022 $ % 2021 Sales and marketing$ 5,296 2,312 77.5%$ 2,984 General and administrative 459 459 100.0% - Total$ 5,755 2,771 92.9%$ 2,984
The increase in amortization expense for the year ended
compared with the year ended
arising from our acquisition of CHT.
Other (income) expense, net
The following table presents our other expenses for the years ended
2022
Year ended
December 31, Year ended December
(in thousands) 2022 $ % 31, 2021
Other (income) expense, net $ (75,094) (78,935) n/m $ 3,841
Percentage of revenue (16.4) % 0.6 %
For the year ended December 31, 2022 , other (income), net consisted primarily of
a gain on reduction of our liability pursuant to the TRA of $83.3 million
resulting from remeasuring of the non-current portion of liability to zero as of
December 31, 2022 after we concluded that payments under the agreement are no
longer probable, offset in part by charges related to the impairment of our cost
method investment of $8.6 million . For the year ended December 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 an additional accrual of $2.1 million reimbursable to White
Mountains for settlement of federal and state tax returns for the period prior
to the Reorganization Transaction related to 2020 federal and state tax returns
filed during the three months ended December 31, 2021 , both of which have an
offsetting benefit recorded within income tax expense (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").
Interest expense
The following table presents our interest expense for the years endedDecember 31, 2022 and 2021, and the dollar and percentage changes between the periods: Year ended Year ended December (in thousands) December 31, 2022 $ % 31, 2021 Interest expense, net$ 9,245 1,415 18.1 %$ 7,830 Percentage of revenue 2.0 % 1.2 % The increase in interest expense for the year endedDecember 31, 2022 , compared with the year endedDecember 31, 2021 , was driven primarily by the interest on amounts drawn on our 2021 Revolving Credit Facility inApril 2022 to fund a portion of the consideration for our acquisition of CHT and higher interest rates on our 2021 Term Loan Facility, offset in part by the impact of a lower average outstanding balance on the 2021 Term Loan Facility. 57
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Income tax expense (benefit)
The following table presents our income tax expense (benefit) for the years endedDecember 31, 2022 and 2021, and the dollar and percentage changes between the periods: Year ended December 31, Year ended December (in thousands) 2022 $ % 31, 2021 Income tax expense (benefit)$ 102,905
103,952 n/m$ (1,047) Percentage of revenue 22.4 % (0.2) % For the year endedDecember 31, 2022 , we recorded income tax expense of$102.9 million resulting from our effective tax rate of 337.8%, which differed from theU.S. federal statutory rate of 21%, due primarily to changes in valuation allowance, tax impacts associated with equity based awards, and tax impacts of losses attributable to non-controlling interests. Such expense was due primarily to a valuation allowance of$84.5 million that we recorded on our deferred tax assets during the year endedDecember 31, 2022 , as based on our recent history of pre-tax losses we determined that the negative evidence outweighs the positive evidence and so it is more likely than not that our deferred tax assets will not be utilized.
n/m - Not meaningful
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 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.
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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, 2022 , 2021 and 2020. Year Ended December 31, (in thousands) 2022 2021 2020 Net (loss) income$ (72,446) $ (8,475) $ 10,562 Equity-based compensation expense 58,472 45,713 25,536 Interest expense 9,245 7,830 7,938 Income tax expense (benefit) 102,905 (1,047) (1,267) Depreciation expense on property and equipment 392 369 289 Amortization of intangible assets 5,755 2,984 3,201 Transaction expenses(1) 636 4,128 11,511 Employee-related costs(2) - 674 - SOX implementation costs(3) 110 1,168 - Fair value adjustment to contingent consideration(4) (7,007) - - Impairment of cost method investment 8,594 - - Settlement costs(5) - 859 - Changes in TRA related liability(6) (83,832) 911 - Changes in Tax Indemnification Receivable(7) (58) 1,360 304 Non-cash compensation(8) - 880 - Employee retention credits(9) - (1,303) - Settlement of federal and state income tax refunds(10) 92 2,116 - Adjusted EBITDA$ 22,858 $ 58,167 $ 58,074 (1)Transaction expenses for the year endedDecember 31, 2022 consist of$0.6 million of legal, accounting and other consulting fees incurred by us in connection with our acquisition of CHT. For the year endedDecember 31, 2021 , transaction expenses consist of$4.1 million of expenses incurred 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 bonuses related to the Reorganization Transactions and IPO, and$2.0 million in loss on extinguishment of debt related to the termination of 2019 Credit Facilities.
(2)Employee-related costs for the year ended
million
connection with the hiring of certain executive officers to support our
operation as a publicly-reporting company.
(3)SOX implementation costs consist of$0.1 million and$1.2 million of expenses incurred by us for the years endedDecember 31, 2022 and 2021, respectively, 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)Fair value adjustment to contingent consideration for the year endedDecember 31, 2022 consists of$7.0 million of gain in connection with the remeasurement of the contingent consideration for the acquisition of CHT as ofDecember 31, 2022 .
(5)Settlement costs for the year ended
of expenses incurred by us to settle certain claims made by the
General's Office of the State of Washington
(6)Changes in TRA related liability for the year endedDecember 31, 2022 consist of$83.3 million of gain on reduction of liability pursuant to the TRA resulting from remeasuring of the non-current portion of liability to zero as we no longer consider the payments under the agreement to be probable. Changes in TRA related liability for the year endedDecember 31, 2021 consist of$0.9 million of expense due to a change in the estimated future state tax benefits, and other changes in the estimate, resulting in changes to the TRA liability created in connection with the Reorganization Transactions. (7)Changes in Tax Indemnification Receivable consists of$0.1 million of income,$1.4 million of expense, and$0.3 million of expense incurred by us for the years endedDecember 31, 2022 , 2021, and 2020, respectively, related to changes in the tax indemnification receivable recorded in connection with the Reorganization Transactions. The change also resulted in an expense/benefit of the same amount which has been recorded within income tax expense (benefit) for the same periods.
(8)Non-cash compensation for the year ended
million
executive officers that were paid in the form of grants of restricted stock
units, rather than in cash.
(9)Employee retention credits for the year endedDecember 31, 2021 consist of$1.3 million of benefit as a result of our receipt of employee retention credits under the provisions of the CARES Act. (10)Settlement of federal and state tax refunds consist of$0.1 million and$2.1 million of expenses incurred by us for the years endedDecember 31, 2022 and 2021, respectively, 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). 59
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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 costs; 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 the years endedDecember 31, 2022 , 2021 and 2020. Year Ended December 31, (in thousands) 2022 2021 2020 Revenue$ 459,072 $ 645,274 $ 584,814 Less cost of revenue (389,013) (543,750) (499,434) Gross profit$ 70,059 $ 101,524 $ 85,380 Adjusted to exclude the following (as related to cost of revenue): Equity-based compensation 3,634 1,665 2,809 Salaries, wages, and related 3,556 2,004 2,188 Internet and hosting 496 419 438 Amortization - - - Depreciation 41 29 24 Other expenses 720 451 284 Other services 2,171 1,213 902 Merchant-related fees 109 309 585 Contribution$ 80,786 $ 107,614 $ 92,610 Gross Margin 15.3 % 15.7 % 14.6 % Contribution Margin 17.6 % 16.7 % 15.8 % 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. 60
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The following table presents Transaction Value by platform model for the years
ended
Year Ended December
31,
(in thousands) 2022 2021
2020
Open Marketplace transactions$ 445,950 $ 627,705 $ 573,242 Percentage of total Transaction Value 60.5 % 61.6 % 70.3 % Private Marketplace transactions$ 291,564 391,265
242,470
Percentage of total Transaction Value 39.5 % 38.4 % 29.7 % Total Transaction Value$ 737,514 $ 1,018,970 $ 815,712
The following table presents Transaction Value by vertical for the years ended
Year Ended December 31,
2022 2021 2020
(in thousands)
Property & Casualty insurance $ 399,861 $ 655,591 $ 549,916
Percentage of total Transaction Value 54.2 % 64.3 % 67.4 %
Health insurance 251,400 245,221
175,539
Percentage of total Transaction Value 34.1 % 24.1 % 21.5 % Life insurance 44,619 52,302
42,206
Percentage of total Transaction Value 6.0 % 5.1 % 5.2 % Other 41,634 65,856
48,051
Percentage of total Transaction Value 5.6 % 6.5 % 5.9 % Total Transaction Value$ 737,514 $ 1,018,970 $ 815,712 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. The following table presents the percentages of total Transaction Value generated from clicks, calls and leads for the years endedDecember 31, 2022 and 2021: Year Ended December 31, 2022 2021 Clicks 75.3 % 79.3 % Calls 15.3 % 9.5 % Leads 9.4 % 11.3 % 61
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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. Our acquisition of CHT did not create any additional segments as our chief executive officer continues to review financial information and allocate resources on a consolidated basis. Since we operate in one operating segment and reportable segment, all required financial segment information can be found in the consolidated financial statements.
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 principal sources of liquidity are our cash flow generated from operations and cash and funds available under the 2021 Revolving Credit Facility. Our principal uses of cash include funding of our operations, interest payments, and mandatory principal payments on our long-term debt. As ofDecember 31, 2022 andDecember 31, 2021 , our cash and cash equivalents totaled$14.5 million and$50.6 million , respectively. As ofDecember 31, 2022 , the aggregate principal amount outstanding under the 2021 Term Loan Facility was$180.5 million and our borrowing capacity under the 2021 Revolving Credit Facility was$45.0 million . We believe that our current sources of liquidity will be sufficient to meet our projected operating and debt service requirements, and to continue to comply with our financial covenants under the 2021 Credit Facilities, for at least the next 12 months. To the extent that our current liquidity is insufficient to fund future activities or we do not remain in compliance with our financial covenants under the 2021 Credit Facilities, we may need to reduce operating costs, negotiate amendments to or waivers of the terms of such credit facilities, refinance our debt, or raise additional capital. Our business is seasonal and cyclical in nature and these trends, if continued for a long period of time, could impact the cash flows generated from operations, requiring us to draw on our available borrowing capacity under the 2021 Revolving Credit Facility or raise additional funds in the short term. During the second half of 2021, the auto insurance industry began to experience a cyclical downturn, as supply chain disruptions and cost increases caused by the pandemic and overall inflationary pressures contributed to higher-than-expected P&C insurance claims costs, which led many carriers to reduce their customer acquisition spending to preserve their profitability. These reductions continue to impact revenue from our P&C insurance vertical and we are currently unable to estimate their impact beyond the first quarter of 2023. We have historically not used funds available under our credit facilities to fund our operations and payments under the credit facilities. OnApril 1, 2022 , we closed the acquisition of substantially all of the assets ofCustomer Helper Team, LLC ("CHT") for cash consideration of$49.7 million at closing, plus contingent consideration of up to$20.0 million based on CHT's achievement of revenue and profitability targets for the two successive 12-month periods following the closing. We funded the transaction in part by drawing$25.0 million under the 2021 Revolving Credit Facility and the balance from cash on hand as of the closing. We expect to be able to pay the contingent consideration, if any, from our cash balances. During the year endedDecember 31, 2022 , we repaid$20.0 million under the 2021 Revolving Credit Facility. OnMarch 14, 2022 , our Board of Directors approved the repurchase of shares of our Class A common stock having an aggregate value of up to$5.0 million from time to time in open market transactions at prevailing market prices or by other means in accordance with federal securities laws. The Company completed the repurchase program during the year endedDecember 31, 2022 . The repurchases were financed from our cash balances. During the year endedDecember 31, 2022 , we repurchased 455,297 shares of Class A common stock for aggregate consideration of$5.0 million . We may in the future engage in additional merger and acquisition or other activities, including share repurchases, that could require us to draw on our existing credit facilities or 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 62
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material cash requirements include our long-term debt, operating lease
obligations, any payments under the TRA, and any contingent consideration
payable in connection with our acquisition of CHT.
Cash flows
The following table presents a summary of our cash flows for the years endedDecember 31, 2022 and 2021, and the dollar and percentage changes between the periods: Year ended Year ended December 31, December 31, (in thousands) 2022 $ % 2021 Net cash provided by operating activities$ 28,274 (347) (1.2) %$ 28,621 Net cash used in investing activities$ (49,775) (49,125) 7,557.7 %$ (650) Net cash used in financing activities$ (14,521) (13,560) 1,411.0 %$ (961) Operating activities
Net cash provided by operating activities primarily consists of net loss,
adjusted for certain (i) non-cash items including equity-based compensation
expense, changes in deferred taxes, 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
ended
primarily to the timing of our accounts payables and higher working capital
usage in 2021 driven primarily by growth in our business and non-recurring
transactions, offset in part by the higher net loss during the year ended
Investing activities
Our investing activities consist primarily of purchases of property and
equipment, acquisitions of intangible assets as part of business acquisitions,
and investments.
Cash flows used in investing activities were$49.8 million for the year endedDecember 31, 2022 , compared with$0.7 million for the year endedDecember 31, 2021 . The increase resulted primarily from the payment of cash consideration of$49.7 million for our acquisition of CHT, which closed onApril 1, 2022 .
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$14.5 million for the year endedDecember 31, 2022 , compared with$1.0 million for the year endedDecember 31, 2021 . The increase was due to principal payments on the 2021 Term Loan Facility of$9.5 million and payments made under the share repurchase program of$5.0 million , offset in part by the net amounts drawn on the 2021 Revolving Credit Facility of$5.0 million to fund a portion of the consideration for the CHT acquisition. 63
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Senior secured credit facilities
2021 Credit Facilities
OnJuly 29, 2021 ,QuoteLab, LLC 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 outstanding under the existing 2020 Term Loan Facility and the unpaid interest thereon 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 2021 Credit Facilities 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. The 2021 Credit Facilities allows for the LIBOR to be phased out and replaced with other interbank offered rates to alternative reference rates such as Secured Overnight Funding Rate ("SOFR"). We expect to amend the Amended Credit Agreement to replace the existing LIBOR with an alternative reference rate prior to the expected phase out of LIBOR inJune 2023 . Loans under the 2021 Credit Facilities will mature onJuly 29, 2026 . Loans under the 2021 Term Loan Facility 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. The 2021 Revolving Credit Facility does not require amortization of principal and will mature onJuly 29, 2026 . As ofDecember 31, 2022 , we had$178.1 million of outstanding borrowings, net of deferred debt issuance costs of$2.4 million and$5.0 million under the 2021 Term Loan Facility and 2021 Revolving Credit Facility, respectively.
Contractual and Other Obligations
Our material cash requirements include the principal and interest payments under the 2021 Credit Facilities and payments under the Tax Receivables Agreement, which are discussed in more detail below.
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 or any assignees 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.
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In addition to tax expenses, we may also make payments under the TRA, which could 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. 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). Judgment 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 our assessment of probability of making payments under the TRA, changes in blended tax rates, changes in tax laws or interpretations thereof could materially impact our results. As ofDecember 31, 2022 , in conjunction with recording a valuation allowance on our deferred tax assets and projections of future taxable income, we determined that we no longer consider the payments under the agreement to be probable, and so remeasured our liabilities pursuant to the TRA, net of current portion, to be zero. As ofDecember 31, 2022 , we recorded$2.8 million as current portion of payments related to the 2021 tax year due under the TRA within accrued expenses on the consolidated balance sheets.
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 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 acquisitions in accordance with ASC Topic 805 - Business
Combinations, which requires us, among other things, to recognize the fair value
of all the assets acquired and liabilities assumed; the recognition of
acquisition-related costs in the consolidated statements of operations; and
contingent purchase consideration to be recognized at their fair values on the
acquisition date with subsequent adjustments recognized in the consolidated
statements 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 the date of acquisition.
We perform valuations of assets acquired and liabilities assumed in an
acquisition and allocate the purchase price to the respective net tangible and
intangible assets of the acquired business. 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. Our estimates of fair value
are based on assumptions believed to be reasonable, but which are inherently
uncertain and unpredictable and, as a result, actual results may differ from
estimates. For material acquisitions, we engage the assistance of valuation
specialists in concluding on fair value measurements of certain assets acquired
or liabilities
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assumed in a business combination. During the measurement period, which does not
exceed one year from the acquisition date, we may record adjustments to the
assets acquired and liabilities assumed, with the corresponding offset to
goodwill. At the conclusion of the measurement period, any subsequent
adjustments are reflected in the consolidated statements of operations.
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 may first perform a qualitative assessment to determine whether it is necessary to perform a goodwill impairment test or bypass the qualitative assessment in any period and proceed directly to the goodwill impairment test. If we perform a qualitative assessment, 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 or if we decide to proceed directly to the goodwill impairment, we 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 finite lived 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 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 profits interest units, directly or indirectly, in QLH ("QLH Class B
units") for services in connection with our operations, which were considered to
fall within the scope of equity-based compensation.
We used 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 for 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.
Because all of the QLH Class B units were either (1) settled or (2) canceled and
replaced upon the IPO, there were no QLH Class B units outstanding as of
December 31, 2022 and 2021.
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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 we determine that they are more likely than not to be realized. Evaluating the need for and the amount of a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence. In making such a determination, we consider all available positive and negative evidence and the weight of that evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified. 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 if it is probable that
we would have sufficient future taxable income in aggregate over the term of the
TRA to utilize the related tax benefits. The projection of future taxable income
is inherently uncertain and involves judgment. In projecting taxable income, the
Company considers certain assumptions, including revenue growth and operating
margins among others. Actual taxable income may differ from our estimates, which
could impact the timing or obligation to make 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 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 are not be able to fully utilize all or part of the related tax
benefits, we 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. 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.
67
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