MEDIAALPHA, INC. – 10-Q – Management's discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of
operations should be read together with our unaudited consolidated financial
statements and related notes included in Part I, Item 1 of this Quarterly Report
on Form 10-Q.
This discussion, particularly information with respect to our future results of
operations or financial condition, business strategy and plans, and objectives
of management for future operations, includes forward-looking statements that
involve risks and uncertainties as described under the heading "Cautionary
Statement Regarding Forward-Looking Statements" in this Quarterly Report on Form
10-Q. You should review the disclosure under the heading "Risk Factors" in Part
II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of important
factors that could cause our actual results to differ materially from those
anticipated in 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 over $1.6 billion in
Transaction Value across our platform over the last two years.
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 websites looking to
monetize high-intent users on their websites. For the twelve-month period ended
September 30, 2021, an average of 33.7 million consumers each month shopped for
insurance products through the websites of our diversified group of supply
partners and our proprietary websites, driving an average of over 8.0 million
Consumer Referrals per month on our platform.
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 Part I, Item 1A "Risk Factors" in the 2020 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. 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 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.
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Transaction Value
Transaction Value from Open marketplace transactions is a direct driver of our
revenue, while Transaction Value from Private marketplace transactions is an
indirect driver of our revenue (see "Key business and operating metrics" below).
Transaction Value on our platform grew to $255.1 million and $774.1 million for
the three and nine months ended September 30, 2021, respectively, from $217.6
million and $558.8 million for the three and nine months ended September 30,
2020, respectively. 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 three and nine months ended September 30, 2021, 96.6% and
98.3% of total Transaction Value executed on our platform, respectively, came
from demand partner relationships in place during 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 1,279 during the three months ended
September 30, 2021 from 935 during the three months ended September 30, 2020,
driven by increased engagement in our P&C and Health verticals, offset in part
by decreased engagement in our Travel vertical as advertising spend in this
vertical decreased sharply during the three months ended March 31, 2021,
compared with the prior year period, due to reduced travel resulting from the
COVID-19 pandemic. 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, 15 of the top
20 largest auto insurance carriers by customer acquisition spend are 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 25.3 million and 72.7
million for the three and nine months ended September 30, 2021, respectively,
from 19.9 million and 56.6 million for the three and nine months ended September
30, 2020, respectively. 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 ending March 31 and September
30 due to a greater supply of Consumer Referrals and higher customer acquisition
budgets during those quarters, and to seasonal weakness in our quarters ending
December 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 ending March 31 and December 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.
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Cyclicality
Our results are also subject to fluctuations as a result of business cycles
experienced by companies in the insurance industry. These cycles, most notably
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 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, the California
Consumer Privacy Act ("CCPA"), became effective on January 1, 2020, and number
of other states, including Colorado and Virginia, 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 "Business-Regulation" and
"Risk factors-Risks related to laws and regulation" in our 2020 Annual Report on
Form 10-K.
COVID-19
Our Travel vertical is largely driven by consumer and business spending on
airfare, hotels, rentals and other travel products. However, 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
three and nine months ended September 30, 2021, revenue from the Travel vertical
comprised approximately 2.1% and 2.0% of our total revenue, respectively,
compared with 11.1% and 12.3% for the three and nine months ended September 30,
2019, prior to the start of the pandemic. 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 three months ended September
30, 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 the Company's P&C vertical, and the duration and extent of this impact are
difficult to estimate beyond the current year.
Recent developments
On July 29, 2021, we entered into an amendment to the 2020 Credit Agreement for
a new senior secured term loan facility in an aggregate principal amount of
$190.0 million, the proceeds of which were used to refinance all $186.4 million
of the existing term loans outstanding and the unpaid interest thereof as of the
date of the amendment, 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, which
replaced the existing revolving credit facility under the 2020 Credit Agreement.
See "Liquidity and Capital Resources" below for additional information regarding
these transactions.
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.
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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 Open marketplace transactions, we have control over the Consumer
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 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 the Open 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 our Private 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 the Private marketplace
transactions and recognize revenue for the platform fee received. There are no
separate payments made by us to suppliers in our Private marketplace.
Cost and operating expenses
Cost 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, amortization expense 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.
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 and debt discounts associated with
these arrangements.
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Provision for income taxes
We are the sole managing member of QLH, which is treated as a partnership for
U.S. federal and most applicable state and local income tax purposes. As a
partnership, QLH is not subject to U.S. federal and certain state and local
income taxes. Any taxable income or loss generated by QLH is passed through to
and included in the taxable income or loss of its members, including us, on a
pro rata basis. We are subject to U.S. federal income taxes, in addition to
state and local income taxes with respect to our allocable share of any taxable
income or loss generated by QLH. As our ownership interest in QLH increases, our
share of the taxable income (loss) of QLH also increases. As of September 30,
2021, our ownership interest in QLH was 65.8%.
Net income (loss) attributable to QLH prior to Reorganization Transactions
Net income incurred prior to the completion of the Reorganization Transactions
is attributed to QLH.
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) to the non-controlling interest holders pro-rata to their holdings. The
non-controlling interests balance represents the holders of Class B-1 units.
Operating results for the three months ended September 30, 2021 and 2020
The following table sets forth our operating results in absolute dollars and as
a percentage of revenue for the three months ended September 30, 2021 and 2020:
                                                                               Three months ended
                                                                                 September 30,
(in thousands)                                                    2021                                     2020
Revenue                                           $    152,749                100.0  %       $ 151,548                100.0  %
Cost and operating expenses
Cost of revenue                                        128,080                 83.8  %         130,830                 86.3  %
Sales and marketing                                      5,620                  3.7  %           2,916                  1.9  %
Product development                                      3,754                  2.5  %           1,766                  1.2  %
General and administrative                              15,349                 10.0  %           7,605                  5.0  %
Total cost and operating expenses                      152,803                100.0  %         143,117                 94.4  %
(Loss) income from operations                              (54)                 0.0  %           8,431                  5.6  %
Other expenses, net                                        316                  0.2  %           1,998                  1.3  %
Interest expense                                         1,765                  1.2  %           1,594                  1.1  %
Total other expense                                      2,081                  1.4  %           3,592                  2.4  %
(Loss) income before income taxes                       (2,135)                (1.4) %           4,839                  3.2  %
Income tax expense                                       2,125                  1.4  %              20                  0.0  %
Net (loss) income                                 $     (4,260)                (2.8) %       $   4,819                  3.2  %
Net income attributable to QLH prior to
Reorganization Transactions                                  -                  0.0  %           4,819                  3.2  %
Net (loss) attributable to non-controlling
interest                                                  (733)                (0.5) %               -                  0.0  %
Net (loss) attributable to MediaAlpha, Inc.       $     (3,527)                (2.3) %       $       -                  0.0  %
Net (loss) per share of Class A common
stock
-Basic                                            $      (0.09)                              $       -
-Diluted                                          $      (0.10)                              $       -
Weighted average shares of Class A common
stock outstanding
-Basic                                              38,416,723                                       -
-Diluted                                            61,190,185                                       -


Revenue
The following table presents our revenue, disaggregated by vertical, for the
three months ended September 30, 2021 and 2020, and the dollar and percentage
changes between the two periods:
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                                                Three Months                                                Three Months
                                                    Ended                                                       Ended
                                                September 30,                                               September 30,
(dollars in thousands)                              2021                 $                   %                  2020
Property & Casualty insurance                   $  105,104          $  (9,028)                (7.9) %       $  114,132
Percentage of total revenue                           68.8  %                                                     75.3  %
Health insurance                                    34,053              6,710                 24.5  %       $   27,343
Percentage of total revenue                           22.3  %                                                     18.0  %
Life insurance                                       7,489                 97                  1.3  %       $    7,392
Percentage of total revenue                            4.9  %                                                      4.9  %
Other                                                6,103              3,422                127.6  %       $    2,681
Percentage of total revenue                            4.0  %                                                      1.8  %
Revenue                                         $  152,749              1,201                  0.8  %       $  151,548


The decrease in P&C insurance revenue for the three months ended September 30,
2021, compared with the three months ended September 30, 2020, was due to a
decrease in customer acquisition spending by certain insurance carriers to
address profitability concerns caused by higher-than-expected automobile repair
and replacement costs and claims from hurricanes and other major storms. We
believe that, due to these profitability issues, during the quarter ended
September 30, 2021 the auto insurance industry began to experience a cyclical
downturn that has led us to reduce our revenue forecasts for the fourth quarter
of 2021. 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 current year.
The increase in health insurance revenue for the three months ended September
30, 2021, compared with the three months ended September 30, 2020, was driven by
increased customer acquisition spending in our marketplaces by from health
insurance carriers and brokers, as well as by an increased supply of customer
referrals to our marketplaces by our supply partners and our proprietary
websites due to the increased demand.
The increase in life insurance revenue for the three months ended September 30,
2021, compared with the three months ended September 30, 2020, was driven by an
increase in customer acquisition spending in our marketplaces by life insurance
carriers, as well as by an increased supply of customer referrals to our
marketplaces by our supply partners due to the increased demand.
The increase in other revenue for the three months ended September 30, 2021,
compared with the three months ended September 30, 2020, was driven primarily by
an increase in travel comparison shopping, due to the easing of concerns related
to COVID-19, as well as higher activity levels from our consumer finance supply
and demand partners due to the continued strength in the mortgage and refinance
market.
Cost of revenue
The following table presents our cost of revenue for the three months ended
September 30, 2021 and 2020, and the dollar and percentage changes between the
two periods:
                               Three Months Ended                                 Three Months Ended
(dollars in thousands)         September 30, 2021         $             %         September 30, 2020
Cost of revenue               $         128,080       $ (2,750)       (2.1) %    $         130,830
Percentage of revenue                      83.8  %                                            86.3  %


The decrease in cost of revenue for the three months ended September 30, 2021,
compared with the three months ended September 30, 2020, was driven by the
higher mix of Transaction Value from our Private marketplace, where we recognize
revenue on a net basis and have no associated cost of revenue.
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Sales and marketing
The following table presents our sales and marketing expenses for the three
months ended September 30, 2021 and 2020, and the dollar and percentage changes
between the two periods:
                               Three Months Ended                                Three Months Ended
(dollars in thousands)         September 30, 2021         $            %         September 30, 2020
Sales and marketing           $           5,620       $ 2,704        92.7  %    $           2,916
Percentage of revenue                       3.7  %                                            1.9  %


The increase in sales and marketing expenses for the three months ended
September 30, 2021, compared with the three months ended September 30, 2020, was
due primarily to higher equity-based compensation expense of $1.8 million and an
increase in personnel-related costs of $0.9 million resulting from planned
headcount additions.
Product development
The following table presents our product development expenses for the three
months ended September 30, 2021 and 2020, and the dollar and percentage changes
between the two periods:
                               Three Months Ended                                Three Months Ended
(dollars in thousands)         September 30, 2021         $            %         September 30, 2020
Product development           $           3,754       $ 1,988       112.6  %    $           1,766
Percentage of revenue                       2.5  %                                            1.2  %


The increase in product development expenses for the three months ended
September 30, 2021, compared with the three months ended September 30, 2020, was
due primarily to higher equity-based compensation expense of $1.5 million and an
increase in personnel-related costs of $0.4 million resulting from planned
headcount additions to continue the enhancement and development of new
functionality on our platform.
General and administrative
The following table presents our general and administrative expenses for the
three months ended September 30, 2021 and 2020, and the dollar and percentage
changes between the two periods:
                                 Three Months Ended                                Three Months Ended
(dollars in thousands)           September 30, 2021         $            %         September 30, 2020
General and administrative      $         15,349        $ 7,744       101.8  %    $           7,605
Percentage of revenue                       10.0   %                                            5.0  %


The increase in general and administrative expenses for the three months ended
September 30, 2021, compared with the three months ended September 30, 2020, was
due primarily to higher equity-based compensation expense of $6.9 million, and
higher costs in the current year period related to our operation as a
publicly-reporting company, including directors and officers insurance premiums
of $1.5 million and higher professional and other fees, offset in part by
professional and legal fees incurred during the prior year period related to our
Reorganization Transaction and IPO that did not recur in the current year
period.
Equity-based compensation
The following table presents our equity-based compensation expense that was
included in cost and operating expenses for the three months ended September 30,
2021 and 2020, and the dollar and percentage changes between the two periods:
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                                                          Three Months                                                  Three Months
                                                             Ended                                                          Ended
                                                         September 30,                                                  September 30,
(dollars in thousands)                                        2021                 $                    %                   2020
Cost of revenue                                          $       447          $     429               2,383.3  %       $         18
Sales and marketing                                            1,956              1,798               1,138.0  %                158
Product development                                            1,602              1,508               1,604.3  %                 94
General and administrative                                     7,193              6,857               2,040.8  %                336
Total                                                    $    11,198          $  10,592               1,747.9  %       $        606


The increase in equity-based compensation expense for the three months ended
September 30, 2021, compared with the three months ended September 30, 2020, was
driven primarily by grants of equity-based awards to Senior Executives and
Legacy Profit Interest Holders at the time of our IPO and grants of restricted
stock units under the 2020 Omnibus Incentive Plan.
Depreciation
The following table presents our depreciation expense that was included in cost
and operating expenses for the three months ended September 30, 2021 and 2020,
and the dollar and percentage changes between the two periods:
                                 Three Months Ended                              Three Months Ended
(dollars in thousands)           September 30, 2021        $           %         September 30, 2020
Cost of revenue                 $                 7      $  1        16.7  %    $                 6
Sales and marketing                              37        11        42.3  %                     26
Product development                              29         6        26.1  %                     23
General and administrative                       26         8        44.4  %                     18
Total                           $                99      $ 26        35.6  %    $                73


The increase in depreciation expense for the three months ended September 30,
2021 compared with the three months ended September 30, 2020 was not material.
Amortization
The following table presents our amortization of intangible asset expense that
was included in cost and operating expenses for the three months ended September
30, 2021 and 2020, and the dollar and percentage changes between the two
periods:
                               Three Months Ended                               Three Months Ended
(dollars in thousands)         September 30, 2021         $           %         September 30, 2020

Sales and Marketing           $               746      $ (53)       (6.6) %    $               799


The decrease in amortization expense for the three months ended September 30,
2021 compared with the three months ended September 30, 2020 was not material.
Interest expense
The following table presents our interest expense for the three months ended
September 30, 2021 and 2020, and the dollar and percentage changes between the
two periods:
                               Three Months Ended                              Three Months Ended
(dollars in thousands)         September 30, 2021        $           %         September 30, 2020
Interest expense              $           1,765       $ 171        10.7  %    $           1,594
Percentage of revenue                       1.2  %                                          1.1  %


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The increase in interest expense for the three months ended September 30, 2021,
compared with the three months ended September 30, 2020, was driven by a higher
principal balance on the 2021 Credit Facility resulting from the refinancing of
our 2020 Credit Facilities on July 29, 2021.
Income tax expense
The following table presents our income tax expense for the three months ended
September 30, 2021 and 2020, and the dollar and percentage changes between the
two periods:
                               Three Months Ended                                    Three Months Ended
(dollars in thousands)         September 30, 2021         $              %           September 30, 2020
Income tax expense            $           2,125       $ 2,105        10,525.0  %    $            20
Percentage of revenue                       1.4  %                                              0.0     %


For the three months ended September 30, 2021, we recorded an income tax expense
of $2.1 million resulting from our effective tax rate of (99.5)%, which differed
from the U.S. federal statutory rate of 21%, due primarily to nondeductible
equity-based compensation, state taxes, income not taxable to us associated with
the non-controlling interest, and the impact of tax benefits associated with
equity-based awards. The results for the three months ended September 30, 2020
consisted solely of the activities of its wholly owned Taiwanese subsidiary,
Skytiger Studio Ltd., which is a taxpaying entity in Taiwan, and prior to the
Reorganization Transactions, the consolidated QLH pass through entity was not
subject to corporate income tax.
Operating results for the nine months ended September 30, 2021 and 2020
The following table sets forth our operating results in absolute dollars and as
a percentage of revenue for the nine months ended September 30, 2021 and 2020:
                                                                              Nine Months Ended
                                                                                September 30,
(in thousands)                                                   2021                                    2020
Revenue                                           $  483,690                100.0  %       $ 394,609                100.0  %
Cost and operating expenses
Cost of revenue                                      407,563                 84.3  %         335,692                 85.1  %
Sales and marketing                                   16,721                  3.5  %           8,866                  2.2  %
Product development                                   10,904                  2.3  %           5,482                  1.4  %
General and administrative                            44,677                  9.2  %          13,907                  3.5  %
Total cost and operating expenses                    479,865                 99.2  %         363,947                 92.2  %
Income from operations                                 3,825                  0.8  %          30,662                  7.8  %
Other expenses, net                                      337                  0.1  %           1,998                  0.5  %
Interest expense                                       6,303                  1.3  %           4,844                  1.2  %
Total other expense                                    6,640                  1.4  %           6,842                  1.7  %
(Loss) income before income taxes                     (2,815)                (0.6) %          23,820                  6.0  %
Income tax expense                                     1,636                  0.3  %              20                  0.0  %
Net (loss) income                                 $   (4,451)                (0.9) %       $  23,800                  6.0  %
Net income attributable to QLH prior to
Reorganization Transactions                                -                  0.0  %          23,800                  6.0  %
Net (loss) attributable to non-controlling
interest                                              (1,021)                (0.2) %               -                  0.0  %
Net (loss) attributable to MediaAlpha, Inc.       $   (3,430)                (0.7) %       $       -                  0.0  %
Net (loss) per share of Class A common
stock
-Basic                                            $    (0.09)                              $       -
-Diluted                                          $    (0.09)                              $       -
Weighted average shares of Class A common
stock outstanding
-Basic                                               36,426,270                                       -
-Diluted                                             36,426,270                                       -


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Revenue
The following table presents our revenue, disaggregated by vertical, for the
nine months ended September 30, 2021 and 2020, and the dollar and percentage
changes between the two periods:
                                                Nine months ended                                                Nine months ended
(dollars in thousands)                          September 30, 2021            $                   %              September 30, 2020
Property & Casualty insurance                   $    339,981             $  65,159                 23.7  %       $    274,822
Percentage of total revenue                             70.3     %                                                       69.6     %
Health insurance                                     103,637                22,217                 27.3  %       $     81,420
Percentage of total revenue                             21.4     %                                                       20.6     %
Life insurance                                        22,921                (1,344)                (5.5) %       $     24,265
Percentage of total revenue                              4.7     %                                                        6.1     %
Other                                                 17,151                 3,049                 21.6  %       $     14,102
Percentage of total revenue                              3.5     %                                                        3.6     %
Revenue                                         $    483,690                89,081                 22.6  %       $    394,609


The increase in P&C insurance revenue for the nine months ended September 30,
2021, compared with the nine months ended September 30, 2020, was due to
increased customer acquisition spending in our marketplaces by insurance
carriers, driven by improving carrier profitability in the first half of the
year and the growing trend of P&C insurance carriers allocating customer
acquisition budgets to the DTC channel, resulting in our supply partners driving
more consumers through their websites. We believe that, due to these
profitability issues, during the three months ended September 30, 2021 the auto
insurance industry began to experience a cyclical downturn that has led us to
reduce our revenue forecasts for the three months ended December 31, 2021. 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 current year.
The increase in health insurance revenue for the nine months ended September 30,
2021, compared with the nine months ended September 30, 2020, was driven by
increased customer acquisition spending in our marketplaces by health insurance
carriers and brokers, as well as by an increased supply of customer referrals to
our marketplaces by our supply partners and our proprietary websites due to the
increased demand.
The decrease in life insurance revenue for the nine months ended September 30,
2021, compared with the nine months ended September 30, 2020, was driven by a
higher mix of transactions occurring on our Private marketplace as certain of
our larger supply partners migrated more of their consumer referral transactions
with certain demand partners from our Open marketplace to our Private
marketplace.
The increase in other revenue for the nine months ended September 30, 2021,
compared with the nine months ended September 30, 2020, was driven primarily by
an increase in travel comparison shopping, due to the easing of concerns related
to COVID-19, higher activity levels from our consumer finance supply and demand
partners due to the continued strength in the mortgage and refinance market.
Cost of revenue
The following table presents our cost of revenue for the nine months ended
September 30, 2021 and 2020, and the dollar and percentage changes between the
two periods:
                                                       Nine months ended                                                Nine months ended
(dollars in thousands)                                 September 30, 2021            $                   %              September 30, 2020
Cost of revenue                                        $    407,563             $  71,871                 21.4  %       $    335,692
Percentage of revenue                                          84.3     %                                                       85.1     %


The increase in cost of revenue for the nine months ended September 30, 2021,
compared with the nine months ended September 30, 2020, was driven by the
overall increase in revenue volume and the corresponding increase in revenue
share payments to suppliers. Cost of revenue as a percentage of revenue
decreased due to a higher mix of Transaction Value from our Private marketplace,
where we recognize revenue on a net basis and do not have associated cost of
revenue.
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Sales and marketing
The following table presents our sales and marketing expenses for the nine
months ended September 30, 2021 and 2020, and the dollar and percentage changes
between the two periods:
                                                        Nine months ended                                                 Nine months ended
(dollars in thousands)                                  September 30, 2021            $                   %               September 30, 2020
Sales and marketing                                     $     16,721             $   7,855                 88.6  %       $       8,866
Percentage of revenue                                            3.5     %                                                         2.2      %


The increase in sales and marketing expenses for the nine months ended September
30, 2021, compared with the nine months ended September 30, 2020, was due
primarily to higher equity-based compensation expense of $5.3 million and an
increase in personnel-related costs of $2.3 million resulting from planned
headcount additions.
Product development
The following table presents our product development expenses for the nine
months ended September 30, 2021 and 2020, and the dollar and percentage changes
between the two periods:
                                                        Nine months ended                                                 Nine months ended
(dollars in thousands)                                  September 30, 2021            $                   %               September 30, 2020
Product development                                     $     10,904             $   5,422                 98.9  %       $       5,482
Percentage of revenue                                            2.3     %                                                         1.4      %


The increase in product development expenses for the nine months ended September
30, 2021, compared with the nine months ended September 30, 2020, was due
primarily to higher equity-based compensation expense of $3.9 million and an
increase in personnel-related costs of $1.4 million resulting from planned
headcount additions to continue the enhancement and development of new
functionality on our platform..
General and administrative
The following table presents our general and administrative expenses for the
nine months ended September 30, 2021 and 2020, and the dollar and percentage
changes between the two periods:
                                                         Nine months ended                                                Nine months ended
(dollars in thousands)                                   September 30, 2021            $                   %              September 30, 2020
General and administrative                               $     44,677             $  30,770                221.3  %       $     13,907
Percentage of revenue                                             9.2     %                                                        3.5     %


The increase in general and administrative expenses for the nine months ended
September 30, 2021, compared with the nine months ended September 30, 2020, was
due primarily to higher equity-based compensation expense of $20.3 million, and
higher costs in the current year period related to our operation as a
publicly-reporting company, including directors and officers insurance premiums
of $4.4 million, higher professional and legal fees incurred in connection with
the Secondary Offering, and other professional fees, offset in part by
professional and legal fees incurred during the prior year period related to our
Reorganization Transaction and IPO that did not recur in the current year
period.
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Equity-based compensation
The following table presents our equity-based compensation expense that was
included in cost and operating expenses for the nine months ended September 30,
2021 and 2020, and the dollar and percentage changes between the two periods:
                                                           Nine months                                                   Nine months ended
                                                         ended September                                                   September 30,
(dollars in thousands)                                       30, 2021                $                    %                    2020
Cost of revenue                                          $       1,289          $   1,231               2,122.4  %       $           58
Sales and marketing                                              5,639              5,326               1,701.6  %                  313
Product development                                              4,599              3,876                 536.1  %                  723
General and administrative                                      21,794             20,335               1,393.8  %                1,459
Total                                                    $      33,321          $  30,768               1,205.2  %       $        2,553


The increase in equity-based compensation expense for the nine months ended
September 30, 2021, compared with the nine months ended September 30, 2020, was
driven primarily by grants of equity-based awards to Senior Executives and
Legacy Profit Interest Holders at IPO and grants of restricted stock units under
the 2020 Omnibus Incentive Plan.
Depreciation
The following table presents our depreciation expense that was included in cost
and operating expenses for the nine months ended September 30, 2021 and 2020,
and the dollar and percentage changes between the two periods:
                                                          Nine months                                                 Nine months
                                                             ended                                                       ended
                                                         September 30,                                               September 30,
(dollars in thousands)                                       2021                 $                   %                  2020
Cost of revenue                                          $       22          $       5                 29.4  %       $       17
Sales and marketing                                             109                 34                 45.3  %               75
Product development                                              80                 13                 19.4  %               67
General and administrative                                       61                 10                 19.6  %               51
Total                                                    $      272          $      62                 29.5  %       $      210


The increase in depreciation expense for the nine months ended September 30,
2021 compared with the nine months ended September 30, 2020 was not material.
Amortization
The following table presents our amortization of intangible asset expense that
was included in cost and operating expenses for the nine months ended September
30, 2021 and 2020, and the dollar and percentage changes between the two
periods:
                                                        Nine months ended                                               Nine months ended
                                                          September 30,                                                   September 30,
(dollars in thousands)                                        2021                   $                   %                    2020

Sales and Marketing                                     $        2,238          $    (164)                (6.8) %       $        2,402


The decrease in amortization expense for the nine months ended September 30,
2021, compared with the nine months ended September 30, 2020, was driven by
lower amortization based on the economic life of our customer relationships.
Interest expense
The following table presents our interest expense for the nine months ended
September 30, 2021 and 2020, and the dollar and percentage changes between the
two periods:
                                                         Nine months ended                                                  Nine months ended
(dollars in thousands)                                   September 30, 2021        $                        %               September 30, 2020
Interest expense                                        $       6,303              $   1,459                 30.1  %       $       4,844
Percentage of revenue                                             1.3      %                                                         1.2      %


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The increase in interest expense for the nine months ended September 30, 2021,
compared with the nine months ended September 30, 2020, was driven by a higher
principal balance on the 2020 and 2021 Credit Facility in connection with the
refinancing of our 2019 Credit Facilities in 2020 and 2020 Credit Facilities in
2021.
Income tax expense
The following table presents our income tax expense for the nine months ended
September 30, 2021 and 2020, and the dollar and percentage changes between the
two periods:
                                                                                                                             Nine months
                                                                                                                                ended
                                                         Nine months ended                                                  September 30,
(dollars in thousands)                                   September 30, 2021        $                         %                  2020
Income tax expense                                      $       1,636              $   1,616               8,080.0  %       $       20
Percentage of revenue                                             0.3      %                                                       0.0  %


For the nine months ended September 30, 2021, we recorded an income tax expense
of $1.6 million. Our effective tax rate of (58.1)% differed from the U.S.
federal statutory rate of 21%, due primarily to nondeductible equity-based
compensation, state taxes, income not taxable to us associated with the
non-controlling interest, nondeductible transaction costs associated with the
Secondary Offering and the impact of tax benefits associated with equity-based
awards. The results for the nine months ended September 30, 2020 consisted
solely of the activities of its wholly owned Taiwanese subsidiary, Skytiger
Studio Ltd., which is a taxpaying entity in Taiwan, and prior to the
Reorganization Transactions, the consolidated QLH pass through entity was not
subject to corporate income tax.
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, and
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 three and nine months ended September 30, 2021 and 2020.
                                                         Three months ended                     Nine months ended
                                                           September 30,                          September 30,
(in thousands)                                        2021                2020               2021                2020
Net (loss) income                                 $   (4,260)         $   4,819          $   (4,451)         $  23,800
Equity-based compensation expense                     11,198                606              33,321              2,553
Interest expense                                       1,765              1,594               6,303              4,844
Income tax expense                                     2,125                 20               1,636                 20
Depreciation expense on property and
equipment                                                 99                 73                 272                210
Amortization of intangible assets                        746                799               2,238              2,402
Transaction expenses(1)                                1,152              6,049               3,883              6,049
Employee-related costs(2)                                270                  -                 619                  -
SOX implementation costs(3)                              348                  -                 797                  -
Settlement costs(4)                                      800                  -                 800                  -
Changes in TRA related liability(5)                     (448)                 -                (604)                 -
Reduction in Tax Indemnification
Receivable(6)                                              -                  -                 147                  -
Adjusted EBITDA                                   $   13,795          $  13,960          $   44,961          $  39,878


(1)Transaction expenses include $1.2 million and $3.9 million of expenses
incurred by us for the three and nine months ended September 30, 2021,
respectively, for legal and accounting fees and other costs in connection with
the Secondary Offering, and other registration statements, and refinancing of
our 2020 Credit Facilities. Transaction expenses of $6.0 million for the three
and nine months ended September 30, 2020, include $4.0 million in legal,
accounting, and professional fees in connection with the Reorganization
Transaction and IPO and $2.0 million in loss on extinguishment of debt related
to the termination of the 2019 Credit Facilities.
(2)Employee-related costs include $0.3 million and $0.5 million of expenses
incurred by us for the three and nine months ended September 30, 2021,
respectively, for amounts payable to recruiting firms in connection with the
hiring of certain executive officers to support our operation as a
publicly-reporting company.
(3)SOX implementation costs include $0.3 million and $0.8 million of expenses
incurred by us for the three and nine months ended September 30, 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). During the three months ended
June 30, 2021, we updated our Adjusted EBITDA definition to exclude these costs
and accordingly determined that it was appropriate to recast our Adjusted EBITDA
calculation for the three months ended March 31, 2021 to exclude these costs of
$0.2 million.
(4)Settlement costs include $0.8 million of expenses incurred by us for the
three and nine months ended September 30, 2021, to settle certain claims made by
the Attorney General's Office of the State of Washington.
(5)Changes in TRA related liability includes $0.4 million and $0.6 million of
income for the three and nine months ended September 30, 2021, respectively, 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 includes $0.1 million of expenses
incurred by us for the nine months ended September 30, 2021 related to a
reduction in the tax indemnification receivable recorded in connection with the
Reorganization Transactions.
Contribution and Contribution Margin
We define "Contribution" as revenue less revenue share payments and online
advertising costs, or, as reported in our consolidated statements 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; internet and hosting; amortization; depreciation; other
services; and merchant-related fees. We define "Contribution Margin" as
Contribution expressed as a
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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 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 three and nine months ended September 30, 2021 and 2020:
                                                        Three months ended                     Nine months ended
                                                           September 30,                         September 30,
(in thousands)                                        2021               2020               2021               2020
Revenue                                           $ 152,749          $ 151,548          $ 483,690          $ 394,609
Less cost of revenue                               (128,080)          (130,830)          (407,563)          (335,692)
Gross profit                                         24,669             20,718             76,127             58,917
Adjusted to exclude the following (as
related to cost of revenue):
Equity-based compensation                               447                 18              1,289                 58
Salaries, wages, and related                            501                434              1,523              1,175
Internet and hosting                                    105                107                315                328
Other expenses                                          103                 69                320                205
Depreciation                                              7                  6                 22                 17
Other services                                          300                189                847                616
Merchant-related fees                                    56                130                286                447
Contribution                                         26,188             21,671             80,729             61,763
Gross margin                                           16.2  %            13.7  %            15.7  %            14.9  %
Contribution Margin                                    17.1  %            14.3  %            16.7  %            15.7  %


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 relationships we have with
our partners. Our partners use our platform to transact via Open and Private
marketplace transactions. In our Open marketplace model, Transaction Value is
equal to the revenue recognized and revenue share payments to our supply
partners represent costs of revenue. In our Private 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.
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The following table presents Transaction Value by platform model for the three
and nine months ended September 30, 2021 and 2020:
                                                  Three months ended              Nine months ended
                                                    September 30,                   September 30,
(dollars in thousands)                           2021            2020            2021            2020
Open Marketplace transactions                $ 147,800       $ 148,240       $ 469,670       $ 386,224
Percentage of total Transaction Value             57.9  %         68.1  %         60.7  %         69.1  %
Private Marketplace transactions               107,290          69,320         304,410         172,590
Percentage of total Transaction Value             42.1  %         31.9  %         39.3  %         30.9  %
Total Transaction Value                      $ 255,090       $ 217,560       $ 774,080       $ 558,814

The following table presents Transaction Value by vertical for the three and
nine months ended September 30, 2021 and 2020:

                                                  Three months ended              Nine months ended
                                                    September 30,                   September 30,
(dollars in thousands)                           2021            2020            2021            2020
Property & Casualty insurance                $ 175,375       $ 161,323       $ 535,448       $ 390,955
Percentage of total Transaction Value             68.8  %         74.2  %         69.2  %         70.0  %
Health insurance                                48,692          33,650         146,275          98,739
Percentage of total Transaction Value             19.1  %         15.5  %         18.9  %         17.7  %
Life insurance                                  13,361          11,628          41,736          31,717
Percentage of total Transaction Value              5.2  %          5.3  %          5.4  %          5.7  %
Other (1)                                       17,662          10,959          50,621          37,403
Percentage of total Transaction Value              6.9  %          5.0  %          6.5  %          6.7  %
Total Transaction Value                      $ 255,090       $ 217,560       $ 774,080       $ 558,814


(1)Our other verticals include Travel, Education and Consumer Finance.
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 three and nine
months ended September 30, 2021, Transaction Value generated from clicks, calls
and leads was 80.1%, 8.4% and 11.6% and 81.4%, 7.7% and 10.9%, 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.
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Segment information
We operate in the 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.
Liquidity and capital resources
Overview
Our primary sources 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, if any. On October 30, 2020,
we completed our IPO selling 7,027,606 shares of Class A common stock at a
public offering price of $19.00 per share, which includes 769,104 shares issued
pursuant to the underwriters' over-allotment option. We received $124.2 million,
net of underwriting discounts and commissions.
The Secondary Offering did not generate any proceeds for the Company.
As of September 30, 2021 and December 31, 2020, our cash and cash equivalents
totaled $29.3 million and $23.6 million, respectively.
We believe that our current sources of liquidity, which include cash flow
generated from operations, cash and funds available under the 2021 Revolving
Credit Facilities under the Amended Credit Agreement entered into on July 29,
2021, as discussed in more detail below, will be sufficient to meet our
projected operating and debt service requirements for at least the next 12
months. As of September 30, 2021 we had all of the $50.0 million available under
our 2021 Revolving Credit Facility. To the extent that our current liquidity is
insufficient to fund future activities, we 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.
Cash Flows
The following table presents a summary of our cash flows for the nine months
ended September 30, 2021 and 2020, and the dollar and percentage changes between
the periods:
                                                Nine months ended                                                 Nine months
                                                  September 30,                                                 ended September
(dollars in thousands)                                2021                   $                   %                  30, 2020

Net cash provided by operating activities $ 6,676 $ (32,624)

               (83.0) %       $      39,300
Net cash used in investing activities                     (568)             9,588                (94.4) %             (10,156)
Net cash used in financing activities                     (361)            26,806                (98.7) %             (27,167)


Operating activities
Cash flows provided by operating activities were $6.7 million for the nine
months ended September 30, 2021, compared with $39.3 million for the nine months
ended September 30, 2020. The decrease resulted from higher working capital
usage due primarily to the timing of our payables, offset in part by improved
collection of our accounts receivable.
Investing activities
Cash flows used in investing activities were $0.6 million for the nine months
ended September 30, 2021, compared with $10.2 million for the nine months ended
September 30, 2020. During the nine months ended September 30, 2020, we entered
into a cost method investment of $10.0 million for which there was no comparable
investment in the nine months ended September 30, 2021.
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Financing activities
Cash flows used in financing activities were $0.4 million for the nine months
ended September 30, 2021, compared with $27.2 million for the nine months ended
September 30, 2020. The decrease in net cash used was due primarily to higher
distributions of $130.9 million to the members of QLH during the nine months
ended September 30, 2020, including dividend distributions made in connection
with the refinancing of our 2019 Credit Facilities during the nine months ended
September 30, 2020 and our 2020 Credit Facilities during the nine months ended
September 30, 2021.
Senior secured credit facilities
2021 Credit Facilities
As of September 30, 2021, we had $186.6 million of outstanding borrowings, net
of deferred debt issuance costs of $3.4 million, under the 2021 Credit
Facilities, which consist of (i) a $190.0 million term loan (the "2021 Term Loan
Facility") and (ii) a $50.0 million revolving credit facility (the "2021
Revolving Credit Facility" and, together with the 2021 Term Loan Facility, the
"2021 Credit Facilities").
On July 29, 2021, we entered into an amendment (the "First Amendment") to the
2020 Credit Agreement (as amended by the First Amendment, "Amended Credit
Agreement"). The Amendment Credit Agreement provides for a new senior secured
term loan facility in an aggregate principal amount of $190.0 million, 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, which replaced the 2020 Revolving Credit Facility. Our
obligations under the term loan facility and the revolving credit facility are
guaranteed by QLH and secured by substantially all assets of QLH and QL.
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 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 the London
interbank offered rate and from 1.00% to 1.75% with respect to the base rate.
The Amended Credit Agreement contains certain customary financial and
non-financial covenants and default provisions. The financial covenants include
a minimum Fixed Charge Coverage Ratio and a maximum Total Net Leverage Ratio (in
each case, as defined in the 2021 Credit Facilities). The non-financial
covenants include restrictions on investments, dividends, asset sales, and the
incurrence of additional debt and liens.
Loans under the term loan facility and the revolving credit facility will mature
on July 29, 2026. Loans under the term loan facility will amortize quarterly,
beginning with the first business day after December 31, 2021 and ending with
June 30, 2026, by an amount equal to 1.25% of the aggregate outstanding
principal amount of the term loans initially made.
Tax receivable agreements
Our purchase (through Intermediate Holdco) of Class B-1 units from certain
unitholders (including the Selling Class B-1 Unit Holders) in connection with
the IPO as well as any 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),
and the Pre-IPO Leveraged Distribution and other actual or deemed distributions
by QLH to its members pursuant to the Exchange Agreement, are expected 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 of Class B-1
units of QLH, as discussed above, and (3) 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
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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 will account for the income tax effects and
corresponding TRA effects resulting from future exchanges of Class B-1 units by
recognizing an increase in our deferred tax assets, based on enacted tax rates
at the date of the exchange. Further, we will 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 will be estimated at the
time of any purchase or redemption as a reduction to shareholders' 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 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 Note 2 to consolidated financial statements appearing in Part I,
Item 1 of this Quarterly Report on Form 10-Q.
Critical accounting policies and estimates
Our critical accounting policies and estimates are included in the 2020 Annual
Report on Form 10-K and did not materially change during the nine months ended
September 30, 2021.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, we are subject to market risks. Market risk
represents the risk of loss that may impact our financial position due to
adverse changes in financial market prices and rates.
Interest rate risk
The 2021 Credit Facilities bear interest at a variable rate. As a result, we may
be exposed to fluctuations in interest rates to the extent of our outstanding
borrowings under the 2021 Credit Facilities. A hypothetical 1.0% increase or
decrease in the interest rate associated with the 2021 Credit Facilities would
have resulted in a $1.4 million change in our interest expense for the nine
months ended September 30, 2021.
Concentrations of credit risk and of significant demand and supply partners
We maintain cash balances that can, at times, exceed amounts insured by the
Federal Deposit Insurance Corporation. We have not experienced any losses in
these accounts and believe we are not exposed to any unusual credit risk in this
area based on the financial strength of the institutions with which we maintain
our deposits.
Our accounts receivable, which are unsecured, may expose us to credit risks
based on their collectability. We control credit risk by investigating the
creditworthiness of all customers prior to establishing relationships with them,
performing periodic reviews of the credit activities of those customers during
the course of the business relationship, and regularly analyzing the
collectability of accounts receivable.
Customer concentrations consisted of two customers that accounted for
approximately $46 million, or 30%, and $141 million, or 29%, of revenue for the
three and nine months ended September 30, 2021, respectively, and one customer
that accounted for approximately $46 million, or 30%, and $102 million, or 26%,
of revenue for the three and nine months ended September 30, 2020, respectively.
Our two largest customers accounted for approximately $20 million, or 28%, and
$33 million, or 35%, of our accounts receivable as of September 30, 2021 and
December 31, 2020, respectively.
Our supplier concentration can expose us to business risks. For the three months
ended September 30, 2021, we had one supplier that accounted for approximately
$13 million, or 10%, of total purchases, and for the nine months ended September
30, 2021, we had no supplier that accounted for more than 10% of total
purchases. For the three and nine months ended September 30, 2020, two suppliers
that collectively accounted for approximately $34 million, or 25%, and $71
million,
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or 20%, of total purchases, respectively. We had one large supplier that
accounted for approximately $7 million, or 16%, of total accounts payable as of
September 30, 2021 and two large suppliers that collectively accounted for
approximately $25 million, or 25%, of total accounts payable as of December 31,
2020.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2021, we carried out an evaluation, under the supervision
and with the participation of management, including our Chief Executive Officer
(principal executive officer) and Chief Financial Officer (principal financial
officer), of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended ("the Exchange Act")) to determine
whether such disclosure controls and procedures provide reasonable assurance
that information to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the SEC and such
information is accumulated and communicated to management, including our
principal executive and principal financial officers or persons performing
similar functions, as appropriate to allow timely decisions regarding
disclosure. Based on that evaluation, our principal executive officer and our
principal financial officer have concluded that as of September 30, 2021, our
disclosure controls and procedures were not effective to provide reasonable
assurance because of the previously reported material weakness in our internal
control over financial reporting that we describe in Part II, Item 9A "Controls
and Procedures" of the 2020 Annual Report on Form 10-K.
Management's Remediation Plan for the Previously Identified Material Weakness
and status of remediation efforts
We previously described our remediation plan in Part II, Item 9A "Controls and
Procedures" of the 2020 Annual Report on Form 10-K.
We have made significant progress on our previously reported remediation plan.
During the three months ended September 30, 2021, we have completed the
implementation of our third-party equity-based compensation software system
which automates the tracking of expense calculation of our equity-based
compensation awards and enhanced related internal controls over financial
reporting. The material weakness cannot be considered remediated until the
applicable remedial controls have operated for a sufficient period of time and
we have concluded, through testing, that these controls are designed and
operating effectively.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during the
three months ended September 30, 2021, except as discussed in the above section
- Management's Remediation Plan for the Previously Identified Material Weakness
and status of remediation efforts, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Inherent Limitations on Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives. In addition, the design of disclosure controls and procedures must
reflect the fact that there are resource constraints and management is required
to apply its judgment in evaluating the benefits of possible controls and
procedures relative to their costs.