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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 together leading insurance carriers and
high-intent consumers 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 $859 million in Transaction Value across our
platform over the twelve-month period ended June 30, 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 LTV consumers, or an
insurance-focused research destination or other financial website looking to
monetize high-intent users on their websites. For the twelve-month period ended
June 30, 2022 , the websites of our diversified group of supply partners and our
proprietary websites drove an average of 8.2 million Consumer Referrals on our
platform each month.
We generate revenue by earning a fee for each Consumer Referral sold on our
platform. A transaction becomes payable upon a qualifying consumer action, such
as a click, call or lead, and is not contingent on the sale of a product to the
consumer.
We believe in the disruptive power of transparency. Traditionally, insurance
customer acquisition platforms operated in a black box. We recognized that a
consumer may be valued differently by one insurer versus another; therefore,
insurers should be able to determine pricing granularly based on the value that
a particular customer segment is expected to bring to their business. As a
result, we developed a technology platform that powers an ecosystem where buyers
and sellers can transact with full transparency, control, and confidence,
aligning the interests of the parties participating on our platform.
We believe our technology is a key differentiator and a powerful driver of our
performance. We maintain deep, custom integrations with partners representing
the majority of our Transaction Value, which enable automated, data-driven
processes that optimize our partners' customer acquisition spend and revenue.
Through our platform, our insurance carrier partners can target and price across
over 35 separate consumer attributes to manage customized acquisition
strategies.
Key factors affecting our business
Revenue
We believe that our future performance will depend on many factors, including those described below and in Part I, Item 1A "Risk Factors" in the 2021 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 over time. 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 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$182.9 million and$421.9 million for the three and six months endedJune 30, 2022 , respectively, from$256.5 million and$519.0 million for the three and six months endedJune 30, 2021 , respectively, due primarily to a decrease in customer acquisition spending by P&C insurance carriers in response to reductions in underwriting profitability. 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, leading many of them to use our platform as their central hub for broadly managing digital customer acquisition and monetization, and resulting in strong retention rates. For the three and six months endedJune 30, 2022 , 95% and 98% of total insurance Transaction Value executed on our platform, respectively, came from demand partner relationships in existence during 2021.
Our demand and supply partners
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 longstanding and involve most of the top-tier insurance carriers in the industry. In terms of buyers, during the three and six months endedJune 30, 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 22.3 million and 47.0 million for the three and six months endedJune 30, 2022 , respectively, from 22.9 million and 47.4 million for the three and six months endedJune 30, 2021 , 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 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 property & casualty insurance vertical is typically characterized by seasonal strength in our quarters endingMarch 31 due to a greater supply of Consumer Referrals and higher customer acquisition budgets during the start of the year, and to seasonal weakness in our quarters endingDecember 31 due to a lower supply of Consumer Referrals available on a cost-effective basis and lower customer acquisition budgets from some buyers during those quarters. Our health insurance vertical is typically characterized by seasonal strength in our quarters endingDecember 31 due to open enrollment periods for health insurance and annual enrollment for Medicare during those quarters, with a material increase in consumer search volume for health products and a related increase in buyer customer acquisition budgets.
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 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 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.
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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 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. For a description of laws and regulations to which we are generally subject, see Item 1 "Business" and Item 1A "Risk Factors." in our 2021 Annual Report on Form 10-K. 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.
COVID-19
While the COVID-19 pandemic has changed the physical working environment of the substantial majority of our workforce to working from home, it has otherwise caused only minor disruptions to our business operations with a limited impact on our operating results thus far. Our Travel vertical is largely driven by consumer spending on airfare, hotels, rentals and other travel products. As a result of COVID-19, we have experienced a dramatic decline in revenue from the Travel vertical and expect this trend to continue for the foreseeable future. For the three and six months endedJune 30, 2022 , 2021, and 2020, revenue from the Travel vertical comprised approximately 3.9%, 2.7%, and 0.3% and 3.2%, 2.0%, and 3.9%, respectively, of our total revenue. While we have sought to maintain our commercial relationships in the Travel vertical and remain positioned to capitalize on transactions in the Travel vertical when travel activity resumes, we do not expect that revenue from the Travel vertical will match our historical results or have any material impact on our overall revenue or profitability for the foreseeable future. In addition, supply chain disruptions and cost increases caused by the pandemic and other inflationary pressures have contributed to higher-than-expected property and casualty insurance claims costs, which has led many carriers to continue to reduce their customer acquisition spending to preserve their profitability. These reductions continue to impact revenue from our P&C vertical, and the duration and extent of this impact are difficult to estimate beyond the third quarter of 2022.
Recent developments
OnApril 1, 2022 , we closed the acquisition of substantially all of the assets ofCustomer Helper Team, LLC ("CHT"), a provider of customer generation and acquisition services for Medicare insurance, automobile insurance, health insurance, life insurance, debt settlement, and credit repair companies on the terms and subject to the conditions set forth in the Asset Purchase Agreement (as amended, the "Agreement"). We believe the acquisition is a good strategic fit with our long-term objectives and will increase our ability to generate Consumer Referrals on various social media and short form video platforms. The purchase price for the acquisition included cash consideration of$49.7 million paid at closing plus contingent cash 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.
Key components of our results of operations
Revenue
We operate primarily in the P&C insurance, health insurance and life insurance
verticals and generate revenue through the purchase and sale of Consumer
Referrals.
The price and amount of Consumer Referrals purchased and sold on our platform
vary based on a number of market conditions and consumer attributes, including
(i) geographic location of consumers, (ii) demographic attributes of consumers,
(iii) the source of Consumer Referrals and quality of conversion by source,
(iv) buyer bids and (v) buyer demand and budget.
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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 and (ii) a fee to internet search companies to drive consumers to our proprietary websites. We are the principal in theOpen Marketplace transactions. As a result, the fees paid by demand partners are recognized as revenue and the fees paid to suppliers are included in cost of revenue. With respect to ourPrivate Marketplace transactions, buyers and suppliers contract with one another directly and leverage our platform to facilitate transparent, real-time transactions utilizing the reporting and analytical tools available to them from use of our platform. We charge the supplier a platform fee on the Consumer Referrals transacted. We act as an agent in thePrivate Marketplace transactions and recognize revenue for the platform fee received. There are no other payments made by us to suppliers in ourPrivate Marketplace .
Costs and operating expenses
Costs and operating expenses consist primarily of cost of revenue, sales and
marketing expenses, product expenses and general and administrative expenses.
Cost of revenue
Our cost of revenue is comprised primarily of revenue share payments to suppliers and traffic acquisition costs paid to top tier search engines, as well as telephony infrastructure costs, internet and hosting costs, and merchant fees, and include salaries, wages and benefits, including non-cash equity-based compensation, and other expenses.
Sales and marketing
Sales and marketing expenses consist primarily of an allocation of personnel expenses for employees engaged in demand side and supply side business development, marketing and media acquisition activities, and include salaries, wages and benefits, including non-cash equity-based compensation. Sales and marketing expenses also include costs related to attracting partners to our platform, including marketing and promotions, tradeshows and related travel and entertainment expenses. Sales and marketing expenses also include an allocated portion of rent and facilities expenses and depreciation and amortization expense.
Product development
Product development expenses consist primarily of an allocation of personnel
expenses for employees engaged in technology, engineering and product
development and include salaries, wages and benefits, including non-cash
equity-based compensation. Product development expenses also include an
allocated portion of rent and facilities expenses and depreciation and
amortization expense.
General and administrative
General and administrative expenses consist primarily of an allocation of personnel expenses for executive, finance, legal, human resources, and business analytics employees, and include salaries, wages and benefits, including non-cash equity-based compensation. General and administrative expenses also include professional services and an allocated portion of rent and facilities expenses and depreciation and amortization expense and any change in fair value of contingent consideration.
Interest expense
Interest expense consists primarily of interest expense associated with
outstanding borrowings under our loan and security agreements and the
amortization of deferred financing costs associated with these arrangements.
Provision for income taxes
MediaAlpha, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from QLH based uponMediaAlpha, Inc.'s economic interest held in QLH. QLH is treated as a pass-through partnership for income tax reporting purposes and is not subject to federal income tax. Instead, QLH's taxable income or loss is passed through 25
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to its members, including
increases, our share of the taxable income (loss) of QLH also increases. As of
Net income (loss) attributable to Non-controlling interest
Net income (loss) is attributed to non-controlling interests in accordance with QLH's limited liability company agreement. We allocate the share of net income (loss) incurred subsequent to the Reorganization Transactions to the non-controlling interest holders pro-rata to their holdings. The non-controlling interests balance represents the Class B-1 units, substantially all of which are held by Insignia and the Senior Executives.
Operating results for the three months ended
The following table sets forth our operating results in absolute dollars and as
a percentage of revenue for the three months ended
Three months ended
June 30,
(in thousands) 2022 2021
Revenue $ 103,449 100.0 % $ 157,353 100.0 %
Costs and operating expenses
Cost of revenue 87,925 85.0 % 132,305 84.1 %
Sales and marketing 7,958 7.7 % 5,724 3.6 %
Product development 5,661 5.5 % 3,840 2.4 %
General and administrative 12,316 11.9 % 13,585 8.6 %
Total costs and operating expenses 113,860 110.1 % 155,454 98.8 %
(Loss) income from operations (10,411) (10.1) % 1,899 1.2 %
Other expenses, net 44 0.0 % 171 0.1 %
Interest expense 1,956 1.9 % 2,237 1.4 %
Total other expense, net 2,000 1.9 % 2,408 1.5 %
(Loss) before income taxes (12,411) (12.0) % (509) (0.3) %
Income tax expense (benefit) 611 0.6 % (125) (0.1) %
Net (loss) $ (13,022) (12.6) % $ (384) (0.2) %
Net (loss) attributable to non-controlling
interest (3,883) (3.8) % (177) (0.1) %
Net (loss) attributable to MediaAlpha, Inc. $ (9,139) (8.8) % $ (207) (0.1) %
Net (loss) per share of Class A common
stock
-Basic and diluted $ (0.22) $ (0.01)
Weighted average shares of Class A common
stock outstanding
-Basic and diluted 41,705,344 37,667,432
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Revenue
The following table presents our revenue, disaggregated by vertical, for the three months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Three Months Ended Ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 Property & Casualty insurance$ 57,571 $ (51,766) (47.3) %$ 109,337 Percentage of total revenue 55.7 % 69.5 % Health insurance 33,163 (525) (1.6) %$ 33,688 Percentage of total revenue 32.1 % 21.4 % Life insurance 7,005 (474) (6.3) %$ 7,479 Percentage of total revenue 6.8 % 4.8 % Other 5,710 (1,139) (16.6) %$ 6,849 Percentage of total revenue 5.5 % 4.4 % Revenue$ 103,449 (53,904) (34.3) %$ 157,353 The decrease in P&C insurance revenue for the three months endedJune 30, 2022 , compared with the three months endedJune 30, 2021 , 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 overall inflationary pressures and certain carriers and supply partners shifting their transactions with each other from ourOpen Marketplace to ourPrivate Marketplace 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 carriers experiencing lower than expected underwriting profitability, leading them to reduce marketing budget allocations to our channel. We are currently unable to predict the duration of this cyclical downturn or its impact on our revenue from the P&C insurance vertical, or our profitability, beyond the third quarter of 2022. The decrease in health insurance revenue for the three months endedJune 30, 2022 , compared with the three months endedJune 30, 2021 , was driven by reduced customer acquisition spending in our marketplaces by Medicare insurance partners, offset in part by additional revenue of$1.7 million during the three months endedJune 30, 2022 as a result of the CHT acquisition. In addition, revenue from this vertical during the three months endedJune 30, 2021 was positively impacted by a special extended enrollment period during such period, which did not repeat in the current year. The decrease in life insurance revenue for the three months endedJune 30, 2022 , compared with the three months endedJune 30, 2021 , was driven by a continued decrease in customer shopping for life insurance as concerns related to COVID-19 eased. The decrease in other revenue for the three months endedJune 30, 2022 , compared with the three months endedJune 30, 2021 , was driven primarily by a decrease in our consumer finance vertical due to a reduction in mortgage and refinancing activity caused by rising interest rates, offset in part by the addition of revenue generated from the credit vertical of CHT, which the Company exited during the second quarter of 2022. In addition, revenue from our education vertical decreased to$0.3 million during the three months endedJune 30, 2022 from$0.5 million during the three months endedJune 30, 2021 . Revenue from the education vertical is not material to our operations, and we expect to fully exit such vertical during the third quarter of 2022.
Cost of revenue
The following table presents our cost of revenue for the three months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 Cost of revenue $ 87,925$ (44,380) (33.5) % $ 132,305 Percentage of revenue 85.0 % 84.1 % 27
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The decrease in cost of revenue for the three months ended
compared with the three months ended
lower revenue share payments to suppliers due to the overall decrease in
revenue, as well as a higher mix of transactions in our
which are recorded on a net revenue basis.
Sales and marketing
The following table presents our sales and marketing expenses for the three months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 Sales and marketing $ 7,958$ 2,234 39.0 % $ 5,724 Percentage of revenue 7.7 % 3.6 % The increase in sales and marketing expenses for the three months endedJune 30, 2022 , compared with the three months endedJune 30, 2021 , was due to an increase in equity-based compensation expense of$0.8 million , an increase in personnel-related costs of$0.7 million resulting from headcount additions related to our acquisition of CHT, and an increase in amortization expense of$0.8 million related to intangible assets arising from our acquisition of CHT.
Product development
The following table presents our product development expenses for the three months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 Product development $ 5,661$ 1,821 47.4 % $ 3,840 Percentage of revenue 5.5 % 2.4 % The increase in product development expenses for the three months endedJune 30, 2022 , compared with the three months endedJune 30, 2021 , was due primarily to an increase in equity-based compensation expense of$1.0 million and an increase in personnel-related costs of$0.7 million resulting from planned headcount additions to continue to enhance our technology.
General and administrative
The following table presents our general and administrative expenses for the three months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 General and administrative $ 12,316$ (1,269) (9.3) % $ 13,585 Percentage of revenue 11.9 % 8.6 % The decrease in general and administrative expenses for the three months endedJune 30, 2022 , compared with the three months endedJune 30, 2021 , was due primarily to a gain of$2.8 million recorded on remeasurement of the contingent consideration related to CHT for the three months endedJune 30, 2022 as the fair value declined due to lower projected revenue and gross profit targets for CHT and lower professional fees, offset in part by an increase in equity-based compensation expense of$1.8 million .
Equity-based compensation
The following table presents our equity-based compensation expense that was
included in costs and operating expenses for the three months ended
2022
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Three Months Ended Three Months Ended
(dollars in thousands) June 30, 2022 $ % June 30, 2021
Cost of revenue $ 1,240 $ 798 180.5 % $ 442
Sales and marketing 2,769 788 39.8 % 1,981
Product development 2,646 981 58.9 % 1,665
General and administrative 9,188 1,755 23.6 % 7,433
Total $ 15,843 $ 4,322 37.5 % $ 11,521
The increase in equity-based compensation expense for the three months ended
June 30, 2022 , compared with the three months ended June 30, 2021 , was driven
primarily by expenses related to additional restricted stock units granted to
employees as part of the annual incentive process and to restricted stock units
granted to the employees added as part of 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 three months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 Sales and Marketing $ 1,525$ 779 104.4 % $ 746 General and administrative 152 152 100.0 % - Total $ 1,677$ 931 124.8 % $ 746
The increase in amortization expense for the three months ended
compared with the three months ended
amortization of intangible assets arising from our acquisition of CHT.
Other expenses, net
The following table presents our other expenses for the three months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 Other expenses, net $ 44$ (127) (74.3) % $ 171 Percentage of revenue 0.0 % 0.1 %
The decrease in other expenses for the three months ended
compared with the three months ended
Interest expense
The following table presents our interest expense for the three months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 Interest expense $ 1,956$ (281) (12.6) % $ 2,237 Percentage of revenue 1.9 % 1.4 %
The decrease in interest expense for the three months ended
compared with the three months ended
interest rate on the 2021 Credit Facility resulting from the refinancing of our
2020 Credit Facilities, offset by the interest on amounts drawn on our 2021
Revolver Credit Facility in connection with our acquisition of CHT.
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Table of Contents Income tax expense (benefit) The following table presents our income tax expense for the three months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Three Months Ended Three Months Ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 Income tax expense (benefit) $ 611$ 736 (588.8) % $ (125) Percentage of revenue 0.6 % (0.1) % For the three months endedJune 30, 2022 , we recorded an income tax expense of$0.6 million resulting from our effective tax rate of (4.9)%, which differed from theU.S. federal statutory rate of 21%, due primarily to nondeductible equity-based compensation, losses associated with non-controlling interests not taxable to us, state taxes, and other nondeductible permanent items. For the three months endedJune 30, 2021 , we recorded an income tax benefit of$0.1 million resulting from our effective tax rate of 24.6% which differed from theU.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.
Operating results for the six months ended
The following table sets forth our operating results in absolute dollars and as
a percentage of revenue for the six months ended
Six Months Ended
June 30,
(in thousands) 2022 2021
Revenue $ 246,048 100.0 % $ 330,941 100.0 %
Costs and operating expenses
Cost of revenue 208,806 84.9 % 279,485 84.5 %
Sales and marketing 15,181 6.2 % 11,115 3.4 %
Product development 10,877 4.4 % 7,160 2.2 %
General and administrative 29,464 12.0 % 29,334 8.9 %
Total costs and operating expenses 264,328 107.4 % 327,094 98.8 %
(Loss) income from operations (18,280) (7.4) % 3,847 1.2 %
Other (income) expenses, net (479) (0.2) % 21 0.0 %
Interest expense 3,315 1.3 % 4,538 1.4 %
Total other expense, net 2,836 1.2 % 4,559 1.4 %
(Loss) before income taxes (21,116) (8.6) % (712) (0.2) %
Income tax expense (benefit) 1,754 0.7 % (489) (0.1) %
Net (loss) $ (22,870) (9.3) % $ (223) (0.1) %
Net (loss) attributable to non-controlling
interest (6,655) (2.7) % (301) (0.1) %
Net (loss) income attributable to
MediaAlpha, Inc. $ (16,215) (6.6) % $ 78 0.0 %
Net (loss) income per share of Class A
common stock
-Basic and diluted $ (0.39) $ 0.00
Weighted average shares of Class A common
stock outstanding
-Basic and diluted 41,279,146 35,414,548
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Revenue
The following table presents our revenue, disaggregated by vertical, for the six months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Six months ended Six months ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 Property & Casualty insurance$ 145,025 $ (89,853) (38.3) %$ 234,878 Percentage of total revenue 58.9 % 71.0 % Health insurance 75,272 5,688 8.2 %$ 69,584 Percentage of total revenue 30.6 % 21.0 % Life insurance 14,072 (1,360) (8.8) %$ 15,432 Percentage of total revenue 5.7 % 4.7 % Other 11,679 632 5.7 %$ 11,047 Percentage of total revenue 4.7 % 3.3 % Revenue$ 246,048 (84,893) (25.7) %$ 330,941 The decrease in P&C insurance revenue for the six months endedJune 30, 2022 , compared with the six months endedJune 30, 2021 , 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 overall inflationary pressures and certain carriers and supply partners shifting their transactions with each other from ourOpen Marketplace to ourPrivate Marketplace 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 carriers experiencing lower than expected underwriting profitability, leading them to reduce marketing budget allocations to our channel. We are currently unable to predict the duration of this cyclical downturn or its impact on our revenue from the P&C insurance vertical, or our profitability, beyond the third quarter of 2022. The increase in health insurance revenue for the six months endedJune 30, 2022 , compared with the six months endedJune 30, 2021 , 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, as well as by the addition of$1.7 million of revenue during the second quarter of 2022 as a result of the CHT acquisition. Additionally, the Open and Annual Enrollment periods for fiscal 2021, which typically end byDecember 15th , were extended untilJanuary 15, 2022 , resulting in increased revenue from our health insurance vertical during the first quarter of 2022. These increases were offset in part by reduced customer acquisition spending in our marketplaces by Medicare insurance partners in the second quarter of 2022. The decrease in life insurance revenue for the six months endedJune 30, 2022 , compared with the six months endedJune 30, 2021 , was driven by a decrease in customers shopping for life insurance as concerns related to COVID-19 eased. The increase in other revenue for the six months endedJune 30, 2022 , compared with the six months endedJune 30, 2021 , was driven primarily by an increase in our travel vertical, due to the easing of concerns related to COVID-19, and to the addition of revenue generated from the credit vertical of CHT, which the Company exited during the second quarter of 2022, offset in part by a decline in revenue from our consumer finance vertical due to a reduction in mortgage and refinancing activity caused by rising interest rates. In addition, revenue from our education vertical decreased to$0.9 million during the six months endedJune 30, 2022 from$1.0 million during the six months endedJune 30, 2021 . Revenue from the education vertical is not material to our operations, and we expect to fully exit such vertical during the third quarter of 2022.
Cost of revenue
The following table presents our cost of revenue for the six months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Six months ended Six months ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 Cost of revenue$ 208,806 $ (70,679) (25.3) %$ 279,485 Percentage of revenue 84.9 % 84.5 % 31
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The decrease in cost of revenue for the six months endedJune 30, 2022 , compared with the six months endedJune 30, 2021 , was driven by lower revenue share payments to suppliers due to the overall decrease in revenue as well as a higher mix of transactions in ourPrivate Marketplace , which are recorded on a net revenue basis.
Sales and marketing
The following table presents our sales and marketing expenses for the six months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Six months ended Six months ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 Sales and marketing$ 15,181 $ 4,066 36.6 %$ 11,115 Percentage of revenue 6.2 % 3.4 % The increase in sales and marketing expenses for the six months endedJune 30, 2022 , compared with the six months endedJune 30, 2021 , was due primarily to an increase in equity-based compensation expense of$1.8 million , an increase in personnel-related costs of$1.5 million resulting from planned headcount additions, and an increase in amortization expense of$0.7 million related to the amortization of intangible assets arising from our acquisition of CHT.
Product development
The following table presents our product development expenses for the six months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Six months ended Six months ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 Product development$ 10,877 $ 3,717 51.9 %$ 7,160 Percentage of revenue 4.4 % 2.2 % The increase in product development expenses for the six months endedJune 30, 2022 , compared with the six months endedJune 30, 2021 , was due primarily to an increase in equity-based compensation expense of$1.9 million and an increase in personnel-related costs of$1.5 million resulting from planned headcount additions to continue to enhance our technology.
General and administrative
The following table presents our general and administrative expenses for the six months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Six months ended Six months ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 General and administrative$ 29,464 $ 130 0.4 %$ 29,334 Percentage of revenue 12.0 % 8.9 % The increase in general and administrative expenses for the six months endedJune 30, 2022 , compared with the six months endedJune 30, 2021 , was due primarily to an increase in equity-based compensation expense of$3.0 million and an increase in personnel-related costs of$0.8 million resulting from planned headcount additions offset by a gain of$2.8 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 and by lower legal and professional fees incurred in the current year period due to expenses incurred in the prior year period related to the Secondary offering and our first year of being subject to Section 404(b) of the Sarbanes-Oxley Act that did not repeat in the current year period.
Equity-based compensation
The following table presents our equity-based compensation expense that was
included in costs and operating expenses for the six months ended
and 2021, and the dollar and percentage changes between the two periods:
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Six months Six months
ended June 30, ended June 30,
(dollars in thousands) 2022 $ % 2021
Cost of revenue $ 1,638 $ 796 94.5 % $ 842
Sales and marketing 5,474 1,791 48.6 % 3,683
Product development 4,895 1,898 63.3 % 2,997
General and administrative 17,609 3,008 20.6 % 14,601
Total $ 29,616 $ 7,493 33.9 % $ 22,123
The increase in equity-based compensation expense for the six months ended June
30, 2022 , compared with the six months ended June 30, 2021 , was driven primarily
by expenses related to additional restricted stock units granted to employees as
part of the annual incentive process and to restricted stock units granted to
the employees added as part of 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 six months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Six months ended Six months ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 Sales and Marketing$ 2,208 $ 716 48.0 %$ 1,492 General and administrative 152 152 100.0 % - Total$ 2,360 $ 868 58.2 %$ 1,492
The increase in amortization expense for the six months ended
compared with the six months ended
assets arising from our acquisition of CHT.
Other (income) expenses, net
The following table presents our other income for the six months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Six months ended Six months ended June (dollars in thousands) June 30, 2022 $ % 30, 2021 Other (income) expenses, net$ (479) $ (500) (2,381.0) % $ 21 Percentage of revenue (0.2) % 0.0 % The increase in other income for the six months endedJune 30, 2022 , compared with the six months endedJune 30, 2021 , was driven primarily by adjustments to the estimated future state tax benefits related to the tax receivables agreement ("TRA"). Interest expense The following table presents our interest expense for the six months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Six months ended Six months ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 Interest expense$ 3,315 $ (1,223) (27.0) %$ 4,538 Percentage of revenue 1.3 % 1.4 % The decrease in interest expense for the six months endedJune 30, 2022 , compared with the six months endedJune 30, 2021 , was driven by a lower interest rate on the 2021 Credit Facility resulting from the refinancing of our 2020 Credit Facilities offset by the interest on amounts drawn on our 2021 Revolver Credit Facility in connection with our acquisition of CHT. 33
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Income tax expense (benefit)
The following table presents our income tax expense for the six months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the two periods: Six months ended Six months ended (dollars in thousands) June 30, 2022 $ % June 30, 2021 Income tax expense (benefit)$ 1,754
$ 2,243 (458.7) %$ (489) Percentage of revenue 0.7 % (0.1) % For the six months endedJune 30, 2022 , we recorded an income tax expense of$1.8 million resulting from our effective tax rate of (8.3)%, which differed from theU.S. federal statutory rate of 21%, due primarily to nondeductible equity-based compensation, losses associated with non-controlling interests not taxable to us, state taxes, and other nondeductible permanent items. For the six months endedJune 30, 2021 , we recorded an income tax benefit of$0.5 million resulting from our effective tax rate of 68.7% which differed from theU.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.
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 (loss), the most
directly comparable financial measure calculated and presented in accordance
with GAAP, for the three and six months ended
Three months ended Six months ended
June 30, June 30,
(in thousands) 2022 2021 2022 2021
Net (loss) $ (13,022) $ (384) $ (22,870) $ (223)
Equity-based compensation expense 15,843 11,521 29,616 22,123
Interest expense 1,956 2,237 3,315 4,538
Income tax expense (benefit) 611 (125) 1,754 (489)
Depreciation expense on property and
equipment 99 91 197 173
Amortization of intangible assets 1,677 746 2,360 1,492
Transaction expenses(1) 150 66 530 2,731
Employee-related costs(2) - 99 - 349
SOX implementation costs(3) - 297 110 449
Fair value adjustment to contingent
consideration(4) (2,845) - (2,845) -
Changes in TRA related liability(5) 40 - (590) (156)
Changes in Tax Indemnification
Receivable(6) (15) 147 (29) 147
Settlement of federal and state income tax
refunds(7) 4 - 92 -
Adjusted EBITDA $ 4,498 $ 14,695 $ 11,640 $ 31,134
(1)Transaction expenses consist of $0.2 million and $0.5 million of legal,
accounting and other consulting fees incurred by us for the three and six months
ended June 30, 2022 , respectively, in connection with the acquisition of CHT.
For the three and six months ended June 30, 2021 , transaction expenses consist
of $0.1 million and $2.7 million for legal, accounting, and other consulting
fees in connection with the Secondary Offering, respectively.
(2)Employee-related costs include $0.1 million and $0.3 million of expenses
incurred by us for the three and six months ended June 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 consist of $0.1 million of expenses incurred by us
for the six months ended June 30, 2022 , and $0.3 million and $0.4 million of
expenses for the three and six months ended June 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) for 2021.
(4)Fair value adjustment to contingent consideration consists of $2.8 million of
gain for the three and six months ended June 30, 2022 , in connection with the
remeasurement of the contingent consideration for the acquisition of CHT as of
June 30, 2022 .
(5)Changes in TRA related liability consist of immaterial expenses for the three
months ended June 30, 2022 , and $0.6 million and $0.2 million of income for the
six months ended June 30, 2022 and 2021, respectively, due to a change in the
estimated future state tax benefits and other changes in the estimate resulting
in reductions of the TRA liability.
(6)Changes in Tax Indemnification Receivable consists of immaterial income
incurred by us for the three and six months ended June 30, 2022 , and
$0.1 million of expenses incurred by us for the three and six months ended June
30, 2021 , related to a reduction in the tax indemnification receivable recorded
in connection with the Reorganization Transactions. The reduction also resulted
in a benefit of the same amount which has been recorded within income tax
(benefit).
(7)Settlement of federal and state tax refunds consist of immaterial expenses
and $0.1 million of expense incurred by us for the three and six months ended
June 30, 2022 , respectively, related to reimbursement to White Mountains for
state tax refunds for the period prior to the Reorganization Transaction related
to 2020 tax returns. The settlement also resulted in a benefit of the same
amount which has been recorded within income tax expense (benefit).
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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 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 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 three and six months endedJune 30, 2022 and 2021: Three months ended Six months ended June 30, June 30, (in thousands) 2022 2021 2022 2021 Revenue$ 103,449 $ 157,353 $ 246,048 $ 330,941 Less cost of revenue (87,925) (132,305) (208,806) (279,485) Gross profit 15,524 25,048 37,242 51,456 Adjusted to exclude the following (as related to cost of revenue): Equity-based compensation 1,240 442 1,638 842 Salaries, wages, and related 1,034 558 1,690 1,022 Internet and hosting 119 108 223 210 Other expenses 215 112 342 219 Depreciation 12 8 18 15 Other services 576 256 1,106 547 Merchant-related fees 44 139 59 230 Contribution 18,764 26,671 42,318 54,541 Gross margin 15.0 % 15.9 % 15.1 % 15.5 % Contribution Margin 18.1 % 16.9 % 17.2 % 16.5 % 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. 36
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The following table presents Transaction Value by platform model for the three
and six months ended
Three months ended Six months ended
June 30, June 30,
(dollars in thousands) 2022 2021 2022 2021
Open Marketplace transactions $ 99,633 $ 152,522 $ 237,729 $ 321,870
Percentage of total Transaction Value 54.5 % 59.5 % 56.3 % 62.0 %
Private Marketplace transactions 83,237 104,005 184,154 197,119
Percentage of total Transaction Value 45.5 % 40.5 % 43.7 % 38.0 %
Total Transaction Value $ 182,870 $ 256,527 $ 421,883 $ 518,989
The following table presents Transaction Value by vertical for the three and six
months ended
Three months ended Six months ended
June 30, June 30,
(dollars in thousands) 2022 2021 2022 2021
Property & Casualty insurance $ 111,930 $ 176,646 $ 260,014 $ 360,073
Percentage of total Transaction Value 61.2 % 68.9 % 61.6 % 69.4 %
Health insurance 46,394 47,240 106,649 97,583
Percentage of total Transaction Value 25.4 % 18.4 % 25.3 % 18.8 %
Life insurance 12,467 13,933 24,858 28,374
Percentage of total Transaction Value 6.8 % 5.4 % 5.9 % 5.5 %
Other (1) 12,079 18,708 30,362 32,959
Percentage of total Transaction Value 6.6 % 7.3 % 7.2 % 6.4 %
Total Transaction Value $ 182,870 $ 256,527 $ 421,883 $ 518,989
(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.
The following table presents Transaction Value generated from clicks, calls and
leads for the three and six months ended
Three months ended Six months ended
June 30, June 30,
2022 2021 2022 2021
Calls 79.1 % 81.5 % 78.3 % 82.1 %
Clicks 12.0 % 7.4 % 11.8 % 7.3 %
Leads 8.9 % 11.1 % 9.9 % 10.6 %
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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.
Liquidity and capital resources
Overview
Our principal 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. As ofJune 30, 2022 andDecember 31, 2021 , our cash and cash equivalents totaled$35.2 million and$50.6 million , respectively. We believe that our current sources of liquidity, which include cash flow generated from operations, cash and funds available under the 2021 Credit Facilities, 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 raise additional funds or negotiate amendments to or waivers of the terms of such credit facilities with our lenders. 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 property and casualty 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 vertical and we are currently unable to estimate their impact beyond the third quarter of 2022. 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. 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 timing and amount of the share repurchases are determined by our management team based on their ongoing evaluation of market conditions, our capital needs, debt covenants and other factors. The repurchases are financed from our cash balances. During the three and six months endedJune 30, 2022 , we repurchased 321,150 shares of Class A common stock for aggregate consideration of$3.5 million , and we expect to complete the repurchase program inAugust 2022 . We may engage in additional merger and acquisition or other activities including share repurchases that could require us to draw on our existing credit facilities or may need to raise additional funds. In the future, we may attempt to raise additional capital through the sale of equity securities or through debt financing arrangements. If we raise additional funds by issuing equity securities, the ownership of our existing stockholders will be diluted. The incurrence of additional debt financing would result in debt service obligations, and any future instruments governing such debt could provide for operating and financing covenants that could restrict our operations. Our material cash requirements include our long-term debt, operating lease obligations, liabilities under the TRA, and any contingent consideration payable in connection with our acquisition of CHT. 38
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Cash Flows
The following table presents a summary of our cash flows for the six months endedJune 30, 2022 and 2021, and the dollar and percentage changes between the periods: Six months Six months ended June 30, ended June 30, (dollars in thousands) 2022 $ % 2021 Net cash provided by (used in) operating activities$ 19,894 $ 25,694 (443.0) %$ (5,800) Net cash used in investing activities (49,756) (49,286) 10,486.4 % (470) Net cash provided by (used in) financing activities 14,492 16,776 (734.5) % (2,284)
Operating activities
Cash flows provided by operating activities were$19.9 million for the six months endedJune 30, 2022 , compared with cash flows used in operating activities of$5.8 million for the six months endedJune 30, 2021 . The increase resulted from lower working capital usage due primarily to the timing of our payables and receivables and higher working capital usage in 2020 and 2021 driven primarily by growth in our business, offset in part by the higher net loss in the current period.
Investing activities
Cash flows used in investing activities were$49.8 million for the six months endedJune 30, 2022 , compared with$0.5 million for the six months endedJune 30, 2021 . The increase resulted primarily from the payment of cash consideration for our acquisition of CHT, which closed onApril 1, 2022 .
Financing activities
Cash flows provided by financing activities were$14.5 million for the six months endedJune 30, 2022 , compared with cash flows used in financing activities of$2.3 million for the six months endedJune 30, 2021 . The increase in net cash provided was due to the amounts drawn on the 2021 Revolving Credit Facility to partially fund the CHT acquisition, offset in part by principal payments on the 2021 Term Loan Facility and payments made under the share repurchase program.
Senior secured credit facilities
2021 Credit Facilities
OnJuly 29, 2021 , we entered into an amendment (the "First Amendment") to the 2020 Credit Agreement (as amended by the First Amendment, the "Amended Credit Agreement"). The Amended Credit Agreement provides for a new senior secured term loan facility in an aggregate principal amount of$190.0 million (the "2021 Term Loan Facility"), the proceeds of which were used to refinance all of the$186.4 million of the existing 2020 Term Loan Facility outstanding and the unpaid interest thereof as of the date of the First Amendment, to pay fees related to these transactions, and to provide cash for general corporate purposes, and a new senior secured revolving credit facility with commitments in an aggregate amount of$50.0 million (the "2021 Revolving Credit Facility" and, together with the 2021 Term Loan Facility, the "2021 Credit Facilities"), which replaced the 2020 Revolving Credit Facility. Our obligations under the 2021 Credit Facilities are guaranteed by QLH and secured by substantially all assets ofQLH and QuoteLab, LLC . Borrowings under the 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 base rate plus an applicable margin. The applicable margins will be based on our consolidated total net leverage ratio as calculated under the terms of the Amended Credit Agreement (the "Leverage Ratio") for the prior fiscal quarter and range from 2.00% to 2.75% with respect to theLondon interbank offered rate and from 1.00% to 1.75% with respect to the base rate. Loans under the 2021 Credit Facilities will mature onJuly 29, 2026 . Loans under the 2021 Term Loan Facility will amortize quarterly, beginning with the first business day afterDecember 31, 2021 and ending withJune 30, 2026 , by an amount equal to 1.25% of the aggregate outstanding principal amount of the term loans initially made. The 2021 Revolving Credit Facility does not require amortization of principal and will mature onJuly 29, 2026 . As ofJune 30, 2022 , we had$182.4 million of outstanding borrowings, net of deferred debt issuance costs of$2.8 million , and$25.0 million under the 2021 Term Loan Facility and 2021 Revolver Credit Facility, respectively. 39
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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, 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 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.
In addition to tax expenses, we will also make payments under the TRA, which we
expect to be significant. We account for the income tax effects and
corresponding TRA effects resulting from any Exchange by recognizing an increase
in our deferred tax assets, based on enacted tax rates at the date of the
Exchange. Further, we evaluate the likelihood that we will realize the benefit
represented by the deferred tax asset and, to the extent that we estimate that
it is more likely than not that we will not realize the benefit, we will reduce
the carrying amount of the deferred tax asset with a valuation allowance. The
amounts to be recorded for both the deferred tax assets and the liability for
our obligations under the TRA are estimated at the time of any purchase or
exchange as a reduction to stockholders' equity, and the effects of changes in
any of our estimates after this date will be included in net income (loss).
Similarly, the effect of subsequent changes in the enacted tax rates will be
included in net income (loss). 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 blended tax rates, changes in tax laws or
interpretations thereof could materially impact our results.
Recent accounting pronouncements
For a discussion of new accounting pronouncements recently adopted and not yet adopted, see Note 1 to the 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 2021 Annual Report on Form 10-K and did not materially change during the six months endedJune 30, 2022 .
MANAGEMENT'S DISCUSSION AND ANALYSIS
Q2 2022 Letter to Unitholders
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