MediaAlpha Inc

(Unaudited)

1. Summary of significant accounting policies

The Company's significant accounting policies are included in the 2023 Annual Report on Form 10-K and under Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and did not materially change during the nine months ended September 30, 2024.

Basis of presentation

The accompanying unaudited consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments, consisting of only those of a normal recurring nature, considered necessary for a fair statement of the financial position and interim results of the Company as of and for the periods presented have been included.

The December 31, 2023 balance sheet data was derived from audited consolidated financial statements; however, the accompanying interim notes to the consolidated financial statements do not include all of the annual disclosures required by GAAP. Results for interim periods are not necessarily indicative of those that may be expected for a full year. The financial information included herein should be read in conjunction with the Company's consolidated financial statements and related notes in its 2023 Annual Report on Form 10-K and under Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q.

Accounts receivable

Accounts receivable are net of allowances for credit losses of $1.0 million and $0.5 million as of September 30, 2024 and December 31, 2023, respectively.

Concentrations of credit risk and of significant customers and suppliers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains cash balances that can, at times, exceed amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in these accounts and believes it is not exposed to unusual risk beyond the normal credit risk in this area based on the financial strength of the institutions with which the Company maintains its deposits.

The Company's accounts receivable, which are unsecured, may expose it to credit risk based on their collectability. The Company controls 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, regularly analyzing the collectability of accounts receivable, and recording allowances for credit losses. The Company's supplier concentration can also expose it to business risks.

Customer and supplier concentrations consisted of the below:

Related Party Transactions

The Company is party to the tax receivables agreement ("TRA") under which it is contractually committed to pay certain holders of Class B-1 units 85% of the amount of any tax benefits that the Company actually realizes, or in some cases is deemed to realize, as a result of certain transactions. During the three and nine months ended September 30, 2024, no payments were made pursuant to the TRA. During the three and nine months ended September 30, 2023, payments of $0 and $2.8 million, respectively, were made pursuant to the TRA.

Liquidity

As of September 30, 2024, the aggregate principal amount outstanding under the 2021 Credit Facilities was $165.8 million, with $45.0 million remaining for borrowing under the 2021 Revolving Credit Facility. As of September 30, 2024, the Company was in compliance with all of its financial covenants under such credit facilities.

On October 30, 2024, the Company received a letter from the Federal Trade Commission (FTC) in which the FTC proposes to seek injunctive and monetary relief and civil penalties, as further discussed in Note 5 -Commitments and contingencies - Litigation and other matters. The total amount of the proposed items significantly exceed the Company's existing liquidity and financial resources. Any such costs above the existing liquidity and financial resources would require the Company to seek additional capital, incur debt or otherwise take significant actions in order to satisfy the claims and there can be no assurances that such financing could be obtained on acceptable terms, or at all. The Company’s ability to continue to comply with its covenants will depend on, among other things, financial, business, market, competitive, the outcome of the FTC matter, and other conditions, many of which are beyond the Company’s control.

The Company’s results are subject to fluctuations as a result of business cycles experienced by companies in the insurance industry. During the second half of 2021, the auto insurance industry began to experience a cyclical downturn, as supply chain disruptions and cost increases caused by the pandemic and overall inflationary pressures contributed to higher-than-expected P&C insurance claims costs, which led many carriers to reduce their customer acquisition spending to preserve their profitability. However, the Company's Property & Casualty (P&C) insurance vertical has rebounded strongly during 2024, with multiple carriers meaningfully increasing their spending in the Company's marketplace. The Company believes that its expected near-term revenue, cash on hand and availability to access additional cash under its 2021 Revolving Credit Facility are sufficient to meet its operating and capital expenditure requirements, and to continue to comply with its debt covenants, for at least the next twelve months as of the filing date of this Quarterly Report on Form 10-Q.

The extent to which market conditions impact the Company’s business, results of operations, cash flows and financial condition will depend on future developments impacting its carrier partners, including inflation rates, the extent of any major catastrophic losses, and the timing of regulatory approval of premium rate increases, which remain highly uncertain and cannot be predicted with accuracy. The Company considered the impact of this uncertainty on the assumptions and estimates used when preparing these quarterly financial statements. These assumptions and estimates may continue to change as new events occur, and such changes could have an adverse impact on the Company's results of operations, financial position and liquidity.

New Accounting Pronouncements

Recently adopted accounting pronouncements

There have been no recently adopted accounting pronouncements by the Company.

Recently issued not yet adopted accounting pronouncements

In December 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, that requires disclosure of disaggregated income taxes paid, prescribes standard categories for the components of the effective tax rate reconciliation, and modifies other income tax-related disclosure. The amendments in the ASU are intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments are effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments in this ASU should be applied on a prospective basis but retrospective application is permitted. The Company is currently evaluating the impact of the ASU on its disclosures in the consolidated financial statements.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. The ASU is effective for annual periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted and the amendments in this update are required to be applied on a retrospective basis to all periods presented. The Company is currently evaluating the impact of the ASU on disclosures in its consolidated financial statements.

2. Disaggregation of revenue

The following table shows the Company’s revenue disaggregated by transaction model:

The following table shows the Company’s revenue disaggregated by product vertical:

3. Goodwill and intangible assets

Goodwill and intangible assets consisted of:

Amortization expense related to intangible assets amounted to $1.6 million and $1.7 million for the three months ended September 30, 2024 and 2023, respectively, and $4.8 million and $5.2 million for the nine months ended September 30, 2024 and 2023, respectively. The Company hasno accumulated impairment of goodwill.

The following table presents the changes in goodwill and intangible assets:

As of September 30, 2024, future amortization expense relating to identifiable intangible assets with estimable useful lives over the next five years was as follows:

4. Long-term debt

On July 29, 2021, the Company entered into an amendment (the "First Amendment") to the 2020 Credit Agreement dated as of September 23, 2020, with the lenders that are party thereto and JPMorgan Chase Bank, N.A., as administrative agent (as amended by the First Amendment, the “Existing Credit Agreement”). On June 8, 2023, the Company entered into a Second Amendment (the “Second Amendment”) to the Existing Credit Agreement (as amended by the Second Amendment, the “Amended Credit Agreement”).

Long-term debt consisted of the following:

The Company incurred interest expense on the 2021 Term Loan Facility of $3.3 million and $3.8 million for the three months ended September 30, 2024 and 2023, respectively, and $10.3 million and $10.9 million for the nine months ended September 30, 2024 and 2023, respectively. Interest expense included amortization of debt issuance costs on the 2021 Credit Facilities of $0.2 million for the three months ended September 30, 2024 and 2023, respectively, and $0.6 million for the nine months ended September 30, 2024 and 2023, respectively.

As of September 30, 2024, the Company’s borrowing capacity available under the 2021 Revolving Credit Facility was $45.0 million, which carries a commitment fee based on the Company’s consolidated total net leverage ratio and ranges from 0.25% to 0.50%. The commitment fee on the unused portion of the 2021 Revolving Credit Facility was 0.25% as of September 30, 2024. The Company incurred interest expense on the 2021 Revolving Credit Facility of $0.1 million and $0.2 million for the three months ended September 30, 2024 and 2023, respectively, and $0.5 million for the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, the Company’s interest rates on the outstanding borrowings under the 2021 Term Loan Facility and the 2021 Revolving Credit Facility were 7.57% and 7.68%, respectively.

Accrued interest was $3.3 million as of September 30, 2024 and $3.7 million as of December 31, 2023, and is included within accrued expenses on the consolidated balance sheets. As of September 30, 2024, the Company was in compliance with all covenants under the 2021 Credit Facilities.

The expected future principal payments for all borrowings as of September 30, 2024 were as follows:

5. Commitments and contingencies

Litigation and other matters

The Company is subject to certain legal proceedings and claims that arise in the normal course of business. In the opinion of management, the Company does not believe that the amount of liability, if any, as a result of these proceedings and claims will have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

On February 21, 2023, the Company received a civil investigative demand from the FTC regarding compliance with the FTC Act and the Telemarketing Sales Rule, as they relate to the advertising, marketing, promotion, offering for sale, or sale of healthcare-related products, the collection, sale, transfer or provision to third parties of consumer data, telemarketing practices, and/or consumer privacy or data security. The Company has cooperated fully with the FTC investigation.

On October 30, 2024, after completion of the Company’s earnings call, the Company received a letter from the staff of the FTC (the “FTC Staff”) stating that the FTC Staff is prepared to recommend the filing of a complaint against the Company for violations of Section 5(a) of the FTC Act, the Telemarketing Sales Rule ("TSR") and the Government and Business Impersonation Rule (the “Impersonation Rule”).

The FTC Staff alleges that, in connection with the Company’s lead generation and telemarketing activities, the Company has represented itself as affiliated with government entities, made misleading claims (in particular regarding health insurance products and the Company’s use of consumers’ personal information) and utilized deceptive advertising, in violation of Section 5(a) of the FTC Act. The FTC Staff further alleges that the Company has violated the Impersonation Rule in representing itself to be affiliated with government entities and the TSR in connection with telemarketing activities.

The FTC Staff proposes to seek injunctive and monetary relief and civil penalties. If obtained in whole or in part, the monetary relief and penalties proposed by the FTC Staff would have an adverse, and potentially material, effect on the Company’s liquidity, financial condition and results of operations. The total amount of these proposed items significantly exceeds the Company’s existing liquidity and financial resources. Any such costs above the existing liquidity and financial resources would require the Company to seek additional capital, incur debt or otherwise take significant actions in order to satisfy the claims and there can be no assurances that such financing could be obtained on acceptable terms, or at all. In addition, the proposed injunctive terms, if obtained in whole or in part, could materially and adversely affect the Company’s ability to operate its business in its Health insurance vertical, including how the Company conducts its marketing activities and endeavors to ensure compliance with consumer protection laws by itself and third parties with which the Company does business.

The Company strongly disagrees with the FTC Staff’s allegations and believes it has substantial and meritorious defenses to these claims. Among other things, the Company believes that its conduct does not rise to the legal standard required for the FTC to obtain the proposed monetary relief and penalties. The Company will continue to engage in good faith and with the FTC Staff and seek to resolve this matter prior to litigation, but the Company is prepared to defend itself vigorously if a complaint is filed.

Based on the facts and circumstances available to the Company as of the time of this filing, the Company believes that a loss in connection with the FTC matter is probable, either as a result of legal fees to be incurred to defend the claim or as a result of a settlement of the matter. However, due to, among other things, inherent uncertainty regarding the ultimate resolution of the FTC Staff’s claims, whether through settlement or litigation, the Company is unable to reasonably estimate the amount of probable loss or range of probable loss at this time.

During the three and nine months ended September 30, 2024, the Company incurred legal fees of $0.2 million and $2.0 million, respectively, and during the three and nine months ended September 30, 2023, the Company incurred legal fees of $1.6 million and $3.0 million, respectively, in connection with the demand, which are included within general and administrative expenses on the consolidated statement of operations. At this time, the Company is unable to predict the ultimate outcome of this matter or the significance, if any, to the Company’s business, results of operations or financial condition.

On February 26, 2024, the Company received an assessment from the City of Los Angeles related to its examination of the Company's Business Tax filings for tax years 2018 through 2023. Such assessment was affirmed by the Appeals Review Officer at an initial hearing in July 2024. The Company intends to appeal the assessment to the Board of Review of the Office of Finance. As of September 30, 2024, the Company has assessed its probable loss related to this matter and has accrued a reserve, which is not material.

As of September 30, 2024 and December 31, 2023, the Company didnot have any material contingency reserves established for any litigation liabilities.

6. Equity-based compensation

Equity-based compensation cost recognized for equity-based awards outstanding during the three and nine months ended September 30, 2024 and 2023 was as follows:

Equity-based compensation cost was included in the following expense categories in the consolidated statements of operations during the three and nine months ended September 30, 2024 and 2023:

As of September 30, 2024, total unrecognized compensation cost related to unvested restricted stock units and PRSUs was $57.3 million and $0.8 million, respectively, which are expected to be recognized over weighted-average periods of 2.53 years and 0.45 years, respectively.

7. Fair Value Measurements

The following are the Company’s financial instruments measured at fair value on a recurring basis:

Contingent consideration

Contingent consideration is measured at fair value on a recurring basis using significant unobservable inputs and thus represent a Level 3 measurement in the valuation hierarchy.

Contingent consideration relates to the estimated amount of additional cash consideration to be paid in connection with the Company's acquisition of substantially all of the assets of Customer Helper Team, LLC ("CHT") which was closed on April 1, 2022. The fair value is dependent on the probability of achieving certain revenue and gross profit margin targets for thetwo successive twelve-month periods following the closing of the acquisition. The Company used the Monte Carlo simulation approach to estimate the fair value of the revenue and gross margin targets. The fair value of the contingent consideration as of December 31, 2023 waszero. CHT did not achieve the minimum revenue target for either twelve-month period, and so the Company did not pay any contingent consideration.

The following are the Company’s financial instruments measured at fair value on a non-recurring basis:

Long-Term Debt

As of September 30, 2024, the carrying amount of the 2021 Term Loan Facility and the 2021 Revolving Credit Facility approximates their respective fair values. The Company used a discounted cash flow analysis to estimate the fair value of the long-term debt, using an adjusted discount rate of 5.50% and the estimated payments under the 2021 Term Loan Facility until maturity, including interest payable based on the Company's forecasted total net leverage ratio.

Cost method investment

The Company has elected the measurement alternative for its investment in equity securities without readily determinable fair values and reviews such investment on a quarterly basis to determine if it has been impaired. If the Company's assessment indicates that an impairment exists, the Company estimates the fair value of the equity investment and recognizes in its consolidated statement of operations an impairment loss that is equal to the difference between the fair value of the equity investment and its carrying amount. On March 29, 2024, the board of directors and stockholders of a company in which the Company held a minority equity investment approved a plan of restructuring and liquidation that had the effect of cancelling the Company's investment. The Company had previously determined as of December 31, 2023 that the fair value of the investment waszero and accordingly this cancellation had no impact on the consolidated financial statements as of and for the three and nine months ended September 30, 2024.

The Company used a market approach to estimate the fair value of equity and allocated the overall equity value to estimate the fair value of the common stock based on the liquidation preference and was classified within Level 3 of the fair value hierarchy.

8. 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 upon MediaAlpha, Inc.’s economic interest held in QLH. QLH is treated as a pass-through partnership for income tax reporting purposes and is not subject to federal income tax. Instead, QLH’s taxable income or loss is passed through to its members, including MediaAlpha, Inc. Accordingly, the Company is not liable for income taxes on the portion of QLH’s earnings not allocated to it. MediaAlpha, Inc. files and pays corporate income taxes for U.S. federal and state income tax purposes and its corporate subsidiary, Skytiger Studio, Ltd., is subject to taxation in Taiwan. The Company expects this structure to remain in existence for the foreseeable future.

The Company estimates the annual effective tax rate for the full year to be applied to actual year-to-date income (loss) and adds the tax effects of any discrete items in the reporting period in which they occur. The following table summarizes the Company's income tax expense:

The Company's effective tax rate of 2.6% and 3.1% for the three and nine months ended September 30, 2024, respectively, and (0.5)% and (0.6)% for the three and nine months ended September 30, 2023, respectively, differed from the U.S. federal statutory rate of 21%, due primarily to the tax impacts of changes in valuation allowance.

There were no material changes to the Company’s unrecognized tax benefits during the three and nine months ended September 30, 2024. The Company is currently under examination by various tax authorities in the United States. These examinations are in preliminary stages and the Company does not expect to have any significant changes to unrecognized tax benefits through the end of the fiscal year.

During the three and nine months ended September 30, 2024, holders of Class B-1 units exchanged 0 and 6,496,800 Class B-1 units, respectively, together with an equal number of shares of Class B common stock, for shares of Class A common stock on aone-for-one basis (“Exchanges”). In connection with the Exchanges, the Company did not establish any additional liabilities related to the TRA, which are presented within additional-paid-in-capital in its consolidated statements of stockholders’ equity (deficit). In connection with the Exchanges and the changes to the carrying value of the non-controlling interest, the Company also recognizes deferred tax assets associated with the basis difference in its investment in QLH through additional-paid-in-capital, but during the three and nine months ended September 30, 2024, the Company did not recognize any additional deferred tax assets as the Company has recognized a full valuation allowance on its deferred tax assets.

As of September 30, 2024 and December 31, 2023, the Company had a valuation allowance of $125.2 million and $95.1 million, respectively, against its deferred tax assets based on the recent history of pre-tax losses, which is considered a significant piece of objective negative evidence that is difficult to overcome and limits the ability to consider other subjective evidence, such as projections of future growth. Based on the significant improvement in the Company's pre-tax income for the nine months ended September 30, 2024 and the current forecasts, the Company expects that in the foreseeable future, which could be as early as the fourth quarter of 2024, there may be sufficient positive evidence, and/or that the objective negative evidence in the form of history of pre-tax losses will no longer be present, in which event the Company would be able to release a portion or all of the valuation allowance. Release of any amount of valuation allowance would result in a benefit to income tax expense for the period the release is recorded, which could have a material impact on net income.

Tax Receivables Agreement

In connection with the Reorganization Transactions and the IPO, the Company entered into the TRA with Insignia, Senior Executives, and White Mountains. The Company expects to obtain an increase in its share of the tax basis in the net assets of QLH as Class B-1 units, together with shares of Class B common stock, are exchanged for shares of Class A common stock (or, at the Company’s election, redeemed for cash of an equivalent value). The Company intends to treat any redemptions and exchanges of Class B-1 units as direct purchases for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that it would otherwise pay in the future to various tax authorities.

As of September 30, 2024 and December 31, 2023, the Company determined that making a payment under the TRA was not probable under ASC 450 —Contingencies since a valuation allowance has been recorded against the Company’s deferred tax assets. Accordingly, the Company has determined that the liabilities under the TRA were zero as of September 30, 2024 and December 31, 2023 in the consolidated balance sheets. In the event the Company generates taxable income for the current year, the Company would be required to recognize a portion or all of the liability under the TRA. If the Company had determined that generating sufficient future taxable income such that making a payment under the TRA was probable, it would have also recorded a liability pursuant to the TRA of approximately $121 million as of September 30, 2024 in the consolidated balance sheets.

No payments were made pursuant to the TRA during the three and nine months ended September 30, 2024, and payments of $0 and $2.8 million were made during the three and nine months ended September 30, 2023, respectively.

9. Earnings (Loss) Per Share

Potentially dilutive shares, which are based on the weighted-average shares of underlying unvested QLH restricted Class B-1 units, restricted Class A shares, restricted stock units, and PRSUs using the treasury stock method and the outstanding QLH restricted Class B-1 units using the if-converted method, are included when calculating diluted net income per share attributable to MediaAlpha, Inc. when their effect is dilutive. The effects of certain of the Company’s potentially dilutive securities were not included in the calculation of diluted loss per share as the effect of their inclusion would be anti-dilutive.

The following table summarizes the shares and units with a potentially dilutive impact for the three months ended September 30, 2024 and 2023:

The following table summarizes the shares and units with a potentially dilutive impact for the nine months ended September 30, 2024 and 2023:

The outstanding PRSUs were included in the potentially dilutive securities as of September 30, 2024 to the level in which the performance conditions have been met as of September 30, 2024.

10. Non-Controlling Interest

Pursuant to QLH’s limited liability company agreement, QLH has two classes of equity securities, Class A-1 units, which have all voting rights in QLH, and Class B-1 units, which have no voting or control rights. The Company allocates a share of net income (loss) to the holders of non-controlling interests pro-rata to their ownership interest in QLH at a point in time. The non-controlling interests balance represents the Class B-1 units, substantially all of which are held by Insignia and the Senior Executives.

During the three and nine months ended September 30, 2024, the holders of the non-controlling interests exchanged 0 and 6,496,800 Class B-1 units, respectively, together with an equal number of shares of Class B common stock, for shares of Class A common stock on aone-for-one basis. As of September 30, 2024, the holders of the non-controlling interests owned 17.4% of the total equity interests in QLH, with the remaining 82.6% owned by MediaAlpha, Inc. As of December 31, 2023, the holders of the non-controlling interests owned 27.7% of the total equity interests in QLH, with the remaining 72.3% owned by MediaAlpha, Inc.